Fitch Ratings has downgraded Seplat Energy Plc's Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'B-' from 'B'.
The Outlook is Stable. The Recovery Rating is 'RR4'.
The rating action follows the downgrade of Nigeria's Long-Term IDRs to 'B-' from 'B' and the Country Ceiling to 'B-' from 'B' (see 'Fitch Downgrades Nigeria to 'B-'; Outlook Stable' dated 11 November 2022). Seplat's Long-Term Foreign-Currency IDR is capped at Nigeria's Country Ceiling due to limited offshore structural enhancements. The rating also takes into account the concentration of the company's asset base in Nigeria and its exposure to the Nigerian operating environment.
Key Rating Drivers
Country Risk Drives Rating: Seplat continues to source all its production from Nigeria. Under Central Bank of Nigeria regulation, export revenues must be transferred to domestic accounts within 90 days of receipt. The company follows a practice of sending export proceeds to domestic accounts before they are repatriated to offshore accounts typically after 24 hours. Combined with Seplat's exposure to the operating environment in Nigeria, this constrains Seplat'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, Mobil Producing Nigeria Unlimited (MPNU), if successful, will increase its working interest production to around 146 thousand barrels of oil equivalent per day (kboe/d) from 51kboe/d in 2020, while its 2P reserves will nearly double to 945 million barrels of oil equivalent (mmboe). This will strengthen the business profile due to larger-scale operations combined with diversification into offshore operations, mitigating potential onshore logistical interruptions.
Completion of Acquisition Delayed: The delay to, or possible cancellation of, acquisition of MPNU from Exxon Mobil, will not have any impact on Seplat's rating. The deal is on hold due to arbitration in Nigerian High State Court between Nigerian National Petroleum Company Limited (NNPC) and MPNU. The arbitration is for a dispute over interpretation of pre-emption rights under a joint operating agreement between the parties. Although Seplat is not a party to the suit, the Nigerian State High Court ordered an injunction preventing completion of the acquisition until the court proceedings are concluded. In the absence of the acquisition Seplat's business profile would remain in line with its 'B-' rating.
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 up to USD225 million-USD275 million, with the balance to be covered by an USD350 million undrawn revolving credit facility (RCF) and cash. Due to the material EBITDA contribution of the acquired assets we expect funds from operations (FFO) net leverage to remain below 1.5x in 2023 and below 2.0x in 2024-2025. Potential payment of USD300 million contingency is subject to the oil price and production thresholds at which we expect sufficient coverage from free cash flow (FCF). If the acquisition does not take place, Seplat's credit metrics will still remain strong.
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 2016-2017 period. In 3Q22, despite challenging market conditions Seplat successfully refinanced its USD350 million RCF and extended its maturity until 2025 with a one-year extension option.
Reliable AEP Export Route: The commissioning of Amukpe-Escravos Pipeline (AEP) in 3Q22 should provide a more reliable and secure export route from Seplat's major assets since the infrastructure is mostly underground. Before that, Seplat had relied on the Trans Forcados System, which has experienced numerous disruptions due to pipeline maintenance and vandalism.
Small Nigerian E&P Company: Seplat's operations are concentrated around the Niger Delta region of Nigeria. The Nigerian oil and gas sector is characterised by 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 77% of 2021 production. We expect Seplat to ramp up its daily oil and gas output at existing assets to 59 kboe/d until 2024, from 48 kboe/d in 2021.
Gas Business Provides Stability: Seplat's gas production was 19 kboe/d in 2021, or 39% of its total hydrocarbon volumes. The regulated gas price under 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. This price could last until 2025. Seplat sells the rest of its gas to commercial companies at higher contract prices and expects a weighted average gas price of USD2.7/kcf in 2022.
ESG - Social: 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. Historically, this area has been a high-risk environment driven by militancy, crude oil theft, pipeline sabotage, as well as environmental pollution arising from militant strikes against oil infrastructure.
Derivation Summary
On a pro-forma basis for the acquisition, Seplat's business profile in terms of production (146 kboe/d) and reserves (2P: 945 mmboe) will be closer to that of Neptune Energy Group Midco Limited (BB+/Stable) at around 130 kboe/d in 2021 and 2P reserves of 604 mmboe. Neptune has more diversified assets, operates in jurisdictions with a stronger operating environment and, in contrast to Seplat, is largely a gas producer.
Murphy Oil Corporation (BB+/Stable) has a higher, more comparable share of liquids in production. However, its production, reserves and geographical diversification are stronger than Seplat's.
Ithaca Energy Ltd. (B/Stable) benefits from slightly lower leverage, a more robust hedging position, higher production volumes (2021: 56kboe/d) compared with Seplat's existing assets and 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: five years on a 1P basis for 2020) 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 to areas characterised by geopolitical risk.
Despite concentration in one country, Seplat is better diversified by number of producing assets compared with GeoPark Limited (B+/Stable). GeoPark is also smaller in production levels (2021: 37 kboe/d) and reserves (2P: 159 mmboe) although it operates in a more stable operating environment.
Key Assumptions
Brent oil price of USD100/bbl in 2022, USD85/bbl in 2023, USD65/bbl in 2024, and USD53/bbl in 2025
Average realised gas price of USD2.7/kcf in 2022, USD2.6/ kcf in 2023, USD2.5kcf in 2024-2025
EBITDA contribution of new assets from the acquisition to start in 2023
Upstream production ramping up to 155 kboe/d in 2025 from 78.3 kboe/d in 2022
Dividends of about USD60 million a year in 2022-2025
Contingent liability payment of USD25 million in 2022 and USD112 million in 2023
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 a bankruptcy
Seplat's post-reorganisation, GC EBITDA is estimated at USD223 million, based on the 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 an enterprise value (EV)/EBITDA multiple of 4x to calculate a GC EV, reflecting the risks associated with the operating environment in Niger Delta region of Nigeria
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:
- Upgrade of Nigeria's sovereign rating or consistent record of offshore structural enhancements
- 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 the acquisition to reflect a stronger business profile)
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Downgrade of Nigeria's Country Ceiling, subject to satisfying Fitch's Country Ceiling tests
- FFO net leverage sustained above 4.0x (4.5x post-acquisition)
Longer-than-forecast downtime as a result of unforeseen events, resulting in 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 USD304 million of unrestricted cash at 30 September 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.
For acquisition funding, we assume USD200 million utilisation of the RCF in 2022 as well as around USD260 million cash funding, though this is subject to the final amount as it is an effective date transaction. The cash contribution will include largely FCF generated by Seplat in 2022.
Exposure to Nigerian Banks Reduced: 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 sharp deterioration in oil prices and the naira.
Issuer Profile
Seplat is a small to medium-sized oil and gas exploration and production company (post acquisition) operating in Nigeria.
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 Energy Plc 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 of Nigeria. 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 
