Acquisition: Fitch Revises Outlook on Seplat to Positive

Fitch Ratings has revised the outlook on Seplat Energy Plc’s Long-Term Issuer Default Rating (IDR) to positive from stable and affirmed the IDR at ‘B-‘. In a rating note, Fitch said the positive outlook reflects that an upgrade of Nigeria’s long-term IDR (B-/positive) could result in an upward revision of the country ceiling, which would no longer constrain Seplat’s long-term IDR at the current level.

The rating also reflects Seplat’s stable credit metrics and our expectations of a stronger business profile on completion of its acquisition of Mobil Producing Nigeria Unlimited (MPNU) for around USD1.3 billion.

The acquisition, which Fitch assumes will close in the second half of 2024, will increase Seplat’s production by up to 3x from its 2023 standalone level, diversify its business into offshore operations and increase exports as a share of revenues as well as support its refinancing capacity.

“We expect Seplat’s earnings before interest tax depreciation and amortisation (EBITDA) net leverage to remain below 2.0x by 2026, despite the mix of debt and cash funding for the acquisition”, Fitch said.

The global ratings agency said 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.

It noted that the company sends 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 the company’s rating at Nigeria’s Country Ceiling of ‘B-, the rating note stated’.

The rating considered that Seplat’s acquisition of Exxon Mobil’s offshore shallow water assets in Nigeria, MPNU, will increase its working interest production up to around 143,000 barrels of oil equivalent per day (boe/d) from 48,000boe/d in 2023, while its 2P reserves will double from its 2023 level up to around 883 million barrels of oil equivalent (mmboe).

MPNU’s assets will diversify Seplat’s operating assets into offshore operations. However, its single jurisdiction focus implies limited geographic and hydrocarbon diversification, which remains a rating constraint.

Fitch assumes that MNPU’s production and reserves levels have been stable since 2020. While the exact additions to production and reserves will be confirmed at the deal closure, the transaction will strengthen the business profile, due to larger operations and diversification into offshore operations, mitigating potential onshore logistical interruptions.

The rating note stated that the court proceedings brought by Nigerian National Petroleum Corporation Limited against MPNU over the proposed divestment of MPNU’s shares to Seplat were terminated in June 2024.

This allowed the transaction to progress and on 22 October Seplat obtained regulatory approval from the Nigerian authorities.  Fitch believes that the main hurdles have now been cleared and the transaction can be concluded by end-2024.

On financing, Fitch assumes that acquisition consideration of USD1.3 billion will be funded with a combination of new debt, draw down on the USD350 million revolving credit facility (RCF) and cash.

“The material EBITDA contribution of the acquired assets means we expect EBITDA net leverage to remain below 2.0x in 2025-2027.

“In our view, Seplat’s potential net cash outflow will depend on lock box and working capital adjustments, while the USD300 million contingent consideration is subject to oil price and production thresholds, which we expect sufficient coverage from free cash flow”.

Funding may constrain liquidity, according to Fitch which noted that Seplat has a cash management policy to keep at least USD100 million on the balance sheet.

However, full drawdown of the RCF and sizeable use of cash for the settlement of the transaction may temporarily constrain liquidity.

It said the RCF matures in June 2025 with automatic extension until December 2026 if the USD650 million bond due in April 2026 is refinanced by May 2025.

Fitch believes that a stronger business profile after the acquisition, combined with Seplat’s conservative financial policy and the improving operating environment in Nigeria will help reduce refinancing risk and allow Seplat to maintain adequate liquidity.

In the rating note, Fitch said Seplat’s gas production was around 19,700boe/d in 2023, or 41% of its total hydrocarbon volumes.

The regulated gas price under the domestic supply obligation for power generation (around 30% of Seplat’s gas volumes) has been revised to USD2.42 per thousand cubic feet (kcf). 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 USD2.9/kcf in 2023 and USD2.95/kcf 1H24.

Seplat commissioned its 50-50 joint venture, ANOH, with Nigerian Gas Company Limited in May 2024. The facility has a capacity of 300 mmcf/d and is planned to start in 3Q24. Once fully operational, we expect it may generate additional dividends for Seplat. The company’s operations are concentrated around the Niger Delta region of Nigeria. The Nigerian oil and gas sector faces high operational risks and regulatory uncertainty.

In 2023, it produced on average around 47,800boe/d, of which 59% was liquids and 41% natural gas. Seplat’s pre-acquisition main assets are Oil Mining Leases 4, 38 and 41, which accounted for around 72% of its 2023 production.

“We expect Seplat to ramp up its daily oil and gas output at existing assets to 58,000boe/d until 2026, from around 47,800boe/d in 2023”. Following completion of the MPNU acquisition, Seplat’s scale will increase up to around 143kboe/d for 2025 (on a pro-forma basis) and its reserve base will increase to up to 883 mmboe from 478 mmboe on a 2P basis.

Fitch said this yields a reserve life above 26 years. Its cost structure will increase from USD10/boe to USD15/boe, driven by the higher operating costs of the offshore assets.  Naira Drops Market Wide, Exchange Rates Gap Now N102