OREANDA-NEWS. Fitch Ratings has affirmed Kuwait Energy plc's Long-term Issuer Default Rating (IDR) at 'B-' with the Stable Outlook. Fitch has also affirmed the senior unsecured rating of Kuwait Energy's USD250m 9.5% notes due in 2019 at 'B-' with a Recovery Rating of 'RR4'.

Kuwait Energy's limited operations, ie, small size, operations under quasi-PSA (production-sharing agreements) with national oil companies in the Middle East and North Africa (MENA) region, and current reliance on oil production from Egypt (B/Stable), constrain its ratings to the mid-to-low 'B' category, despite a conservative credit profile.

The rating affirmation reflects our view that Kuwait Energy, while maintaining production at its key upstream Egyptian assets, is successfully developing two greenfields in Iraq, Block 9 and Siba, with the plan to bring them on-stream in 4Q15 and 2016, respectively.

With an average production of 25.3 thousand barrels of oil equivalent per day (mboepd) in 2014 on a working interest (WI) basis, mainly from Egypt, Kuwait Energy had revenues of USD271m and EBITDA of USD181m that year. We expect the company's Iraqi assets to start coming on-stream over the next 12 months, which is positive for the company's upstream diversification. We forecast Kuwait Energy's total production should reach 50mboepd in 2017.

KEY RATING DRIVERS

Small MENA Oil Producer
Kuwait Energy is a small MENA-focused oil and gas company with an average WI production of 26.8mboepd in 1Q15, up from 22.5mboepd in 1Q14. In 2014 Kuwait Energy's oil production came from three countries - Egypt (76%), Yemen (14%) and Oman (10%). Egypt has been the backbone of Kuwait Energy's operations since 2008. The company has stakes in four Egyptian assets, whose average WI production more than doubled to 17.5mboepd between 2010 and 2014. The company's operations in Yemen, which had an average WI production of 4.5mboepd in 2014, have been put on hold since the civil war erupted in March 2015.

At end-2014, Kuwait Energy's proved and probable (2P) reserves were 671 million barrels of oil equivalent (mmboe), over 90% of which are located in Iraq. Its 2P reserves in Egypt of 32mmboe imply a reserve life there of only about five years. Kuwait Energy's total hydrocarbon production and reserves are in line with that of Fitch-rated 'B' category peers.

Reduced Collection Risk in Egypt
While Kuwait Energy's historical receivables in Egypt had been high and payments to the company had been irregular at times, receivables collection has improved over the last 12 months. The state-owned Egyptian General Petroleum Corporation (EGPC) acts as its primary off-taker with respect to production entitlement under the PSAs and is responsible for service agreement payments to Kuwait Energy. At 31 December 2014 EGPC receivables to Kuwait Energy declined to USD66m, and in 2014 Kuwait Energy received USD263m in cash from EGPC. As of mid-April 2015, Kuwait Energy stated that EGPC receivables were nil. Kuwait Energy enjoys good relations with EGPC, which acquired a 10% interest in the company's Block 9 in Iraq in 2014.

Although the receivables crisis in Egypt appears to have been largely resolved, we believe that collection risk in Egypt remains given the sovereign's fairly weak finances.

Accelerated Block 9 Development
Kuwait Energy is accelerating the development of greenfield Block 9 in Iraq, in which it currently has a 60% WI, with an expected oil production launch in 4Q15. Located in south-east Iraq close to the existing pipeline and other infrastructure, Block 9 has 2P estimated reserves of 435mmboe (based on a 60% WI).

Block 9 is a 30-year service-type take-or-pay contract with Iraqi state-owned South Oil Company with service fees of USD6.2 per barrel of oil equivalent (boe). The company expects an early production ramp-up of around 20mboepd (gross, not Kuwait Energy's share) in 2016 and a plateau production of 120mboepd (gross). Kuwait Energy estimates its total Block 9 capex at around USD280m in 2015-2017. After the initial cost recovery, service fees to Kuwait Energy are independent of oil prices and, hence, should generate steady cash flow. We believe that Block 9, when operational, should help Kuwait Energy diversify oil production away from Egypt, albeit subject to production and payment risks.

Project Delays Hamper Siba
Siba, Kuwait Energy's greenfield gas project in Iraq, has been delayed beyond the original launch date in 2H15 due to contracting issues. In April 2015 Egyptian state-owned Petrojet was awarded the Siba EPC (engineering, procurement and construction) contract for USD185m. We now expect Siba to start full-scale production in 2H16, while two existing wells currently produce nearly 50 million cubic feet of gas per day (mmcf/d).

As with Block 9, Siba is a 20-year take-or-pay agreement with South Oil Company, with a plateau production of 100mmcf/d and USD7.5/boe service fees. The Siba delay means that that 2014 capex has been re-phased to 2015.

Leverage Peaks in 2015
We view Kuwait Energy's financial profile as commensurate with that of a 'BB'-rated exploration and production oil company. Using Fitch's latest oil price deck (see the list of assumptions below), we forecast funds from operations (FFO) adjusted net leverage to peak at around 3x in 2015 (end-2014: 1x). As the Iraqi assets come on-stream, capex should decrease and the company should de-leverage to under 1x by 2017. If the Iraqi greenfield production is delayed or faces other problems, Kuwait Energy's financial flexibility may decrease.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to positive rating action include:
-Successful launch of Iraqi greenfields with a track record of full and timely payments.
-Successful renewal of licenses in Egypt set to expire in 2016-2017.
-Maintaining strong liquidity and a conservative financial profile, e.g., FFO-adjusted net leverage below 2x on a sustained basis.

Future developments that may, individually or collectively, lead to negative rating action include:
-Problems with cash collection in Egypt.
-Failure to launch Block 9 and Siba on time, ramp-up production or obtain cost recovery.
-FFO-adjusted net leverage above 3x on a sustained basis.
-A downgrade of Egypt, insofar it remains Kuwait Energy's principal production location.

KEY ASSUMPTIONS
-Fitch's oil price deck for Brent of USD55/bbl in 2015, USD65/bbl in 2016, USD75/bbl in 2017 and USD80/bbl in 2018
-Service fees for Iraqi production of USD7.5/boe for Siba and USD6.2/boe for Block 9.
-Iraq's Block 9 comes on stream in 2H15 and Siba in 2016.
-2015 capex of around USD280m mainly to develop Block 9 and Siba.
-Nearly USD70m in non-operating cash inflows in 2015 including proceeds from the disposal of a stake in Iraq's Block 9 and Mansuriya.

LIQUIDITY AND DEBT STRUCTURE

At 31 May 2015, Kuwait Energy had USD171m in cash on hand, deposited with a number of international and regional banks. At end-2014, it had gross debt of about USD360m, mainly the USD250m notes. It has no debt repayments in 2015-2016 and fairly modest repayments in 2017-2018. Its maturities will peak in 2019 with USD272m due, mainly the USD250m notes.