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Fitch Downgrades Nigeria's Seven Energy to 'C'

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Monday, May 8, 2017 2:42 PM / Fitch Ratings

Fitch Ratings has downgraded Nigeria-based Seven Energy International Limited's Long-Term Issuer Default Rating to 'C' from 'CC' following the non-payment of a material financial obligation. Simultaneously, Fitch has affirmed wholly owned subsidiary Seven Energy Finance Limited's USD300 million 10.25% senior secured notes due 2021 at 'C' with an 'RR6' Recovery Rating.

The downgrade to 'C' follows Seven Energy's announcement that it was unable to make payments on 31 March 2017 under the USD385 million Accugas facility, which is secured on the gas upstream and midstream assets, and requested a standstill from the lending banks. In addition, the company did not meet the conditions for the interest capitalisation under the USD300 million senior secured notes and USD100 million notes due 2021, and was unable to make the related cash payment on 11 April 2017.  
 

Key Rating Drivers 

Forcados Closure Continues: All Seven Energy's oil liftings from oil mining licences (OMLs) 4, 38 and 41 under the strategic alliance agreement (SAA) with the state-owned Nigerian Petroleum Development Company Limited (NPDC) have stopped since February 2016, as the Forcados oil pipeline and terminal remain shut due to the threat of militant attacks.

Earlier in 2017, Seven Energy announced that NPDC intends to terminate the SAA unless the company meets outstanding cash calls. Seven Energy has taken steps to preserve its contractual rights under the SAA, but there is a risk that this once key cash-generating asset will remain largely unavailable.

Weak Gas Cash Flows: Near-term cash flows from the company's gas business remain weak as sale volumes are volatile and the company's major gas off-takers, Nigerian state-owned power stations, delay payments for consumed gas.

In April 2017 Seven Energy reported delays in the finalisation and effectiveness of the World Bank partial risk guarantee (PRG), which is meant to compensate Seven Energy for up to USD112 million of gas supply invoices to Calabar power station, its principal gas off-taker. The company currently expects the PRG to be finalised in May-2017 after the approvals from the Nigerian authorities are obtained.

Poor Receivables Collection: Over the longer term, the natural gas business in Nigeria's southeast is an important growth driver for Seven Energy, which is on track to ramp up gas sales to over 150 million cubic feet per day (mmcfpd). Following the completion of the power grid, local power stations including Calabar can now run at full capacity. On the other hand, power stations continue to suffer from stretched liquidity and poor receivables collection, and are delaying their payments to the company.

Going-Concern Risk: Seven Energy's midstream gas infrastructure assets are fully ring-fenced and serve as security for the company's USD385 million Accugas loan. There is a risk that the Accugas lenders may decide to enforce the security on the gas assets, stripping the company of its presently main cash-generating asset and effectively forcing it into liquidation.

Naira Convertibility Issues: Seven Energy's natural gas revenues are US-dollar pegged but are received in naira. Nigerian companies including Seven Energy are facing difficulties changing naira into US dollars, which the company needs to service its US-dollar debt, at the official exchange rate.

To alleviate the problem, the company is currently negotiating with lenders to convert the Accugas facility into naira and extend its maturity. The naira convertibility issue negatively affects the company's liquidity as long as Forcados remains shut, as the company receives little US dollar revenues from its other operations.
 

Derivation Summary 

Nigeria's onshore-based Seven Energy is a small oil and gas production and gas production, distribution and marketing company. Following the continuous closure of the Forcados export oil pipeline and the poor payment discipline of its gas off-takers, the company is discussing a financial restructuring with investors and lenders as it does not generate sustainable cash flows due to factors mostly outside its control.  
 

Key Assumptions 

Fitch's key assumptions within our rating case for the issuer include:

- Brent oil price deck: USD52.5/bbl in 2017, USD55/bbl in 2018 and USD60/bbl 2019;

-no cash flows from SAA in the medium term;

-natural gas sales volumes gradually ramping up to 150mmcfpd;

-short-term liquidity remains weak. 
 

Rating Sensitivities 

Future Developments That May, Individually or Collectively, Lead to Positive Rating Action

-Successful recapitalisation, eg a debt-for-equity swap, new equity issuance, significant extension of debt maturities, and/or other measures

-Improved liquidity due to sustainable cash flows from the natural gas business, or under the SAA.

Future Developments That May, Individually or Collectively, Lead to Negative Rating Action

-An uncured payment on a material financial obligation

-Restructuring that constitutes a distressed debt exchange (DDE) under Fitch's methodology. 

Liquidity

Weak Liquidity: Seven Energy's liquidity is extremely weak. The company has announced negotiations of a comprehensive capital restructuring with its existing and potential lenders. In our view, the company's survival will primarily depend on its ability to secure stable cash flows from its natural gas and/or oil businesses.


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