Fitch Affirms Nigeria's Seven Energy at 'B-'; Outlook Negative
OREANDA-NEWS. Fitch Ratings has affirmed Nigeria-based Seven Energy International Limited's (Seven Energy) Issuer Default Rating (IDR) at 'B-', and removed it from Rating Watch Negative (RWN). The Outlook is Negative. Simultaneously, Fitch has downgraded the senior secured rating of wholly-owned subsidiary Seven Energy Finance Limited's 10.25% USD300m secured notes due 2021 to 'CCC'/'RR6' from 'CCC+'/'RR5'.
The rating actions follow Seven Energy successfully raising USD100m in new equity (completed on 17 February 2016) and the improvement in its liquidity position for the remainder of 2016. The Negative Outlook reflects our view that the company remains vulnerable to execution and other risks associated with its natural gas and liquids business in Nigeria, as well as a Fitch-projected liquidity shortfall as early as in 1H17, absent restructuring of debt maturities. Seven Energy is currently looking for alternative refinancing options for 2017.
Nigeria's onshore-based Seven Energy is a small oil and gas production and gas processing, distribution and marketing company with a complex structure. We expect its funds from operations (FFO) net adjusted leverage to peak in 2015 at 13x (end-14: 2.9x) and then to decline to 3x in 2016 and to under 2x in 2017-2018, commensurate with a mid 'B' category rating.
KEY RATING DRIVERS
2016-2017 Liquidity Remains Tight
Following successfully raising USD100m equity, Seven Energy has largely resolved the liquidity shortage that we had previously anticipated for 2016. Existing shareholders, including Tomasek, Petrofac, Capital International Private Equity, Standard Chartered, and International Finance Corporation (IFC) contributed USD50m and Saudi Arabia's Islamic Development Bank's IDB Infrastructure Fund II invested another USD50m.
In our view, the company's liquidity in 2016-2017 largely rests on the ramp-up in its gas sales volumes, the successful completion of the Oron to Creek Town gas pipeline, which it expects by mid-2016, and a potential extension of debt maturities.
Seven Energy is currently delivering over 110 million standard cubic feet per day (MMcfpd) of natural gas, up from the average of 70MMcfpd in 2015. Offtakers include three power stations (Alaoji, Calabar and Ibom), a cement plant and a fertiliser factory. The company projects gas deliveries of 150-200MMcfpd by end-2016, as the power stations complete commissioning works and electricity transmission infrastructure. Fitch's base rating case incorporates 110MMcfpd gas production volumes in 2016 and 150MMcfpd in 2017-2018.
Given the risks of the Nigerian operating environment, we consider building a further cash buffer as vital for the company to maintain its 'B-' rating.
Weak SAA Cash Flows
Nigerian Petroleum Development Company (NPDC) and Seven Energy are continuing to clear development expenditures' arrears incurred through to 2015 by Seplat Petroleum Development Company (Seplat), the operator of OMLs 4, 38 and 41. Seven Energy's interest in these OMLs is determined by the Strategic Alliance Agreement (SAA) with NPDC.
SAA's 2015 average oil production was 57 thousand barrels of oil per day (kbopd). While January 2016 production reached 65kbopd, it was followed by the shutdown in mid-February 2016 due to the damage to the Forcados oil terminal. All oil liftings are currently suspended, and the management expects oil production to restart in May - June this year.
The downgrade of the Recovery Rating on Seven Energy's USD300m secured notes to 'RR6' from 'RR5' reflects worsening recovery prospects for bondholders. As the USD385m Accugas IV facility is secured on Seven Energy's gas assets in the South East Delta, the value of the bondholders' security package largely rests on the SAA. We forecast SAA to generate negative free cash flows in 2016 and up USD40m annually in positive cash flows starting in 2017-2018, increasing thereafter post clearing of the development expenditure arrears.
-Brent oil price deck of USD35/bbl in 2016, USD45/bbl in 2017, USD55/bbl 2018.
-Negative cash flows from the SAA in 2016, positive cash flows of under USD40m p.a in 2017-2018 and increasing thereafter post clearing of the development expenditure arrears.
-110MMcfpd gas production volumes in 2016 and 150MMcfpd in 2017 and 2018 from Uquo/Accugas.
-CAPEX per management guidelines.
-No dividends in 2015-2018.
Positive: Future developments that may, individually or collectively, lead to the stabilisation of the Outlook:
-Maintenance of a material liquidity buffer in the form of available cash or committed facilities.
-Continued implementation of the SAA funding plan agreement.
-Maintaining stable production volumes under the SAA, and successful development of contingent oil and gas resources.
-Successful execution of gas strategy, both upstream and midstream, with a track record of timely payment for gas by offtakers.
Negative: Future developments that may, individually or collectively, lead to a downgrade to 'CCC':
-A breakdown in the SAA funding plan with adverse cash flow consequences for Seven Energy.
-Continuing security-related shutdowns at the Trans Forcados pipeline and the Forcados oil terminal beyond management expectations.
-Failure to achieve natural gas production targets and/or obtain timely payments for gas from offtakers.
Limited Liquidity, Large Maturities
On 31 December 2015, Seven Energy had cash on hand of USD30m. Seven Energy's debt maturities are USD70m in 2016, USD121m in 2017 and USD126m in 2018. Management is considering refinancing options to extend the existing maturities.