DBRS Confirms the BBB (low) Rating of the Senior Secured Notes Issued by SBM Deep Panuke S.A.

DBRS Limited (DBRS) has today confirmed the BBB (low) rating of the 3.50% Senior Secured Notes due 2021 (the Notes) issued by SBM Deep Panuke S.A. (the Issuer) and has maintained the trend at Stable.

In February 2015, Encana Corporation (Encana) revealed a revision to the expected remaining production for the Deep Panuke field to 80 billion cubic feet (bcf) and Encana’s intention to move to a seasonal production profile. Based on Encana’s lower range of estimated ultimate recoverable gas sales, and subtracting actual production to the end of 2014, this represents a decline from approximately 310 bcf. In May 2015, production was suspended in keeping with Encana’s stated intention and after a significant increase in water production associated with the natural gas.

Because of the Charter Agreement provisions that insulate the Issuer from field-related issues, DBRS does not consider these developments as directly negative for the rating. Conversely, the shortened expected seasonal production periods make the Charter Agreement termination option related to a Platform performance failure an even more remote possibility.

However, the significant underperformance of the Deep Panuke field and continued languishing of natural gas prices increase the motivation for Encana to exercise any Charter Agreement termination options if they become available. Specifically, Encana would have the option to terminate the Charter Agreement without paying a Termination Fee in the event of the bankruptcy or insolvency of SBM Offshore N.V. (SBM Offshore), the indirect owner of the Issuer and of the Operator of the Platform.

At the time of the issuance of the Notes, DBRS’s analysis of the credit quality of SBM Offshore fully incorporated the volatility of hydrocarbon prices and consequent implications for capital expenditure plans in the exploration and production sector. However, of greater significance was, and remains, SBM Offshore’s significant contracted backlog of lease & operate contracts. This resiliency is illustrated by (1) a $19.1 billion lease & operate backlog as of June 30, 2015; (2) no FPSO contract renewals until 2022; and (3) SBM Offshore’s strong liquidity position coupled with all debt aside from its Revolving Credit Facility being secured on third-party contracted production facilities (with some guarantees in place until construction of certain facilities is complete) or non-recourse installer vessels. DBRS considers that the credit quality of SBM Offshore has remained consistent with the rating of the Notes. However, given the increased motivation to terminate the Charter Agreement DBRS will continue to monitor SBM Offshore; a material increase in the risk of bankruptcy or insolvency of SBM Offshore is likely to negatively affect the rating of the Notes.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Project Finance (August 2015), which can be found on our website under Methodologies.