· The positive outlook
reflects the possibility of an upgrade in the next 12 months, subject to Seplat
maintaining smooth operations and us getting a clearer view of the company's
S&P Global Ratings today assigned its 'B-'
long-term issuer credit rating to Nigeria-based oil and gas producer Seplat
Petroleum Development Company PLC. The outlook is positive.
At the same time, we assigned our 'B-' issue
rating to Seplat's proposed $350 million senior unsecured notes.
These ratings are in line with the preliminary
ratings we assigned on Feb. 28, 2018.
The rating on Seplat reflects our assessment of
the company's vulnerable business risk profile and aggressive financial risk
profile based on the proposed capital structure. The rating also captures a
potential midsize acquisition, in line with the company's strategy, which may
translate into weaker credit metrics.
Our assessment of Seplat's business risk is driven
by its operations in Nigeria, which we view as a very high-risk jurisdiction.
This is because of security risks including downtimes, militancy, and theft.
From 2016, tensions between some groups in the Niger Delta and the Nigerian
government have escalated, which resulted in the explosion of the offshore
loading arm of Shell's Forcados export terminal. Following talks between the
groups involved and limited interruptions in the last six months, a lull
appears to be prevailing, although the political situation remains precarious.
Other elements include Seplat being a relatively
small exploration and production player, with net working interest production
of around 47,522 barrels of oil equivalent per day (boepd) from June to
year-end 2017 and with 2P (proved plus probable) reserves standing at 477
million boe as of Dec. 31, 2017, evenly split between oil and gas.
The February 2016 explosion of the Forcados
pipeline, which is Seplat's main export route, and the extended period until it
resumed operations, materially hindered the company's operational performance.
Seplat saw a decline in its total production to about 26,000 boepd in 2016 and
in the first half of 2017, compared with about 43,000 boepd in 2015. The firm
had to take sweeping measures to keep operating during the period, including
significant operating and capital expenditure (capex) cuts and debt
restructuring, as well as establishing an alternative export route via Warri
Since the third quarter of 2017, we have seen a
gradual increase in production which, as of today, is above pre-crisis volumes.
We assume the company will reduce its reliance on the Forcados terminal in the
coming year with the commission of the Escravos pipeline in the third quarter
of 2018, and retain the ability to access the Warry refinery jetties, as it did
Positively, we note the development of Seplat's
gas business in the past two years. We understand that sales from this business
accounted for about 30% of the company's total sales in 2017. The gas is
consumed locally, supported by healthy demand and ongoing price increases,
de-linked from oil prices. Under our base case, we project that sales from the
gas business will increase to $250 million-$300 million in 2020 from about $124
million in 2017, providing the company with some diversity.
Our assessment of Seplat's aggressive financial
risk profile is underpinned by its ability to maintain S&P Global
Ratings-adjusted funds from operations (FFO) to debt of 30%-45% over the coming
years. Our assessment takes into account the company's strategy of allocating a
significant portion of its cash flows to develop the business, both organically
and through mergers and acquisitions (M&A).
In addition, we factor in some buffers to absorb
either operational issues or volatility in prices. Our threshold for the rating
may change over time as the company continues to develop its portfolio,
especially if it reduces its concentration risk. For example, a sizable
acquisition that improved the portfolio and produced stable cash flows could
result in a lower credit metrics threshold for the current rating. At this
stage, we have limited visibility on the timeline of a potential
acquisition, scale, contribution to the cash flow, and other related factors.
After the refinancing, the company's debt is
expected to be about $550 million, including notes of $350 million and $200
million drawn under a new revolving credit facility (RCF) replacing the
existing $300 million facility. On the other hand, we estimate a cash position
of about $350 million.
In 2017, Seplat reported $199 million EBITDA, of
which about two-thirds is linked to the second half of the year (following the
re-commissioning of the Forcados terminal), reflecting the normal production
level and the benefits of the company's cost-saving initiatives.
Looking to 2018, we expect to see a material
strengthening of EBITDA to $400 million-$420 million, with further upside in
2019. This improvement stems mainly from oil production returning to historical
levels, a ramp-up of the gas operations, and some increase in oil prices.
Our projections are underpinned by the following
· An average Brent oil price
of $60 per barrel (/bbl) in the rest of 2018, declining to $55/bbl in 2019. Gas
price of $3/Mscf (one thousand standard cubic feet) over the entire forecast
period. The Brent oil spot price is about $65/bbl.
· Total production of about
50,000 boepd in 2018, followed by 55,000-60,000 boepd in 2019. We believe that
most of the upside in the production will come from the ramp-up of the gas
production in its main fields (OML4, OML38, and OML41). According to our
calculations, a more rapid ramp-up of the gas business in 2018 will have only a
modest effect on EBITDA.
expenditure/barrel oil equivalent around $10 in 2018-2019.Our capex assumption
of $150 million-$200 million in 2018, slowly increasing in 2019. We note that
the company's capex is discretionary and is therefore very flexible. In
practice, we believe that if spot prices stick, the company would accelerate
its drilling effort in the second half of 2018 and in 2019.
· We factor in the
collection of some of Nigerian Petroleum Development Company (NPDC) past
obligations (about $117 million as of Dec. 31, 2017).We do not expect a delay
in the collection of receivables to have a direct effect on the rating.
· No acquisitions, given the
uncertainty around timing, cash outflow, and future contribution. That said,
our rating captures a potential midsize acquisition on a holistic basis as part
of the company's financial policy.
· Resuming dividends in
2018. In our view, over time, the total distribution will be subject to the
spending on growth.
Based on these assumptions, we arrive at the
following credit measures (our adjusted debt doesn't take into account the
company's outstanding cash and can change upon changes in the RCF utilization):