Fitch Affirms Seplat at 'B-'; Outlook Positive

(The following statement was released by the rating agency)
Fitch Ratings-London-23 November 2020:
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 Positive Outlook reflects our view that the Amukpe-to-Escravos oil
pipeline, which Seplat now anticipates to be fully commissioned and
operational in 2H21, will diversify export routes and mitigate cash-flow
volatility. We also view the company's financial profile to be strong for the
rating and if Seplat manages to refinance over the next nine months and spread
its maturities so as to be able to survive for more than two years of force
majeure, this may support the sustainability of its credit profile without the
Escravos pipeline being completed.

In the extreme scenario that the currently primary export route of Trans
Forcados is not operational for over a year and with no alternative other than
the two jetties at the Warri refinery, we expect Seplat to be able to operate
for around 12 months before running out of cash based on the current debt
maturity profile. We would also expect in such a scenario that work on the
Escravos pipeline will be accelerated.

The rating incorporates the small scale of Seplat's operations, concentration
of asset base in Nigeria (B/Stable) and historically unstable operating
environment in the troubled Niger Delta. The rating also reflects moderate
leverage, conservative financial policies, competitive unit profitability and
a growing domestic gas business.
Key Rating Drivers
Small Nigerian E&P Company: Despite the acquisition of Eland Oil and Gas
(Eland), Seplat remains a small oil and gas producer with operations
concentrated around the Niger Delta region. The Nigerian oil and gas sector
has been characterised by high operational risks and regulatory uncertainty.
Its main assets are the Oil Mining Leases (OMLs) 4, 38 & 41, which
accounted for around 75% of 9M20 production and are reliant on the Trans
Forcados pipeline that was out of operation for more than a year between 2016
and 2017 due to sustained breaches by militants.

Ramp-up to 2023: We expect Seplat to ramp up its daily oil and gas output to
around 65kboe/d in 2022-2023 from an estimated 50kboe/d in 2020. Currently,
its crude oil production is subject to the OPEC+ cuts (primarily its Eastern
assets by 20%). We conservatively assume that Seplat will increase production
to around 55kboe/d in 2021 and still remain compliant with the current OPEC+
quotas. We believe that even following Seplat's expected production ramp-up in
2022, it will remain a small E&P company with a significant onshore asset
concentration in one country.

Escravos Pipeline Delayed: Fitch views the completion of the 160kbbl/d
third-party-operated Escravos pipeline as a key factor for upgrade. This is
because it will reduce over-reliance on one particular export route that had
adversely affected business in the past. The Escravos route will materially
improve the assets' production uptime and shrink losses from crude theft and
reconciliation. The commissioning of this export route was initially expected
in 2014, but several delays to payments between the owners and the contractor,
outside of Seplat's control, has stalled progress.

Difficult Macro Environment Stresses Results: We expect Seplat's EBITDA to
decrease 42% yoy in 2020 on lower oil prices and rising costs from the
consolidation of the higher-cost production base of Eland's OML 40. Despite a
challenging macro environment, we expect Seplat to be free cash flow
(FCF)-neutral in 2020. Although we forecast funds from operations (FFO) net
leverage to increase to 2.4x at end-2020 we expect it to average 1.3x in
2021-2023, remaining strong for the rating.

Cost Optimisation Ongoing: Seplat is undertaking cost-cutting measures and
identifying synergies within its newly acquired Eland assets to reduce its
cost base. With the acquisition of Eland, Seplat's operating expenditure
increased to around USD8.73/boe in 3Q20 from about USD6.2/boe in 2019. Cost
optimisations include supplier cost savings, water management optimisation,
barging cost reduction along with legal and other similar cost savings.

Alternative Routes De-risk Operations: The Escravos pipeline will allow
additional oil exports of 40kbbl/d and will be used together with the Trans
Forcados pipeline as the main export routes. We regard the usage of the more
costly Warri refinery route, which allow exports of 30kbbl/d gross, as
unlikely unless force majeure occurs. Furthermore, the Eland acquisition
provides the opportunity to develop its own export route and offshore
terminal, leveraging the Amukpe to Escravos pipeline where together the OMLs
4, 38, 41 and OML 40 crude could be evacuated.

Inorganic Growth: We expect management to continue to actively seek
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 cutting capex during the troubled
2016-2017 period. We consider acquisitions an event risk.

Growing Gas Business Provides Stability: 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. Seplat currently supplies
about 30% of the Nigerian gas to power volumes, a market that is set for
strong growth. The 50-50 ANOH gas development JV between Seplat and Nigerian
Gas Company Limited (NGC) underpins Seplat's effort to further expand gas
operations, adding 300mmscf/d to the existing 525mmscf/d gross wet gas
processing capacity. The facility is on track to be commissioned towards
end-2021.

ANOH Funding Being Finalised: The JV partners are currently in the process of
finalising USD320 million of non-recourse debt financing to fund the remaining
of this USD700 million project. Seplat expects to start receiving dividends
from 2022, although we conservatively do not include any contribution in our
rating case.

ESG - Social: 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. 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. This has a negative impact on its credit
profile and is highly relevant to the ratings. The completion of the new
alternative pipeline will support a positive rating action.

The Trans Forcados pipeline, the company's primary export route, was shut down
for 305 days in 2016 and more than 182 days in 2017, adversely affecting
Seplat's operations. Deeper communication and cooperation between the
government, the companies and local communities have since seen a significant
reduction in targeted attacks on oil infrastructure. Militancy activities
reduced significantly since the force majeure and the Trans Forcados export
system saw an improved uptime of 77% in 9M20 compared with 50% in 2017.
Derivation Summary
Onshore Nigeria-based Seplat is a small oil & gas E&P company by
production and reserves.

We rate Ithaca Energy Ltd (B/RWN) one notch above Seplat as Ithaca benefits
from lower leverage, a more robust hedging position, higher production volumes
(2020F: 67kboe/d) and focus on the UK North Sea, which is a more stable
operating environment compared with that of Seplat, which only focuses on
Nigeria. This is partially mitigated by Seplat's bigger reserve base and
higher reserve life (Ithaca: 4 years on a 1P basis). Ithaca is on RWN as we
see potential liquidity pressure and deterioration of the financial profile
stemming from liquidity issues experienced by its 100% parent Delek Group.

Compared with Kosmos Energy Ltd. (B/Negative), Seplat has bigger reserve base,
higher reserve life and stronger credit metrics with no material maturities
until the beginning of 2022. These strengths are offset by Kosmos' more
diversified asset base in a more predictable business and operating
environment - including the US - compared with Seplat's high exposure and
concentration to areas characterised by geopolitical risk. Kosmos' Negative
Outlook reflects our expectation of adverse impact on the company's liquidity
profile from limited access to committed liquidity sources as well as
uncertainties around the execution of farm-down transactions.
Key Assumptions
Fitch's Key Assumptions within our Rating Case for the Issuer:

- Oil price deck of USD41/bbl in 2020, USD45/bbl in 2021, USD50/bbl in 2022,
and USD53/bbl in 2023

- Domestic gas prices of about USD2.8/mcf on average until 2023

- Upstream production ramping up to above 65kboe/d in 2022-2023

- Dividends of about USD59 million a year up to 2023

Fitch's Key Assumptions for 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 and the risks associated with the
operating environment in the country of operation.

- We assume a 10% administrative claim to be deducted from the going-concern
EV

- Our principal waterfall analysis assumes the USD350 million senior secured
revolving credit facility (RCF) and USD100 million Eland reserve-based lending
facility (RBL) rank senior above Seplat's senior notes

- Taking into account our Country-Specific Treatment of Recovery Ratings
Rating 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 is 50%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating
action/upgrade:

‒ The successful completion and commencement of the Escravos oil pipeline,
positive FCF generation on a sustained basis along with production ramp-up
resulting in forecast FFO net leverage remaining below 3.5x, could result in
an upgrade of the IDR to 'B'.

-We may also consider a positive rating action if the company successfully
refinances its indebtedness and improves its debt maturity profile so as to be
able to survive more than two years of force majeure in the Forcados export
system.

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

-As the rating is on Positive Outlook, negative rating action is unlikely in
the short term. However, failure to maintain FFO net leverage at below 3.5x on
a sustained basis or further delay to completion of the Escravos oil pipeline
along with insufficient liquidity to cope with protracted operational
disruptions could lead to the Outlook being revised to Stable.

-Inability to refinance upcoming maturities would lead to a downgrade.

‒ Higher-than-forecast downtime as a result of unforeseen events, resulting
in material loss of production or downgrades of Nigeria and of local banks
where Seplat has historically kept most of its cash could also lead to a
negative rating action.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a
best-case rating upgrade scenario (defined as the 99th percentile of rating
transitions, measured in a positive direction) of three notches over a
three-year rating horizon; and a worst-case rating downgrade scenario (defined
as the 99th percentile of rating transitions, measured in a negative
direction) of four notches over three years. The complete span of best- and
worst-case scenario credit ratings for all rating categories ranges from 'AAA'
to 'D'. Best- and worst-case scenario credit ratings are based on historical
performance. For more information about the methodology used to determine
sector-specific best- and worst-case scenario credit ratings, visit
https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: As at end-September 2020, Seplat had around USD300 million
of liquidity, including around USD200 million of readily available cash and
USD100 million availability under its USD350 million senior secured RCF that
were more than sufficient to cover its short-term debt repayments. The company
has minor scheduled debt maturities for the rest of 2020 and 2021.

Seplat is also in the process of refinancing the Eland RBL, which should
improve its debt maturity profile further. At end-September 2020, Seplat's
indebtedness stood at USD700 million, including USD350 million of senior
notes, USD250 million drawn under its USD350 million senior secured RCF and a
fully drawn USD100 million Eland RBL. Our modelling suggests that Seplat will
be FCF-neutral in 2020 and FCF-positive after dividends in the subsequent
years.

Exposure to Nigerian Banks Reduced: Seplat has historically held most of its
cash at Nigerian banks, which have ratings from Fitch of 'B'/Stable and below.
At end-September 2020, about 60% of its cash balances were held offshore and
around 85% of its total cash were denominated in US dollars. As a general
policy, the company usually retains around 70% of its total cash in US dollars
and around 70% of the US dollar cash is held offshore. 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 the naira.
Summary of Financial Adjustments
Fitch reclassified around USD3 million of depreciation of right-of-use assets
and around USD0.5 million of interest on lease liabilities as lease expenses,
reducing Fitch-calculated EBITDA by around USD3.5 million in 2019.

Fitch adjusted USD6.7 million cash, subject to legal restrictions, as not
being readily available at end-2019.
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
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. The completion of the
new alternative pipeline will support a positive rating action.

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 the
way in which they are being managed by the entity. For more information on
Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Seplat Petroleum Development Company Plc; Long Term Issuer Default Rating;
Affirmed; B-; Rating Outlook Positive
----senior unsecured; Long Term Rating; Affirmed; B-

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Analyst
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Fitch Ratings Ltd
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London E14 5GN

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Associate Director
+34 93 323 8417

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+44 20 3530 1314

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Additional information is available on www.fitchratings.com
Applicable Model
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to
criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1
(https://www.fitchratings.com/site/re/973270))

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