Moody's Investors Service ("Moody's") has today assigned a B2 instrument rating to the proposed benchmark sized senior unsecured notes to be issued by Seplat Petroleum Development Company Plc (Seplat), an indigenous independent oil and gas exploration and production company operating in Nigeria.
Seplat's B2 corporate family rating (CFR), B2-PD probability rating and B2 instrument rating on its $350 million senior unsecured bonds due 2023 are unaffected. The negative outlook is also unchanged.
The proceeds will be used to redeem all the existing $350 million senior unsecured notes and repay the $250 million drawn revolving credit facility (RCF). The transaction will extend Seplat's maturity profile and will create additional availability under its RCF, which will begin to amortise between 1 July 2022 and 31 December 2023.
The assigned ratings are subject to review of final documentation and assume no material change in the size, terms and conditions of the transaction as advised to Moody's.
The B2 rating assigned to the proposed notes is the same as Seplat's B2 CFR and benefits from various subsidiaries' guarantees including Seplat West Ltd, which owns the core production assets under the OMLs 4, 38 and 41 licences, representing 72% of total revenues, 83% of EBITDA and 76% of working interest production. Both the $350 million revolving credit facility and $100 million Reserve Based Lending (RBL) facility due 2026 are secured and rank ahead of the senior unsecured notes. Moody's however considers the security package (share pledges) under the secured RCF as weak, and therefore ranks it pari passu with the unsecured notes for Moody's loss given default (LGD) analysis. The RBL has a stronger security package but is only secured against Eland's main producing assets, equivalent to 17% of total working interest production. The RBL represents 14% of total outstanding debt, which is not material to warrant a notching down of the notes.
Seplat Petroleum Development Company Plc's (Seplat) B2 ratings reflect its leading exploration and production (E&P) position in Nigeria with long-term oil and gas field licensing agreements. The rating further takes into account Seplat's ability to withstand low oil prices and OPEC+ production restrictions in 2020 that allowed it to remain free cash flow positive, a consequence of its low cost of production of below $30/bbl, more stable contracted gas revenue (21% of 2020 revenues) and prudent financial policy of having short term oil hedges. In addition, Seplat benefited from conservative credit metrics and sizable unrestricted cash balances of $326 million at the beginning of 2020. Based on Moody's base case expectation of an average Brent oil price of $50/bbl for 2021, Seplat's credit metrics are expected to revert back to 2019 levels. For 2021, Moody's-adjusted debt/EBITDA is projected to fall towards 2.2x from 3.3x in 2020 and EBITDA/interest expense to improve to around 5.5x from 3.5x, over the same period.
The ratings are constrained by the company's exposure to volatile oil prices; small scale of production with 51,183 average daily barrels of oil equivalent (boe) and concentration to single asset block, Oil Mining Licences (OML) 4, 38 and 41 which account for 76% of the company's working interest production. In addition, the rating is constrained by the operational concentration to a single country, Nigeria (B2 negative) with reliance on Nigerian government-owned entities for the timely payment of capital cash calls.
Based on Moody's average Brent oil price of $50/bbl for 2021, Seplat's operating cashflows will support capital spending of $150 million per year for the next 12-18 months. Post the new bond issuance, Seplat will have no debt repayments until July 2022, full access to the $350 million undrawn revolving credit facility and unrestricted cash balance of $225 million as of 31 December 2020. The company targets to keep around 70% of its USD cash in offshore accounts which gives it access to dollars for debt servicing. Over the next 3 years, liquidity will further be enhanced by the ongoing recoverability of $107 million receivables due from the NPDC and repayment of the $410 million Westport loan to be received between 2022 to 2024.
Rationale for The Negative Outlook
The negative outlook is in line with that of the Nigerian sovereign reflecting Seplat's close credit links to the Government of Nigeria and operational exposure to the country's political, legal, fiscal and regulatory environment.
Factors That Could Lead to an Upgrade or Downgrade of the Rating
Seplat's ratings could be upgraded if the company were to materially diversify its production away from Nigeria towards an operating jurisdiction that carries a higher sovereign rating. Subject to an upgrade of the Nigerian government bond rating and foreign currency ceiling of B2, an upgrade could be considered if the company's (1) debt/EBITDA were to remain below 4.0x; (2) retained cash flow (RCF)/debt is sustained above 15%; and (3) liquidity were to remain strong.
The ratings are likely to be downgraded in case of a downgrade of Nigeria's sovereign rating. Negative pressure on the ratings would also develop if oil prices remain low such that (1) the company's liquidity deteriorates significantly; (2) its EBITDA/interest expense trends below 2.0x on a sustained basis; and (3) debt/EBITDA increases above 5.0x on a sustained basis or RCF/debt below 15%.
The principal methodology used in this rating was Independent Exploration and Production Industry published in May 2017.
Headquartered in Lagos, Seplat Petroleum Development Company Plc is primarily involved in the exploration, development and production of domestic onshore petroleum resources, and focused on new opportunities in Nigeria, specifically onshore and shallow water offshore areas. Seplat owns minority stakes in a number of oil and gas field licences with the Nigerian government entities holding the remaining majority stakes, and has 98% of total production under operational control. Seplat reported an average daily production of 51,183 boe, generating $530 million in revenue and Moody's-adjusted EBITDA of $219 million for the fiscal year ended 31 December 2020.