Fitch Ratings has placed Wintershall Dea AG's Long-Term Issuer Default Rating (IDR) of 'BBB' and its instrument ratings on Rating Watch Negative (RWN).

This follows an announcement that substantially all of Wintershall Dea's upstream assets will be purchased by Harbour Energy PLC (Harbour; BB/Rating Watch Positive), and that its senior unsecured and subordinated bonds will effectively be assumed by Harbour.

Post-acquisition, Wintershall Dea's assets portfolio will be substantially reduced and will be represented by upstream assets in Russia (which have effectively been expropriated by Russia), upstream assets in the UAE (which are in the development stage), and some other assets. The RWN on the IDR reflects our expectation that its business profile will become extremely weak as a result of the sale.

The RWN on the senior unsecured bonds issued by Wintershall Dea Finance B.V. and on subordinated bonds issued by Wintershall Dea Finance 2 B.V. reflects our expectation that the consolidated credit profile of Harbour will be weaker than that of Wintershall Dea's standalone profile. Our base case forecasts suggest that Harbour's credit profile would be commensurate with the 'BBB-' level following the acquisition.

As the acquisition is expected to be completed in 4Q24, the resolution of the RWP may take longer than the typical six months for a Watch. The transaction is subject to Harbour shareholder approval, regulatory approvals and some other conditions.

Key Rating Drivers

Substantially All Upstream Assets Sold: A substantial share of Wintershall Dea's assets will be sold to Harbour. Assets excluded from the transaction do not generate material cash flows and include Wintershall Dea's operations in Russia (which Wintershall Dea currently does not control), an upstream project in UAE (which is in the development stage), midstream operations and some other assets. Management announced that after the deal is finalised Wintershall Dea's headquarters will be closed.

Bonds Assumed by Harbour: Wintershall Dea's outstanding senior unsecured bonds issued by Wintershall Dea Finance B.V. for EUR3 billion, and subordinated hybrid bonds issued by Wintershall Dea Finance 2 B.V. for EUR1.5 billion will be assumed by Harbour. The change-of-control clause will not be triggered for senior unsecured bonds as long as the bonds continue to be rated investment-grade.

Other Debt Covered by Cash: Wintershall Dea's other debt (which at 30 June 2023 comprised its cash-pooling arrangement with related companies) in the amount of EUR722 million was covered by Wintershall Dea's cash balance (EUR2.3 billion at 30 June 2023).

Harbour's Post-Transaction Profile: We believe that post-transaction Wintershall Dea's senior unsecured bonds will be rated in line with Harbour's IDR, and hybrid bonds will be notched down from Harbour's post-merger rating. Our base case forecasts suggest that Harbour's credit profile would be commensurate with the 'BBB-' level following the acquisition.

Post-acquisition, Harbour's combined production is expected to be around 500,000 barrels of oil equivalent per day (kboe/d), broadly in line with that of US-focused Diamondback Energy, Inc. and Norway-focused Aker BP ASA (both rated BBB/Stable). Harbour's reserve life, however, will be lower than peers'. While Harbour's EBITDA net leverage should remain fairly conservative, its debt capacity will also be affected by substantial tax payments (given Harbour's presence in Norway and the UK, where sector taxes are high).

For more details on Harbour's post-acquisition profile see 'Fitch Places Harbour Energy on Rating Positive Watch on Wintershall Acquisition' published 29 December 2023.

Derivation Summary

Post-transaction, Wintershall Dea's portfolio will be substantially reduced, which is reflected in the RWN on its IDR. Wintershall Dea's bonds will be transferred to Harbour, and its other debt (represented by the cash-pooling facility) will be fully covered by cash.

We expect Wintershall Dea's senior unsecured bonds to be rated in line with Harbour's post-transaction IDR, which we believe will commensurate with the 'BBB-' level.

Key Assumptions

Crude oil (Brent) price: USD80/bbl in 2024, USD70/bbl in 2025, USD65/bbl in 2026 and USD60/bbl in 2027

Natural gas (TTF) price: USD12/mcf in 2024, USD10/mcf in 2025, USD8/mcf in 2026 and USD5/mcf in 2027

Wintershall Dea's standalone production of around 330 kboe/d in 2024

Wintershall Dea's standalone capex of around EUR 1.2 billion in 2024

Substantially all of Wintershall Dea's producing upstream assets sold to Harbour

Wintershall Dea's senior unsecured bonds and subordinated hybrid bonds are assumed by Harbour

Wintershall Dea's other debt is paid from its cash balance

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

As the rating is on RWN, we do not expect a positive rating action in the short term

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Completion of the sale

Liquidity and Debt Structure

Wintershall Post-Transaction Liquidity: Wintershall Dea's cash balance at 30 June 2023 amounted to EUR2.3 billion and is outside of the transaction scope. We assume that this balance will be available to repay Wintershall Dea's cash-pooling facility with related companies, which at 30 June 2023 amounted to EUR722 million. Wintershall Dea's committed revolving credit facility in the amount of EUR900 million is undrawn.

Senior Unsecured Bonds at IDR: We assume that Wintershall Dea's existing senior unsecured bonds, together with Harbour's existing senior unsecured bonds, and new bonds to be issued by Harbour following the deal completion will rank equally among themselves and will benefit from broadly the same guarantee package. We hence believe that they are likely to be rated in line with Harbour's IDR.

Wintershall's Hybrid Bonds Notched Down: We assume Wintershall Dea's subordinated bonds with call dates in 2026 and 2029 to be a permanent feature of Harbour's post-acquisition capital structure, as articulated by Harbour's management. The bonds will remain deeply subordinated and are likely to be notched down from Harbour's post-merger rating. We also assume that the bonds will continue to qualify for 50% equity credit, reflecting the hybrids' cumulative interest coupon, a feature that is more debt-like in nature.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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