Fitch Ratings has affirmed Seplat Energy Plc's Long-Term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook.
The rating remains constrained by the Nigeria's Country Ceiling of 'B-' due to high concentrations of Seplat's assets and export funds flows in the country.
The rating also reflects Seplat's stable credit metrics and our expectations of a stronger business profile on the completion of its acquisition of Mobil Producing Nigeria Unlimited (MPNU) for around USD1.3 billion. The acquisition, which is expected to close in 2H23, will increase Seplat's production by nearly 3x from its 2022 standalone level, diversify its business into offshore operations and increase exports as a share of Seplat's revenues.
Despite the mix of debt and cash funding of the acquisition, we expect the company's funds from operations (FFO) net leverage to remain below 2.0x by 2026.
Key Rating Drivers
Country Risk Drives Rating: Seplat continues to source all its production from Nigeria. Under the Central Bank of Nigeria's regulation, export revenues must be transferred to domestic accounts within 90 days of receipt. The company sends export proceeds to domestic accounts before they are repatriated to offshore accounts, typically after 24 hours. This, combined with Seplat's exposure to the operating environment in Nigeria, constrains the company's rating to Nigeria's Country Ceiling of 'B-'.
Acquisition Strengthens Business Profile: Seplat's acquisition of Exxon Mobil's offshore shallow water assets in Nigeria, MPNU, if successful, will increase its working interest production to around 146,000 barrels of oil equivalent per day (boe/d) from 44,000boe/d in 2022, while its 2P reserves will double from its 2022 level to 883 million barrels of oil equivalent (mmboe). This will strengthen the business profile, due to larger operations and diversification into offshore operations, mitigating potential onshore logistical interruptions.
Completion of Acquisition Delayed: Fitch believes that a delay or possible cancellation of the acquisition of MPNU will not have any impact on Seplat's rating. The deal is on hold due to arbitration in the Nigerian State High Court between Nigeria National Petroleum Company Limited and MPNU. The arbitration is for a dispute about the interpretation of pre-emption rights under a joint operating agreement between the parties. Seplat is not a party to the suit, but the State High Court issued an injunction preventing the completion of the acquisition until the court proceedings are concluded.
In the absence of the acquisition Seplat's business profile will, in our view, remain commensurate with its 'B-'rating as its smaller existing scale would be accompanied by a lower debt load.
Moderate Leverage: The acquisition payment of USD1.3 billion will be funded by a senior term loan of USD550 million-USD600 million and a junior offtake facility of USD225 million-USD275 million, with the balance to be covered by cash and, optionally, by a USD350 million undrawn revolving credit facility (RCF). The material EBITDA contribution of the acquired assets means we expect FFO net leverage to remain below 1.5x in 2023 and below 2.0x in 2024-2026. The potential payment of a USD300 million contingency is subject to oil price and production thresholds, at which we expect sufficient coverage from free cash flow (FCF).
Conservative Financial Policy: We view Seplat's financial policies as conservative and underpinned by prudent debt management, with flexibility to suspend dividends and capex, as demonstrated during the troubled period of 2016-2017. The company has an internal target of net debt at below 2.0x EBITDA through the cycle and maintains robust liquidity.
Improved Export Route: The commissioning of Amukpe-Escravos Pipeline (AEP) in 3Q22 has diversified export routes and provides more secure oil transport from Seplat's major assets since the infrastructure is mostly underground. Before that, Seplat had relied solely on the Trans Forcados System, which has experienced numerous disruptions due to pipeline maintenance and vandalism. Seplat and Nigerian Petroleum Development Company are jointly entitled to 35,000boe/d of AEP capacity.
Gas Business Supports Stability: Seplat's gas production was 19,000boe/d in 2022, or 44% of its total hydrocarbon volumes. The regulated gas price under the domestic supply obligation for power generation (around 30% of Seplat's gas volumes) was lowered in July 2021 to USD2.18 per thousand cubic feet (kcf) from USD2.5/kcf, after having been flat through 2014-2020. Seplat sells the rest of its gas to commercial companies at higher contract prices, which offset fluctuations in regulated prices and resulted in stable realised prices of above USD2.8/kcf in 2021 and 2022.
Seplat is making progress on the completion of a gas processing plant at its 50-50 ANOH joint venture with Nigerian Gas Company Limited. The facility with a capacity of 300 kcf/d is expected to start in 4Q23 and, once operational, may generate additional dividends for Seplat.
Small Nigerian E&P Company: Seplat's operations are concentrated around the Niger Delta region of Nigeria. The Nigerian oil and gas sector faces high operational risks and regulatory uncertainty. Seplat's pre-acquisition main assets are the Oil Mining Leases 4, 38 and 41, which accounted for around 79% of its 2022 production. We expect Seplat to ramp up its daily oil and gas output at existing assets to 56,000boe/d until 2025, from 44,000boe/d in 2022.
Derivation Summary
On a pro-forma basis for the MPNU acquisition, Seplat's business profile in terms of production (146,000boe/d) and reserves (2P: 883mmboe) would be closer to that of Neptune Energy Group Midco Limited (BB+/Stable) at around 135,000 boe/d and 553 mmboe, respectively, in 2022. Neptune has more diversified assets, operates in jurisdictions with a stronger operating environment and, in contrast to Seplat, is largely a gas producer. Seplat has a longer reserve life of 16.5 years (pro-forma) than Neptune's 11 years.
Murphy Oil Corporation (BB+/Stable) has a reserve life of 11 years but its production of 167,000boe/d and geographical diversification are stronger than Seplat's.
Ithaca Energy plc (B/Stable) benefits from slightly lower leverage, a more robust hedging position, higher production volumes (2022: 71,000boe/d) compared with Seplat's existing assets, and from operations in the UK North Sea, which is a more stable operating environment compared with that of Seplat. This is mitigated by Seplat's larger post-acquisition scale, bigger reserve base, higher reserve life (Ithaca: six years on a 1P basis for 2022), and lower costs.
Compared with Kosmos Energy Ltd. (B+/Stable), Seplat has a bigger reserve base, higher reserve life and stronger credit metrics. These strengths are offset by Kosmos's more diversified asset base and a more stable operating environment compared with Seplat's high exposure and concentration on areas characterised by geopolitical and security risk.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Brent oil price of USD85/bbl in 2023, USD75/bbl in 2024, USD65/bbl in 2025 and USD53/bbl in 2026
Average realised gas price of USD2.8/kcf in 2023, USD2.7/kcf in 2024-2025 and USD2.6/kcf in 2026
EBITDA contribution of new assets from MPNU to start in 3Q23
Upstream production ramping up to 152,000boe/d in 2026 from 44,000boe/d in 2022
Dividends of about USD90 million per year in 2023-2026
Fitch's Key Assumptions for Recovery Analysis:
The recovery analysis assumes that Seplat would be restructured as a going concern (GC) rather than liquidated in bankruptcy
Seplat's post-reorganisation GC EBITDA is estimated at USD223 million, based on its existing (pre-acquisition) asset base, which assumes a drop in EBITDA, due to risks associated with hydrocarbon-price volatility, potential unplanned downtime or other adverse factors, followed by a modest recovery including corrective actions
We have applied a 4x enterprise value (EV)/EBITDA to calculate a GC EV, reflecting the risks associated with the operating environment in the Niger Delta region
Our waterfall analysis assumes Seplat's USD350 million senior secured RCF, USD110 million Westport reserve-based lending facility and USD50 million Westport offtake facility are fully drawn and rank senior to Seplat's senior unsecured notes
After deducting 10% for administrative claims, Fitch's analysis resulted in a waterfall-generated recovery computation (WGRC) for the senior unsecured notes in the 'RR4' band, indicating a 'B-' instrument rating. The WGRC output percentage on current metrics and assumptions is 45%
Post-acquisition we expect WGRC for the senior unsecured notes to remain in the 'RR4' band
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- An upgrade of Nigeria's sovereign rating or a consistent record of Seplat's offshore structural enhancements
- A meaningful diversification of operations to countries with a more favourable operating environment than Nigeria while maintaining strong credit metrics
FFO net leverage consistently below 3.0x (which we will relax to 3.5x following the completion of MPNU to reflect a stronger business profile) or EBITDA net leverage consistently below 2.5x (or 3.0x post acquisition)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- A downgrade of Nigeria's rating
- FFO net leverage sustained above 4.0x (4.5x post-acquisition) or EBITDA net leverage sustained above 3.5x (4.0x post-acquisition)
Longer-than-forecast downtime as a result of unforeseen events, resulting in a material loss of production
- Failure to maintain sufficient liquidity to absorb potential pipeline downtime shocks
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Comfortable Liquidity: Seplat had USD404 million of unrestricted cash at 31 December 2022. It also benefits from a USD350 million undrawn RCF due in June 2025 and USD39 million availability under a committed USD50 million junior off-take credit facility due in 2027.
We assume that the acquisition of MPNU will be financed by new debt and Seplat's cash without RCF drawings.
Exposure to Nigerian Banks Maintained: As a general policy, Seplat usually retains around 70% of its total cash in US dollars and around 70% of the US dollar cash is held offshore. Nevertheless, we believe that Seplat has large exposure to the Nigerian banking system and we believe that cash holdings at Nigerian banking institutions are vulnerable to a sharp deterioration in oil prices and the Nigerian naira.
Issuer Profile
Seplat is a small exploration and production company operating in Nigeria. It has stakes in several oil and gas fields. Its 2022 EBITDA was USD427 million.
Summary of Financial Adjustments
Fitch re-classified around USD5.4 million of depreciation of right-of-use assets and around USD0.4 million of interest on lease liabilities as lease expenses, reducing Fitch-calculated EBITDA by around USD5.8 million in 2022. Fitch removed lease liabilities from Seplat's debt.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Seplat has an ESG Relevance Score of '4' for Human Rights, Community Relations, Access & Affordability due to its focus on upstream operations in the troubled Niger Delta region. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
SEPLAT ENERGY PLC 
