Nigeria-based Seven Energy Limited has been downgraded from ‘C’ to ‘RD’ by Fitch Ratings as the oil firm inches close to default, according to a press release Friday by the global credit ratings agency.
Fitch had downgraded the company’s rating from CC reflecting very high levels of risk to C, indicating that the company has exceptionally high levels of risk, in its rating report released in October 2016.
The downgrade highlights the liquidity challenges which the oil firm, significantly indebted to Nigerian banks, has found itself since oil prices plummeted.
Fitch said in the press release that as at 30 September 2016, Seven Energy’s cash on hand was $24milion, well short of the $396million in short-term debt at this date, prior to on-going debt renegotiations.
“In 9M16 (nine months ended September 2016), Seven Energy used up nearly $92million in cash due to high capex and interest payments, before new equity raising and debt refinancing. We understand the company is negotiating to increase the limit of its existing working-capital facility”, Fitch said.
According to the ratings criteria of the agency contained on its website, ‘RD’ ratings indicate that in its opinion, Seven Energy has experienced an uncured payment default on its bond, loan or other material financial obligation but has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and has not otherwise ceased operating.
In an emailed response to Businessday’s enquiries on the matter, the company said that the Fitch downgrade is a technical term under Fitch’s rating criteria as is not unusual to see ratings go up and down in response to market dynamics.
Furthermore, the company said that overall, the future remains very positive.
“On 4 November 2016, the Group signed a $112 million Partial Risk Guarantee (PRG) with the Federal Government of Nigeria for the supply of natural gas to the 560 MW Nigerian Integrated Power Project (NIPP), Calabar, Cross River State”.
Dolapo Oni who oversees the energy desk of the Ecobank Group, said that the rating means that potential lenders recognise that Seven Energy’s rating is now low and would therefore demand higher compensation to motivate them to lend to the oil and gas firm as they would perceive a higher risk for lending to Seven Energy.
“For a company that needs funds, it could lead to greater financing issues as raising money will become more expensive for the firm,” he said.
Dolapo said that the development is a sad one because the company has a lot of potentials, adding that it has issues only with its Forcados oil facility given that the other facilities are productive.
The company’s unaudited results for the nine months ended 30 September 2016 stated that the company’s net oil entitlement averaged 12,800 barrels of oil per day, a reduction of 16 per cent from similar period in 2015.
“No liftings were received from OMLs 4, 38 and 41 as a result of the prolonged, and ongoing, shutdown of the Forcados terminal,” the report said. “Consequently the only oil revenue received was $7 million (first nine months 2015: $147 million) coming from interests in the South East Niger Delta.”
The company’s EBITDA (and EBITDAX) for the first nine months of 2016 tumbled 16% to $89 million, from $106 million in 2015, while cash flow from operating activities declined 65 per cent, from $139 million for the nine months ended September 2015 to $48 million for the nine months ended September 2016.
Fitch said in the report that Seven Energy’s downgrade came on the hills of announcement of the results of the consent solicitation for the 10.25% $300 million senior secured notes due 2021: 95.
“The accepted proposal qualifies as a distressed debt exchange under Fitch’s criteria as it imposes a material reduction in terms compared with the original ones and is conducted to avoid a payment default.”
“Under the new terms, Seven Energy may choose to pay interest on the notes in kind, i.e. by increasing the principal amount of the outstanding notes or by issuing additional notes for up to four coupon payments between 11 October 2016 and 11 April 2018”.
In addition to the notes consent solicitation, the company has recently agreed with the Accugas IV facility bank lenders to defer the amortisation schedule for debt payments into 2018. It is also working on a new facility with Nigerian and international banks and development finance institutions for longer-term credit facilities.
“Therefore the ‘RD’ rating is likely to remain until we have more clarity on Seven Energy’s post-deal liquidity and financial structure,” Fitch said.
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
