Fitch Rates Seplat Proposed Dollar-Denominated Bond Issuance
By Dipo Olowookere
Last week, one of the companies listed on the Nigerian Stock Exchange (NSE), Seplat Petroleum Development Company Plc (Seplat) announced its intention to issue five or seven-year Dollar denominated bonds to foreign investors.
The notes would be issue to refinance the company’s debts, a statement signed by the oil firm had disclosed.
With investors gearing up for the exercise, one of the renowned rating agencies in the world, Fitch Ratings, has assigned expected senior unsecured ‘B-(EXP)’/’RR4(EXP)’ ratings to the proposed bond issuance.
This information was made known in a statement issued by Fitch on Wednesday, February 28, 2018, which was obtained by Business Post.
Also in the statement, Fitch assigned an expected Long-Term Issuer Default Rating (IDR) of ‘B-(EXP)’ with a Positive Outlook to Seplat.
According to the rating firm, the expected IDR assumes a successful refinancing in 2018, i.e., issuance of USD-denominated senior notes and signing of a new long-term revolving credit facility (RCF).
The assignment of a final IDR is contingent upon the successful completion of the refinancing, with terms and conditions in line with our current assumptions.
The assignment of a final rating to the notes is contingent upon receipt of final documentation substantially in line with draft documentation reviewed.
The ‘B-(EXP)’ IDR reflects Seplat’s small scale by production and reserves, concentration of onshore exploration and production (E&P) assets in Nigeria (B+/Negative), and the cash flow volatility that has been associated with its operating environment.
Specifically, between February 2016 and June 2017, Seplat’s performance was severely impacted by a militant attack and subsequent prolonged downtime at the Forcados oil pipeline and export terminal. The company also has large, albeit declining, receivables from state-owned Nigerian Petroleum Development Company (NPDC).
The force majeure was lifted in June 2017 and Seplat has been ramping up production at its main asset.
Fitch said the Positive Outlook assigned to Seplat reflects its view that the Amukpe-Escravos oil pipeline, which Seplat anticipates to be fully commissioned and operational in Q318, will somewhat mitigate cash flow volatility by providing a viable alternative export route to Seplat.
The successful completion and start of operations of the Escravos oil pipeline coupled with continued production ramp-up across Seplat’s upstream assets could result in an upgrade of the IDR to ‘B’.
Along with the post-restructuring capital structure, the rating captures Seplat’s financial profile over 2018-2020, with forecast funds from operations (FFO) net adjusted leverage expected to remain comfortably below the 3.5x negative sensitivity.
On the key rating drivers, Fitch said Seplat, as a small E&P company with onshore oil and gas assets in Nigeria, had its full year 2017 working interest (WI) production around 37 thousand barrels of oil equivalent per day (kboepd), split nearly equally between liquids and natural gas.
Its main assets are the Oil Mining Leases (OMLs) 4, 38 and 41, production at which was severely constrained in 2016-1H17 due to the closure of the Forcados oil pipeline and export terminal following an attack.
Fitch forecasts that Seplat will continue ramping up its daily oil and gas output to 68kboepd in 2021, which incorporates our conservative estimate of a 20 percent additional downtime on the management forecasts.
It also believes that even following Seplat’s expected production ramp-up in 2018-2021 it will remain a small E&P company with a significant onshore asset concentration in one country. Its WI production and reserves (end-2016 – 241mmboe of proved or 1P reserves) remain commensurate with the ‘B’ category rating for an E&P company.
Fitch said to avoid a repetition of a prolonged downtime experienced when force majeure was declared on the Forcados oil pipeline and export terminal, Seplat and the Nigerian authorities have been working on a number of security options and alternative export routes.
The Nigerian government has prioritised the completion of the 160kbopd Amukpe-Escravos oil pipeline. Seplat currently expects the pipeline to be fully commissioned and operational in 3Q18.
In addition to the Escravos pipeline, two jetties at the domestic Warri oil refinery have been upgraded to allow exports of 30kbopd gross.
However, this is a more expensive option as barging of crude is required and Seplat plans to use Escravos as the primary crude export route, supported by Forcados and the Warri refinery routes.
“We believe that these measures when fully operational should provide adequate flexible cover for Seplat’s export transportation needs, but nonetheless conservatively model additional downtime of 20% in our forecasts for 2018-2020,” the rating agency said in its report.
It noted that following the resumption of production at OLMs 4, 38 and 41 in June 2017, Seplat’s financial profile has improved materially.
“Our 2017 base case forecasts FFO at $134 million vs. negative $11 million in 2016 and FFO net adjusted leverage of 2.5x vs. 8.5x at end-2016.
“We expect that Seplat will maintain a conservative financial profile over 2018-2020, with positive free cash flow (FCF), FFO adjusted net leverage under 2.5x and interest coverage of at least 3x,” it said.
Seplat’s 2017 gas revenues of $124 million were up 18 percent year-on-year and its daily gas sales averaged 293MMscfd (gross, not WI) in 4Q17. Seplat aims to increase gas supply to the domestic Nigerian market. Its gas processing capacity stands at 525MMscfd, while current wells can deliver around 400MMscfd (gross).
Nigerian gas prices are largely de-linked from oil prices, e.g. while average realised oil prices dropped by 21 percent between 2015 and 2016, gas prices increased by 19 percent. Seplat projects a higher share of gas in its production volumes, from 50 percent in 2017 to 60 percent in 2021.
“We view positively the higher share of gas in the sales mix, as it provides a more stable source of revenues.
However, gas remains the smaller business and is projected to account for less than 25 percent of the company’s gross revenues in 2021. Gas sales are also subject to credit risks and FX risks, as USD-linked payments for gas are made in Naira,” Fitch stated.
The rating company said the senior notes and secured RCF are expected to be issued by Seplat and will benefit from pari-passu upstream guarantees from Seplat West Ltd (contributor to almost 100 percent of consolidated EBITDA in 2017), Newton Energy and Seplat East Swamp Ltd.
The RCF will further benefit from a security package including a pledge over the shares of Seplat West and Newton, thus ranking it ahead of senior notes under our recovery analysis.
The notes benefit from a standard high-yield covenant package including covenants on permitted payments, incurrence of indebtedness and issuance of preferred stock, merger, consolidation or sale of assets, investments, creation of certain liens, pari passu in right of payment, and contain no financial maintenance covenants.
On its key assumptions, Fitch said they were based on Brent price deck of $52.5/bbl in 2018, $55/bbl in 2019 and $57.5/bbl thereafter; successful renewal of licenses for OMLs 4, 38 and 41 that expire in June 2019; domestic gas prices of between $2.5/mscf and $3/mscf, in line with management forecasts; and daily oil and gas production volumes ramping up from about 37kboepd in 2017 to 68kboepd in 2021, including a 20 percent additional downtime on the management forecasts.
Other were Opex (excluding royalties) improving from about $7.5/boe in 9M17 to about $6.5/boe in 2020-2021, 20 percent more conservative than management forecasts; average capex of about $105 million in 2017-2021, in line with management forecasts; and other cash inflows and outflows as projected plus $100 million additional outflows assumed by Fitch in each 2019-2021.
On the assumptions that relate to recovery estimates, Fitch its bespoke recovery analysis considered Seplat’s value on a going-concern basis in a distressed scenario and assumed that the company would keep its operating licenses and would be restructured rather than liquidated.
Fitch also applied a 25 percent discount to the 2017 EBITDA reflecting its view of a sustainable, post-reorganisation level upon which it based the valuation of the company. The discount reflects risks associated with the oil price volatility, potential unplanned downtime and other adverse factors.
In addition, the 4.5x multiple was used to calculate a post-reorganisation enterprise value (EV), reflecting a mid-cycle multiple for oil & gas and metals & mining companies in the EMEA region. This considered that Seplat does not have any unique characteristic that would allow for a higher multiple, such as significant market share, or undervalued assets.
As per Fitch’s criteria, the new and prior ranking RCF is assumed to be fully drawn and it has also taken 10 percent off the EV to account for administrative claims.
The waterfall results in a 100 percent recovery corresponding to a ‘RR1’ Recovery Rating for the RCF. The noteholders could achieve a recovery of 70% (RR3) but are capped at ‘RR4’ (soft cap), in line with Fitch’s criteria as Seplat’s physical assets are located in Nigeria.
Fitch said it expects Seplat’s liquidity to improve post refinancing, supported by positive FCF generation and a manageable maturity profile.
Fitch-projected FCF is around $125 million in 2018 and $66 million in 2019 because as at December 31, 2017, Seplat had the equivalent of $437 million in cash.
Three Securities Shore Up NASD Market Capitalisation by N14.99bn
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange closed the final trading session of the week in positive territory as it gained 1.49 per cent at the close of business on Friday, June 2.
This growth was spurred by the upward price movement in the share prices of three companies admitted on the trading platform of the unlisted securities exchange.
FrieslandCampina Wamco Nigeria Plc rose by N4.80 to close at N75.00 per share compared with the preceding day’s N70.20 per share, Central Securities Clearing System (CSCS) Plc gained N1.12 to move up to N15.20 per unit from N14.08 per unit, while Acorn Petroleum Plc added 1 Kobo to close at 15 Kobo versus Thursday’s closing price of 14 Kobo.
The improvement in the prices of the above stocks pushed the market capitalisation of NASD higher by N14.99 billion to N1.023 trillion from N1.007 trillion, as the NASD Unlisted Securities Index (NSI) recorded a 10.84 points gain to wrap the session at 739.21 points compared with 728.37 points in the previous session.
The market witnessed a 15.6 per cent rise in the volume of securities traded by investors yesterday to 1.2 million units from the 1.0 million units transacted a day earlier.
However, the value of shares traded by the market participants decreased by 69.9 per cent to N56.9 million from N189.5 million, as the number of deals declined by 46.7 per cent to eight deals from the 15 deals carried out in the preceding day.
Geo-Fluids Plc closed the day as the most traded stock by volume (year-to-date) with 832.1 million units worth N1.3 billion, Industrial and General Insurance (IGI) Plc has traded 627.7 units valued at N49.4 million, and UBN Property Plc has exchanged 395.9 million units worth N336.6 million.
The most traded stock by value (year-to-date) was VFD Group Plc with 11.0 million units worth N2.5 billion, Geo-Fluids Plc has exchanged 832.1 million units valued at N1.3 billion, and FrieslandCampina Wamco Nigeria Plc has transacted 17.1 million units worth N1.2 billion.
Naira Falls at P2P, Gains at Black Market, Stable at Official Market
By Adedapo Adesanya
The Naira moved in different directions in the various segments of the foreign exchange (FX) market on Friday as traders await the merger of the exchange rates by the Central Bank of Nigeria (CBN) as directed by President Bola Tinubu.
Business Post reports that the Naira depreciated against the Dollar at the Peer-2-Peer (P2P) segment, appreciated in the black market, and remained unchanged in the Investors and Exporters (I&E) window.
In the P2P, the value of the local currency to the greenback fell by N9 to sell at N764/$1 compared with Thursday’s value of N755/$1.
At the parallel market, the domestic currency gained N3 against the greenback to sell at N747/$1, in contrast to the preceding session’s N750/$1.
However, in the official market, the Nigerian Naira maintained stability against the US Dollar to remain unchanged at N464.67/$1, as the forex turnover went down by 60.6 per cent or $152.08 million to $98.90 million from $250.98 million.
In the interbank segment, the Naira depreciated against the British Pound Sterling by 91 Kobo to close at N575.28/£1 versus the previous day’s N574.37/£1 and slumped by 12 Kobo against the Euro to sell at N493.70/€1 compared with Thursday’s N493.58/€1.
As for the digital currency, Bitcoin (BTC) jumped by 0.2 per cent to sell at $27,203.27, Ethereum (ETH) appreciated by 0.7 per cent to quote at $1,904.59, Cardano (ADA) added 1.4 per cent to its value to finish at $0.3774, Ripple (XRP) recorded a 1.3 per cent gain to quote at $0.5254, Dogecoin (DOGE) improved its value by 0.6 per cent to close at $0.0726, and Solana (SOL) made a 0.3 per cent rise to sell at $21.13.
On the flip side, Binance Coin (BNB) fell by 0.6 per cent to sell at $306.43, and Litecoin (LTC) followed with a 0.5 per cent loss to trade at $94.72, as the US Dollar Tether (USDT) and Binance USD (BUSD) remained unchanged at $1.00 each.
Oil Closes 2% Higher Ahead Crucial OPEC+ Meeting
By Adedapo Adesanya
Oil rose over 2 per cent on Friday after the United States Congress passed a debt ceiling deal that averted a government default in the world’s biggest oil consumer and jobs data fueled hopes for a possible pause in Federal Reserve interest rate hikes.
The focus is now on a meeting of the Organisation of the Petroleum Exporting Countries (OPEC) and its allies, OPEC+, this weekend.
Brent futures rose $1.85 or 2.5 per cent yesterday to $76.13 a barrel, while the US West Texas Intermediate (WTI) futures appreciated by $1.64 or 2.3 per cent to $71.74 a barrel, the highest since May 26 for WTI and May 29 for Brent, but for the week, both contracts were down about 1 per cent, their first in three weeks.
The US Senate approved a bipartisan deal to suspend the limit on the government debt ceiling, following approval in the House of Representatives, staving off a default that would have affected the markets.
Also, employment in the world’s largest economy increased more than expected in May, but a moderation in wages could allow the US Federal Reserve to skip a rate hike this month for the first time in more than a year, which could support oil demand.
However, a jump in the unemployment rate to 3.7 per cent from 3.4 per cent in the prior month, a slowing in the pace of hourly wage growth, and a decline in hours worked indicate that the US central bank may go ahead with expected moves.
Oil traders will watch the June 4 meeting of OPEC+. The group in April announced a surprise production cut of 1.16 million barrels per day, but resulting price gains have been erased, and crude is trading below pre-cut levels.
Reports showed that OPEC+ could also be debating an additional oil production cut among possible options.
According to Reuters, three OPEC+ sources said cuts were being discussed among options for Sunday. The sources said cuts could amount to 1 million barrels per day on top of existing cuts of 2 million barrels per day and voluntary cuts of 1.6 million barrels per day that were announced in a surprise move in April.
The oil ministers of the 23-nation alliance will gather at 2 p.m. in Vienna (1 p.m. Nigerian time). Before then, OPEC ministers will meet at 11 a.m. (10 a.m.) on Saturday.
On the demand side, manufacturing data out of China, the world’s second-biggest oil consumer, painted a mixed picture.
In the US, energy firms this week slashed the number of oil rigs operating by the most since September 2021, reducing the overall count for a fifth week in a row, energy services firm Baker Hughes Co. said.
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