Seven Energy sale might not bring relief for creditors

Seven Energy Nigeria Limited (SENL), a privately-held petroleum exploration and development company with headquarters in Lagos, is in sale talks with Savannah Petroleum Plc but even if the deal sails through, it may be no relief for its creditors, including Ecobank Plc.

A consortium of Nigerian banks including Ecobank Nigeria Limited, FCMB , and Union Bank Plc had on July 15 2016, syndicated a $445 million Senior Debt Facility to Accugas Limited, a wholly owned subsidiary of SENL, to refinance existing facilities and support medium-term capital requirements but the once promising energy company is in dire straits, with its creditor banks swirling around it.

Bankers say Seven Energy is unable to meet its loan obligations for several reasons, chiefly because of the collapse in energy prices and its inability to secure dollar revenue streams for gas contracts.

Stakeholders who have proper understanding of issues surrounding the loan, say that unless Savannah Petroleum agrees to pay it off when the transaction is completed, the syndicate banks may need to make provisions in their books to recognise the non-performing status, as they cannot defer interest and principal repayment on the loan indefinitely.

However, some Analysts who spoke to BusinessDay on the development, said that Seven Energy’s prospective acquirer (i.e. Savanna Petroleum) will be expected to improve the performance of the loans the Nigerian energy company has with the banks. They described the deal as a ‘good bargain’ for the banks.

Liquidity challenges for SENL, the West Africa-focused oil and gas company, reached an all-time high, as cash flow reached a record negative US$ 81 million, as at the first half of 2016. The company unsurprisingly defaulted on all its facilities, including those of the banks, raising concerns among analysts about renewed pressure on banks’ loan portfolio quality.

The mounting liquidity and operational challenges have led Fitch, a foremost global rating agency, to ascribe a junk status on Seven Energy. On May 31 2017, the agency announced a downgrade of SENL from ‘C’ to ‘RD’, further affirming the junk status.

“The downgrade follows Seven Energy’s announcement that the 30-day grace period has expired for the cash interest payment that the company missed on its USD300 million secured notes and USD100 million notes due 2021, as the company did not meet the conditions for the interest capitalisation,” Fitch said in a ratings release on its website.

Trading in the shares of Savannah was suspended on AIM, following the announcement of the deal, which Savannah is seeking to complete on an accelerated timescale. AIM is London Stock Exchange’s international market for smaller growing companies. A wide range of businesses, including early stage, venture capital backed, as well as more established companies join AIM seeking access to growth capital.

Stakeholders had accused Seven Energy of improper management of corporate resources, an allegation that the company had debunked, saying that the company’s challenges were caused by macro-economic developments.

In a release dated 13 July 2017 posted on its website, Savannah confirmed that it had entered into a binding exclusivity agreement with Seven Energy in relation to the potential acquisition of substantially all of its oil and gas assets in the West African Region.

Savannah Petroleum is an oil and gas exploration and production company based in the United Kingdom. The value of its proposed purchase of Seven Energy is not yet disclosed. When completed, the deal means that Savannah will take over the operations of the Nigerian oil and gas company by buying 100 per cent equity interest of existing shareholders.

“Savannah confirms that the Target is Seven Energy International Limited, a Nigerian focused oil and gas company,” the release said. “Savannah will provide further updates in due course.”

Analysis of Savannah’s financial position as at the year ended December 31 2016 showed that cash and cash equivalent stood at $23.06 million. The company had used $9.32 million to offset exploration and evaluation costs and raised $33.45 million from issuance of additional equity shares.

With a loss of $8.33 million that Savannah posted in 2016, other analysts say that they are keenly awaiting details of the transaction to know how the company will pay for the purchase, and how they will treat the $445 million facility Seven Energy took from the banks.

If sealed on the terms currently contemplated by both parties, the deal will be classified as a reverse takeover, said a statement obtained from Bloomberg. A reverse takeover is a type of takeover that sees a smaller quoted company taking over a larger unquoted company by a share-for-share exchange.

This means that Savannah may pay for the purchase of Seven Energy by issuing its own shares, especially considering the buyers tight liquidity position. Calls made to Seven Energy for additional details regarding the proposed deal were unsuccessful.

 

INNOCENT UNAH