(The following statement was released by the rating agency)
Fitch Ratings-London-February 21:
Fitch Ratings has affirmed Seplat Petroleum Development Company Plc's (Seplat)
Long-Term Issuer Default Rating (IDR) at 'B-' with a Positive Outlook. Fitch has
also affirmed Seplat's USD350 million 9.25% coupon senior notes due 2023 at
'B-', with a Recovery Rating of 'RR4'.
The rating is constrained by the small scale of Seplat's operations,
concentration of asset base in Nigeria (B+/Negative) and historically unstable
operating environment in the troubled Niger Delta. The rating affirmation
reflects moderate financial leverage despite cash outflows for the Eland Oil
Gas plc (Eland) acquisition and the establishment of the ANOH joint-venture
(Assa North/Ohaji South JV), conservative financial policies, expected
production ramp-up in 2020-2021, competitive unit profitability and a growing
domestic gas business.
The Positive Outlook reflects our view that the Amukpe-to-Escravos oil pipeline,
which now Seplat anticipates to be fully commissioned and operational at
end-1Q20, will provide diversification of export routes and mitigate cash flow
volatility. In addition, it reflects our expectation that Seplat will support
organic growth with further MA activities while maintaining a conservative
financial profile.
Key Rating Drivers
Small Nigerian EP Company: Seplat is a small oil and gas producer that operates
in the Niger Delta region of Nigeria. The Nigerian oil and gas sector has
historically been characterised by high operational risks and regulatory
uncertainty. Its main assets are the Oil Mining Leases (OMLs) 4, 38 41, which
accounted for 96% of 2018 production. In 9M19, its net production was 47,200
barrels of oil equivalent per day (kboe/d) with a 50%/50% liquids/gas split and
a 91% production uptime.
Stabilising Production: 2018 was the first full year of production after the
force majeure on the Forcados oil pipeline and export terminal that took place
between February 2016 and June 2017, which severely constrained crude oil
output. The current security situation in the Niger Delta remains stable with no
major incidents.
Small Scale Despite Ramp-up: We expect Seplat to ramp up its daily oil and gas
output to above 55kboe/d in 2021 (excl. the Elcrest JV) from an estimated
45kboe/d-48kboe/d in 2019. We believe that even following Seplat's expected
production ramp-up in 2020-21 it will remain a small EP company with a
significant onshore asset concentration in one country. Its production and
reserves (480.5mmboe of proved and probable or 2P reserves at end-2018) remain
commensurate with the 'B' category rating for an EP company. The Eland
acquisition does not add material reserves, based on our approach to
deconsolidate the OML 40.
Escravos Pipeline Back on Track: To avoid over-reliance in one particular export
route that had adversely affected business in the past, Seplat has been
prioritising the development of the 160kboe/d third-party-operated Escravos
pipeline. This is a lower-risk underground pipeline designed to minimise
vandalisms and reconciliation losses. Although the commissioning was initially
expected in 2014, several delays on historical payments between the owners and
the contractor, outside of Seplat's control, has stalled progress. The issues
have been largely resolved as final works are underway and the export of oil to
the permitted capacity of 40kboe/d (gross) is expected by end-1Q20.
Alternative Routes De-risk Operations: The Escravos pipeline will diversify
Seplat's oil export routes as it is an addition to the Trans Forcados pipeline
and the two jetties at the domestic Warri refinery, which together allow exports
of 30kboe/d gross. We expect Seplat to use the Escravos pipeline as its main
crude export route, supported by the Forcados pipeline. We regard the usage of
the more costly Warri refinery route as unlikely unless force majeure occurs.
These measures, when fully operational, should provide adequate flexible cover
for Seplat's export transportation needs, but we nonetheless conservatively
model additional downtime of 10% in our forecasts for 2020-2022.
Eland Acquisition Credit-Neutral: With the USD495 million Eland acquisition,
which was financed through a combination of balance-sheet cash and an amended
USD350 million senior secured RCF, Seplat acquired an effective 20.25% interest
in the OML 40 via the Elcrest JV and a 40% interest in the developing Ubima
field without compromising its balance sheet. Seplat will consolidate the
Elcrest JV and will receive all the revenues (apart from management fees) as
long as a loan to its JV partner remains outstanding, in-line with the partners'
agreement.
OML 40 Deconsolidated: Fitch elects to deconsolidate the OML 40 to reflect the
longer-term position of Seplat and to avoid cliffs in the credit assessment
metrics once the loan gets repaid. Instead, we include dividends received and
debt repayment inflows in line with the amortisation schedule. While we estimate
FFO adjusted net leverage to have increased to 1.4x at end-2019, we project it
to drop to 1.0x at end-2020.
OML 40 Operational Control to Eland: Eland's asset base contains the OML 40
block and the Ubima field, which are located in close proximity to Seplat's
asset base. Eland owns 45% in the OML 40 block through a JV called Elcrest
(45%/55% - Eland/ Starcrest Energy Ltd). The other 55% is owned by the operator,
NPDC. Eland provided a loan to Starcrest and currently USD500 million is
outstanding. According to the JV partners agreement, this loan gives full
operational control of the 45% stake in the OML 40 to Eland. Operational control
and consolidation will remain in place until the loan gets fully repaid. The
loan matures in March 2024 and begins amortising in 2021.
Stronger Financial Profile: Following the resumption of production in June 2017,
Seplat's financial profile improved materially on higher production, lower
upstream costs and lower interest payment supported by successful debt repayment
and cheaper refinancing. These factors resulted in a FFO-adjusted leverage of
1.2x at end-2018, compared with 10.7x at end-2016. While the acquisition of
Eland increased leverage metrics temporarily, Fitch expects Seplat to generate
positive free cash flow (FCF) and maintain FFO-adjusted net leverage under 1.5x
over the next four years.
Modest Leverage Supports Inorganic Growth: We expect management to continue
actively seeking opportunities for inorganic growth mainly onshore and shallow
water offshore in Nigeria but also abroad without compromising the current
ratings. Domestic opportunities exist as oil majors continue to streamline their
portfolios, exiting Nigeria. We view Seplat's financial policies as conservative
for the rating category, underpinned by debt-reduction initiatives, as well as
flexibility to suspend dividends and cut capex during the troubled 2016-2017
period. We consider acquisitions as an event risk and would reflect them in the
company's ratings as they occur.
Growing Gas Business Provides Buffer: Fitch views positively the growing share
of natural gas in the production mix as contracted offtake volumes and pricing
enhance stability and visibility of FFO. The ANOH gas development project
(Seplat/Nigerian Gas Company Limited (NGC); 50%/50%) underpins Seplat's effort
to further expand gas operations, adding 300mmscf/d to the existing 525mmscf/d
gross wet gas processing capacity. The facility will be commissioned towards
end-2021.
ANOH Funding Being Finalised: As of end-2019, Seplat and NGC contributed to the
JV a total of USD300 million and USD150 million each. The remaining USD120
million (USD60 million each) part of the equity portion will be paid in 1H20.
The JV partners are currently in the process of raising USD280 million of debt
to finalise the funding of this USD700 million project. According to our
discussion with management, Seplat does not expect to provide any guarantee. The
envisaged long-term capital structure would be 60%/40% debt/equity.
Favorable Gas Fiscal Terms: Gas production enjoys favourable fiscal terms in the
form of lower royalties and taxes in an effort from the Nigerian government to
support an under-developed domestic gas market. Moreover, domestic gas prices
are de-linked from oil price and have shown a steady increase in recent years.
Wet gas production also brings material condensate volumes, which are exported
and payments are received in US dollars. However, gas sales are subject to
credit and FX risks as volumes are sold domestically and US dollar-linked
payments for gas are made in Nigerian naira.
Derivation Summary
Onshore Nigeria-based Seplat is a small oil gas EP company by production and
reserves. Its operating profile is commensurate with the middle range of the 'B'
rating category.
Kosmos Energy Ltd. (B+/Stable) and Seplat have similar liquidity profiles and no
near-term debt maturities. Kosmos benefits from higher production levels and
better diversification with assets located in a more predictable business and
security environment, including the US. On the other hand, Seplat benefits from
stronger credit metrics.
GeoPark Limited (B+/Stable) benefits from higher diversification and operations
in lower-risk jurisdictions. Its rating also reflect Fitch's expectation that
the company will be able to further diversify its asset base away from Colombia
while maintaining a strong balance sheet with FFO-adjusted net leverage of below
1x on average. On the other hand, Seplat benefits from higher production and a
larger reserve base.
Key Assumptions
Fitch's Key Assumptions within our Rating Case for the Issuer:
- Oil price deck: USD62.5/bbl in 2020, USD60/bbl in 2021, and USD57.5/bbl in
- Domestic gas prices of about USD3/mcf on average, in-line with existing
contracts
- Upstream production ramping up to above 55kboe/d in 2021
- Capex averaging above USD200 million a year in 2020-2021
- Dividends of about USD59 million a year up to 2022
Fitch's Key Assumptions for Purposes of Recovery Analysis:
- The recovery analysis assumes that Seplat would be restructured as a going
concern rather than liquidated in an event of default
- Seplat's post-reorganisation, going-concern EBITDA is estimated at around
USD223 million, based on the current asset base. A drop in EBITDA to the
going-concern level reflects risks associated with hydrocarbon price volatility,
potential unplanned downtime and other adverse factors
- We have applied a distressed enterprise value (EV)/EBITDA multiple of 4.5x to
calculate a going-concern EV, reflecting a mid-cycle multiple for the natural
resources sector in the EMEA region
- We assume a 10% administrative claim to be deducted from the going-concern EV
- Our principal waterfall analysis assumes the USD350 million senior secured RCF
and USD125 million Eland reserve-based lending facility (RBL) rank senior above
the group's senior notes
- Taking into account our Country-Specific Treatment of Recovery Ratings
Criteria, our waterfall analysis generated a ranked recovery in the 'RR4' band,
indicating a 'B-' instrument rating. The waterfall analysis output percentage on
current metrics and assumptions was 50%.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive
Rating Action
‒ The successful completion and commencement of the Escravos oil pipeline, FCF
generation on a sustained basis along with production ramp-up resulting in
forecast FFO-adjusted net leverage remaining below 3.5x, which could result in
an upgrade of the IDR to 'B' and a Stable Outlook
Future Developments That May, Individually or Collectively, Lead to Negative
Rating Action
‒ Downgrade of Nigeria and local banks where Seplat has historically kept most
of its cash
‒ Higher-than-forecast downtime as a result of unforeseen events, resulting in
material loss of production
‒ Lower-than-expected production ramp-up in 2020-2021
‒ Failure to maintain FFO-adjusted net leverage at below 3.5x on a sustained
basis
Liquidity and Debt Structure
Adequate Liquidity: Pro-forma end-2019 for the Eland acquisition, Seplat's
standalone indebtedness was USD700 million, including USD350million of senior
notes and a fully drawn USD350 million senior secured RCF. As of 9M19, Eland's
USD125 million RBL had USD75 million drawn. Based on Fitch's assumptions, we
view balance-sheet cash to be the main source of liquidity, which we view as
adequate to support near-term liquidity needs. Our modelling also suggests that
Seplat will be broadly FCF-positive after dividends in the next three years.
Exposure to Nigerian Banks Reduced: Seplat has historically held most of its
cash at Nigerian banks, which have ratings from Fitch of 'B+'/Negative and
below. Currently about half of its cash balances are held offshore and more than
80% of its total cash are denominated in US dollars. Nevertheless, we believe
that Seplat has large exposure to the Nigerian banking system and we believe
that cash holdings at Nigerian banking institutions are vulnerable to a sharp
deterioration in oil prices and naira.
Summary of Financial Adjustments
Fitch adjusted Seplat's debt by adding USD12 million of non-cancellable
operating lease commitments using a multiple of 6x as the company is based in
Nigeria.
Fitch adjusted USD3.4 million cash subject to legal restrictions as not being
readily available.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit
relevance is a score of 3. This means ESG issues are credit-neutral or have only
a minimal credit impact on the entity, either due to their nature or to the way
in which they are being managed by the entity.
Seplat has an ESG Relevance Score of 5 for Human Rights, Community Relations,
Access Affordability due to its focus on upstream operations in the troubled
Niger Delta region of Nigeria. This has a negative impact on its credit profile
and is highly relevant to the ratings as historically, this area has been a
high-risk environment driven by militancy, crude oil theft, pipeline sabotage,
as well as environmental pollution arising from militant strikes against oil
infrastructure.
The Trans Forcados pipeline, the company's primary export route, was shut down
for 305 days in 2016, more than 182 days in 2017 and about 60 days in 2018,
adversely affecting Seplat's operations. Deeper communication and cooperation
between the government, the companies and local communities have seen a
significant reduction in targeted attacks on oil infrastructure since then.
Militancy activities reduced significantly in 2019 and 2020 to date and the
Trans Forcados export system saw an improved uptime of 91% in 2019 compared with
50% in 2017.
For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg
Seplat Petroleum Development Company Plc; Long Term Issuer Default Rating;
Affirmed; B-; RO:Pos
----senior unsecured; Long Term Rating; Affirmed; B-
Contacts:
Primary Rating Analyst
Wilhelm Mjaaland,
Analyst
+44 20 3530 2605
Fitch Ratings Ltd
30 North Colonnade, Canary Wharf
London E14 5GN
Secondary Rating Analyst
Nikos Kousiantzas,
Associate Director
+34 93 323 8417
Committee Chairperson
Peter Archbold, CFA
Senior Director
+44 20 3530 1172
Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email:
adrian.simpson@thefitchgroup.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Criteria (pub. 19 Feb 2019)
https://www.fitchratings.com/site/re/10062582
Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019)
https://www.fitchratings.com/site/re/10090792
Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)
https://www.fitchratings.com/site/re/10058988
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/site/dodd-frank-disclosure/10111623
Solicitation Status
https://www.fitchratings.com/site/pr/10111623#solicitation
Endorsement Policy
https://www.fitchratings.com/regulatory
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