Fitch has downgraded Afren to ‘B’- indicating that the company’s ability to repay it’s debt is questionable. Here is the press release below
(The following statement was released by the rating agency) LONDON/MOSCOW, January 22 (Fitch) Fitch Ratings has downgraded UK-based energy group Afren plc’s Long-term Issuer Default Rating (IDR), as well as its senior unsecured and secured ratings, to ‘B-‘ from ‘B’ and placed them on Rating Watch Negative (RWN). The Recovery Ratings for the debt ratings are ‘RR4’. The rating action follows Afren’s announcement regarding a possible financial restructuring.
The company confirms it has been reviewing with its advisors its capital structure, liquidity and funding requirements. As part of that process Afren is in discussions with its lenders regarding amendments to its existing lending facilities, in addition to seeking a deferral of a USD50m amortisation payment due at the end of January 2015. Fitch has limited information regarding the company’s present liquidity position due to the blackout period related to a possible acquisition by Seplat Petroleum Development Company (Seplat). Fitch will seek to resolve the watch pending further clarification of Afren’s current liquidity position.
KEY RATING DRIVERS Lower Production, Higher Leverage Afren’s credit metrics have weakened since the beginning of the year, reflecting lower output in 2014 compared with 2013 and lower oil prices. Its funds from operations (FFO) adjusted gross leverage was at 2.8x at end-9M14 (1.8x at end-2013), and we believe it will exceed 4x in 2015, assuming moderate production growth, Brent price of USD50/bbl in 2015 and the company’s hedging arrangements. Also, to preserve cash we expect Afren to reduce capex significantly, which is likely to hamper its growth prospects until oil prices rebound. In addition, we believe that the company may breach its financial covenant under the Ebok senior secured facility in 2015, if oil prices remain depressed. Reserve Revision Adds to Rating Pressure In January 2015 Afren announced it has revised down gross 2P reserves at the Barda Rash field in the Kurdistan region of Iraq by 190 million barrels of oil equivalent. The movement in reserves and resources is due to the 2014 reprocessing of 3D seismic shot in 2012 and processed in 2013, as well as results from the company’s drilling campaign. Although we have not factored in the potential production in Kurdistan in our model, this change increases the downward pressure on the company’s credit ratings. Possible Acquisition by Seplat Additional factors that can affect the company’s financial position include a takeover by Seplat, a small-scale Nigerian oil producer, which recently confirmed that it is in preliminary talks with Afren.
Seplat will need to formally declare its intention by the end of January to comply with London Stock Exchange listing rules. Fitch will need confirmation of this possible merger agreement, and a view on the potential financial and strategic direction of the combined group, before taking any potential rating action. Finding New Management Critical Finding suitable replacements for dismissed executives is a significant challenge for Afren. This is particularly important in view of the company’s reduced output in Nigeria and interrupted operations in Kurdistan. Fitch is seeking more information on Afren’s strategy and direction to stabilise and increase output, especially if oil prices remain at their depressed levels – which may be difficult in the absence of a permanent CEO with a clear strategic vision. Inability to find a permanent CEO by end-1H15, if accompanied by little progress in stabilising and increasing production, may result in a further negative rating action. Production to Stabilise Afren’s net production has declined to 27.2 thousand barrels per of oil per day (mbpd in 3Q14 from 49.6mbpd in 3Q13, reflecting a lower production share after initial cost recovery but also due to lower gross production at Ebok, its major asset. We expect that in 2014 Afren’s net production would have been at or slightly below 32mbpd, 15% lower than we projected in May. Afren explains that the lower-than-expected production mainly results from operational delays with installing the Central Fault Block Extension platform at Ebok, and maintenance works in 3Q14.
The platform, which is set to be finally completed in January 2015, should enable Afren to increase output of the field. Other projects, including the North Fault Block at Ebok and ramping-up OML26, should help Afren stabilise its net oil production in the medium term. We expect the company’s net production to average 37mbpd in 2015. Breached Production Covenant At end-9M14 Afren breached its production covenant under the Ebok facility (outstanding USD210m at 30 September 2014). The field’s actual gross production in 2Q14 and 3Q14 (27.8mbpd, excluding periods of maintenance) fell below the required rate of 30mbpd. Afren received a waiver from the lenders and expects to stabilise and increase the production above this threshold. We believe there is a risk that average 2H14 production at Ebok might still have been below 30mbpd due to the drag from the lower 3Q output. Since Afren was able to obtain a waiver for the lower production in 3Q, we see another waiver likely in case of a similar technical breach at 4Q. Concentrated Production Afren’s production remains highly concentrated. In 9M14, Ebok accounted for 68% of Afren’s total production, and it had no material oil output outside Nigeria.
Any swift progress in Kurdistan, where Afren has material reserves, is now less likely than we previously expected due to Nigeria’s unstable political and security environment and higher-than-expected water content. Other challenges include a lack of access to a secure transportation channel and an absence of the associated gas treatment infrastructure. We assume that Nigeria is likely to dominate Afren’s output in the medium term. Such concentration exposes Afren to elevated regulatory and tax risks. Tax Holiday Benefits Cash-Flows Oil companies are generally heavily taxed in Nigeria – they pay substantial royalties and are subject to the petroleum profit tax (PPT), which normally varies from 50% to 85% of pre-tax profits. Afren’s Ebok field is exempt from paying PPT up to May 2016, which significantly benefits Afren’s cash flows and should help finance new projects while keeping leverage at a moderate level. However, the recent production decline at Ebok and lower oil prices could make this strategic advantage less pronounced. We expect that Afren’s cash tax payments will materially increase in 2017. RATING SENSITIVITIES Negative:
Future developments that may, individually or collectively, lead to negative rating action include: – Financial restructuring or delays to the company’s scheduled amortisation payments – Failure to obtain a waiver from the lenders if gross production at Ebok remains below 30mbpd, or net debt/EBITDA exceeds 3.0x – Unfavourable tax changes in Nigeria having a direct impact on Afren’s cash flow generating ability As the ratings are on Watch Negative Fitch’s sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. LIQUIDITY AND DEBT STRUCTURE Fitch views Afren’s liquidity risks as high. The company is in discussions with its lenders regarding amendments to its existing facilities, in addition to seeking a deferral of a USD50mamortisation payment due at the end of January 2015. Potential stress on the company’s near-term liquidity is the main reason for today’s rating action. At 30 September 2014 Afren’s short-term debt of USD210m, including the reclassified portion of the Ebok facility due to the breach of the production covenant, was fully covered by its cash of USD267m. However, in 2015-2016 Afren will need to repay or refinance USD617m, including the USD253m notes due 2016, in addition to attracting new borrowings that may be required to finance its capex programme. The rating actions are as follows: Long-term foreign-currency IDR: downgraded to ‘B-‘ from ‘B’; placed on RWN Senior secured: downgraded to ‘B-‘/’RR4’ from ‘B’/’RR4’; placed on RWN Senior unsecured: downgraded to ‘B-‘/’RR4’ from ‘B’/’RR4’; placed on RWN
