Fitch Rates SBM Deep Panuke S.A.'s Senior Secured Notes at 'BBB-'; Outlook Stable

Fitch Ratings has assigned a 'BBB-' rating to SBM Deep Panuke S.A.'s (Deep Panuke or the issuer) $450 million senior secured notes due 2021. The rating Outlook is Stable.

The 'BBB' rating for Deep Panuke reflects stable cash flow earned under a charter contract with fixed lease payments from strong counterparty, Encana. The rating is tempered by the PFC's higher operational and technical complexity compared across the spectrum of Fitch Ratings' portfolio of availability-based projects. The charter is strong because of achievable performance requirements, a pass-through of all operational costs, and the lack of exposure to resource risk. The rating is not currently constrained by counterparty risk termination provisions linked to guarantor SBM Offshore. The project is expected to derive stable cash flow and achieve DSCRs consistent with the assigned rating, supported by a short debt tenor of seven years and a fully amortizing debt structure.

KEY RATING DRIVERS

Fixed Charter Contract: The charter contract with strong off-taker, Encana Corporation (Encana), insulates the project's cash flow from volume and price risk. The performance requirement linked to charter termination is not onerous and Fitch considers the possibility of performance-related termination remote. Fixed lease payments do not fluctuate based on the Deep Panuke production field center's (PFC or the project) operational performance, and revenue is not based on throughput. (Revenue Risk: Stronger)

Parent-Affiliated Operator: The PFC's operational complexity is mitigated by the involvement of parent SBM Offshore N.V. (SBM Offshore), which has extensive experience in offshore production, and by the full pass-through of all O&M costs to Encana. The operations contract exceeds the debt term, providing long-term operational stability. (Operations Risk: Stronger)

Full Recovery of Life Cycle Costs: The project contracts establish a full pass-through of O&M costs to Encana, including typical project maintenance as well as any capital expenditures. This structure should enable the PFC to meet long-term performance expectations. The seven-year notes mature well within the 20- to 25-year useful life of the PFC's major structural and mechanical components. (Infrastructure Development and Renewal Risk: Stronger)

Typical Debt Structure: SBM Deep Panuke S.A.'s (Deep Panuke or the issuer) debt structure includes conventional features, in line with investment-grade project finance transactions. The senior secured notes are scheduled to fully amortize over a relatively short debt term and benefit from a six-month DSRA. (Debt Structure: Midrange)

Stable Financial Profile: Fixed charter revenues align with level debt payments to create a flat DSCR profile that should allow for consistent financial performance over the term of the notes. Fitch expects debt service coverage to average 1.26x, with a minimum of 1.26x.

Guarantor Credit Quality: Under the operating and charter contracts, bankruptcy or insolvency of guarantor SBM Offshore gives Encana the right to terminate these contracts without compensation to the project. As such, the credit quality of SBM Offshore has a material bearing on the project's rating, but is not currently a rating constraint.

Peer Comparison: Deep Panuke's fixed lease payment structure is stronger than similar peers with revenues subject to reductions based on availability, force majeure or production levels. The ability to pass through nearly all costs provides Deep Panuke with a more stable projected financial profile than its peers, indicating that lower DSCRs are adequate to reach investment grade. Deep Panuke's low leverage and short debt tenor are also favorable features compared with similar availability-based projects.

RATING SENSITIVITIES

Guarantor Credit Quality: Deterioration of the credit quality of guarantor SBM Offshore may increase the likelihood of charter contract termination.

Weak Operational Performance: Persistent weak operational performance may suggest a higher likelihood of charter contract termination.

TRANSACTION SUMMARY

Deep Panuke is the owner of the PFC deployed in the Deep Panuke natural gas field off the shores of Nova Scotia, Canada. The project consists of a natural gas production platform with a contracted production capacity of 300 million standard cubic feet per day, which has been in commercial operation since Nov. 6, 2013. The project generates revenue pursuant to a charter-party contract with Encana for an initial term of eight years. Gas production and processing capacity is chartered exclusively to Encana. The PFC is responsible for accepting raw gas at the platform from all production wells, processing the gas to commercial quality and moving the processed gas to the export pipeline at the exit point of the platform. All other phases from exploration to delivery are Encana's responsibility.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Availability-Based Projects' (June 18, 2013).

Applicable Criteria and Related Research: SBM Deep Panuke S.A. (Offshore Natural Gas Production Facility)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=805088

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Availability-Based Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710784

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=913634

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.