Nigeria-Based Oil & Gas Producer Seplat Upgraded To 'B' After Further Progress On Derisking Its Business; Outlook Stable

  • We expect indigenous Nigerian oil producer Seplat Petroleum Development Company will report strong results in 2018 supported by healthy oil prices and relatively low capital expenditure (capex) and dividends. In our view, this resulted in a reported net cash position as of end-2018.
  • The company continues to de-risk and improve its business. In the coming months, it expects the Amukpe-Escravos Pipeline Project to be commissioned and make a final investment decision (FID) on the Assa North and Ohaji South (ANOH) Gas Processing Plant.
  • Inorganic growth remains a key priority. It could further improve the company's business model without overstretching its balance sheet, in our view.
  • We are therefore raising our issuer and issue credit ratings on Seplat and its $350 million notes due 2023 to 'B' from 'B-'.
  • The stable outlook reflects Seplat's comfortable debt position and its ability to grow the business both organically and inorganically in the coming years without weighing on the rating.
The upgrade reflects the improvements Seplat made in 2018, both operationally 
and financially, which we view as ongoing. This somewhat reduces Seplat's 
inherit weakness as a small oil and gas producer in the troubled Niger Delta 
region. 

We expect Seplat to report strong financial results in 2018 supported by 
healthy oil prices (average Brent oil price of $71/bbl) and steady production 
of about 50,000 barrels of oil equivalent per day (boepd). Moreover, we 
estimate 2018 capex and dividends will be lower than we had previously 
anticipated. We therefore expect Seplat to report a net cash position as of 
the end of 2018. 

On the operations side, we see the imminent completion of the 
third-party-operated Amukpe-Escravos Pipeline Project as a positive 
development. In our view, Seplat will be able to maintain its 50,000 boepd 
production through 2019, before increasing it in the coming years as it steps 
up exploration and gas capabilities. This positive momentum should help the 
company improve its business model, reducing its sensitivity to volatile oil 
prices and enhancing its ability to absorb operational issues. 

While inorganic growth remains a key priority, we understand that the company 
will continue its prudent approach, focusing on assets in proximity to 
existing assets. The coming elections in Nigeria could delay potential 
transactions to toward the end of 2019, if anything happens at all this year. 
We calculate that Seplat could acquire such assets for slightly more than $0.5 
billion before seeing any pressure on the rating, all else remaining 
unchanged.

We see Amukpe-Escravos as an important milestone in reducing Seplat's reliance 
on the Trans Forcados Pipeline (Seplat's operations were badly affected after 
a militant group blew up a section of the Forcados terminal in February 2016). 
Although the Amukpe-Escravos launch was delayed, we understand that it is in 
the final stages and we expect it to start operating in first-quarter 2019 
then ramp-up through the year. The two pipelines--together with some capacity 
for exporting via the costlier Warry Refinery jetties--should reduce the 
effects on the company of potential military conflicts. In 2018, the political 
situation in the Niger Delta remained stable. 

We expect production will likely remain at 50,000-55,000 boepd in 2019 before 
increasing to 55,000-65,000 boepd in 2020. The growth will stem from new 
drillings in 2018 and 2019. Under our base case, Seplat will allocate $100 
million-$200 million to organic growth in each of the coming years compared to 
our estimated capex of well below $100 million in 2018 (in the first nine 
months of 2018 the company invested $29 million).

The Assa North and Ohaji South (ANOH) gas field is seen as one of Nigeria's 
critical gas development projects, aimed at increasing gas production and 
processing infrastructure development to meet growing demand. The plant's 
total expected processing capacity is 300 million standard cubic feet per day 
(mmscfd). Seplat's share will be 150 mmscfd, which is close to our estimate of 
its total gas production in 2018. This project will be important for the 
growth of Seplat's more stable gas business, which is supported by healthy 
local demand and is delinked from oil price volatility. Post the FID, which we 
expect later this year, the company will need to invest several dozens of 
millions in 2019 if it is to target the commissioning of the facility in 2020.


The stable outlook reflects our expectation that Seplat will maintain funds 
from operations (FFO) to debt of more than 45% under the current rating over 
the next 12 months, absent material acquisitions. This is supported by 
continuous production at about 50,000 boepd in 2019, and reduced concentration 
risks once Escravos-Amukpe launches in first-quarter 2019. 

Under our base case (assuming Brent oil price at $55/bbl), we project EBITDA 
of about $300 million-$350 million in 2019, increasing to $350 million-$400 
million in 2020. This should result in S&P Global Ratings-adjusted FFO to debt 
above 50% (before deducting the sizable cash balance). 

If Seplat were to engage in a sizable acquisition, the rating would likely 
remain unchanged at 'B' as long as its adjusted FFO to debt did not drop 
materially below 40% under current market conditions (or about 30% under less 
favorable Brent oil prices).

If we were to lower our sovereign credit rating on Nigeria to 'B-' from 'B' 
currently, we would not expect to follow with a similar rating action on 
Seplat.


We could lower the rating if militant actions and/or operational issues arose 
such that production was disrupted over the longer term. We think such a 
scenario will become less likely over time given the Escravos-Amukpe pipeline, 
increases in Seplat's gas production, and potentially increased 
diversification following future acquisitions.

In addition, rating pressure could arise if the company undertook a large 
debt-financed acquisition resulting in a much less favorable capital 
structure.


We view an upgrade in the coming 12 months as unlikely. In our view an upgrade 
would be subject to meeting most of the followings: 
  • The full availability of the Escravos-Amukpe pipeline.
  • Further increase in production at the ANOH gas facility.
  • Better visibility around inorganic expansion and the potential implications for Seplat's capital structure.
  • Adjusted FFO to debt of about 40% under current market conditions (or about 30% under less favorable Brent oil prices).
  • At least adequate liquidity.
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