Earlier this month, Fitch affirmed Abu Dhabi Crude Oil Pipeline’s (or ADCOP’s) long term rating at AA with a stable outlook. ADCOP owns a 405km pipeline running from Habshan in Abu Dhabi to Fujairah Port transporting ~23% of ADNOC’s (Abu Dhabi National Oil Company, the 100% state owned fully integrated oil company managing ~95% of the UAE’s reserves) exports.
ADCOP generates its revenue through a 37 year use and operate agreement with ADNOC Onshore, the operator of the pipeline, (which is 60% owned by ADNOC). The agreement provides for transporting a minimum of 600,000 bpd amounting to at least USD219m in payments per year to ADCOP and there is scope to transport greater volumes were the need to arise. The contract and agreements in place mitigate a lot of risks to ADCOP generating stable cash-flows which are credit supportive in terms of its ability to service its debt. The pipeline is also lower risk in the sense it has been operational since 2012, uses established technology and bypasses the politically sensitive Strait of Hormuz reducing as much as 3 days of transit time.
Encouragingly, Fitch also noted that the throughput volumes have been running above the minimum volume commitment: in 1H’19 throughput averaged 696,000bpd. This is positive and increased volumes and reduced costs meant the debt service coverage ratio (DSCR) for 3Q’18 was 1.55x, comfortably ahead of Fitch’s estimates. There is scope for this to continue if throughput volumes continue to run above contractual and current utilisation levels as the pipeline’s designed capacity is 1.5m bpd. Fitch notes that testing in June 2019 showed the pipeline was able to run at 1.8m bpd with the use of drag reducing agents.
ADCOP 4.6% 2047 remains one of our favoured holdings reflecting its strong credit profile and attractive valuations: the AA rated bond trades over 4 credit notches cheap on our Relative Value Model (RVM).