TE Exclusive: How Seplat Got Downgraded After Eland Acquisition

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SWITZERLAND, MAY 08 – Despite a boost in production from its Eland oil acquisition, Nigerian indigenous London Stock Exchange listed oil and gas giant, Seplat, is bracing for hard times as a combination of falling oil prices due to COVID-19, asset exposure to risk and a high debt burden from the acquisition has led to its downgrade by credit rating agencies.

Some analysts predict Seplat is set for its steepest revenue decline in seven years whilst others are confident of its rebound.

How Seplat Bought Eland Oil in a Landmark £382mn (N174bn) Deal

In October 2019, Seplat announced that it had reached an acquisition agreement with Eland oil, based in Aberdeen, Scotland. The acquisition cost Seplat a total of £382 million (N174bn), financed through a combination of existing cash resources of Seplat and a new loan facility.

According to Offshore Technology, Eland had two operations in Nigeria that Seplat were interested in. It had a 45% equity stake Oil Mining Lease (OML) 40 in the Niger Delta, which produced an average of 8,000 barrels of oil per day in 2018 and a 40% stake in the Ubima discovery well in Rivers State.

Seplat was elated by its newfound jewel. CEO of Seplat, Austin Avuru said in October when the deal was being finalized:

 “We are delighted to successfully complete the acquisition of Eland, which further enhances Seplat’s footprint in Nigeria and provides opportunities for enhanced scale, diversification and growth.

“We welcome our new colleagues and Nigerian partners as we look forward to working together in this exciting phase of our development.”

By December 2019, the deal was already completed. The Eland acquisition reportedly boosted Seplat’s production capacity by 10,000 bpd, bringing its total daily production to about 72,000 barrels. Furthermore, Eland and Seplat use the same Forcados export terminal, and transport their oil through the Trans-Forcados pipeline. This was expected to bring costs for Seplat down.

Following the announcement of the deal, Seplat’s stock price rose by 1.75% on the London Stock Exchange from 114pence to 116pence a share.

Everyone seemed happy. Even the analysts thought it was a good idea. 

Janet Ogunkoya, Research Analyst at ARM said:

“We think it’s a good acquisition. The big positive that comes for Seplat in this is the addition to their production capacity.”

Vetiva Capital analyst Luke Ofojebe, added in an interview, “For Seplat, the move will boost the company’s production with Eland set for “significant growth by mid-2020”.

 Austin Avuru remarked: “This combination will give us growth and increased profitability. Eland is an excellent fit for Seplat.”

Emerging Troubles

They were wrong. Five months down the line, Seplat’s revenue is dwindling and its credit rating is being downgraded, indicating that it might not be able to fulfil its obligations to its creditors.

A credit rating is an estimate of the ability of a person or organization to fulfil their financial commitments, based on previous dealings. The Credit rating agency rates a debtor’s ability to pay back debt by making timely principal and interest payments and the likelihood of default.

In December 2019, Moody’s downgraded the credit rating of Seplat three other Nigerian companies. Seplat became a B2 CFR company, reflecting a high credit risk. 

According to Moody’s the company’s ratings also factor in a requirement that proceeds from the sales of oil and gas have to pass through the Nigerian banking system for 24 hours before they are allowed to be moved offshore.

Moody added that future laws and regulations that could accelerate the pace of energy transition or changes in technology that affect demand for hydrocarbons represent a material and growing risk for Seplat.

Things would soon get worse. In a new report in April 2020 that downgraded the oil stock in Nigeria, analysts at Lagos-based Chapel Hill Denham said Seplat could suffer its steepest revenue decline in seven years. The analysts now see Seplat revenue declining by 27.7% to $504.38mn.

Today’s Echo gathers that this is due to the effect of the COVID-19 outbreak on the oil economy. The lockdowns enforced by the fuel-consuming industrialized economies has resulted in factory shutdowns, low volume of transportation and aviation paralysis. The resultant low demand for oil and the price war between two oil producers, Russia and Saudi Arabia has driven oil prices to its lowest in two decades, severely impacting oil producers like Seplat. However, an Investor Relations analyst who craves anonymity argues that Seplat will weather the storm: “ It is rather unfortunate to attribute the Seplat’s momentary setback to the acquisition of Eland, this is just a challenging period for the industry as a whole. All oil and gas companies are in the same financial dire straits at this time, did they all buy Eland? We believe that Seplat, with its usual characteristic resilience, will bounce back even stronger before most of its peers.”

Coping With Heavy Debt Burden and Low Revenue

However, some other analysts insists that the large debt component of Seplat’s financing for the Eland acquisition has also contributed to its downgrading. 

On 10 December 2019, Seplat entered into an amended and restated US$350 million revolving credit facility, facilitated by its financial adviser, Citigroup. According to Investopedia, a revolving loan facility is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations.

It is pertinent to note that this revolving loan constitutes 74.1 percent of the acquisition cost. This means over 74 percent of the acquisition cost came from debt.

“Seplat is just unfortunate to be having a low cash to debt ratio at a time when they needed cash the most,” another source told Today’s Echo

“This was one of the strongest companies in Nigeria and probably the most stable indigenous oil company. It would be a tragedy if it is allowed to fall due to the coronavirus outbreak,” he added.

However, Seplat has said its low production cost and flexible debt position gives it the leeway to overcome the current crisis, as it intends to spend as much as $100 million of capital expenditure.

Seplat CEO Austin Avuru said the company would draw from its experience with a similar crisis to surmount headwinds in a challenging phase for the global economy induced by the COVID-19 pandemic and short-term oil oversupply due to demand and supply shocks.

“Seplat will benefit from being a resilient company built on the solid foundations of prudent financial management and the careful mitigation of risk,” he said. “We are a low-cost producer and will continue to manage our finances prudently.”

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