How Niger Delta Militancy Erodes Seven Energy’s Earnings


Ejiofor Alike

The renewed attacks on oil facilities in the Niger Delta by the Niger Delta Avengers (NDA) have eroded the earnings of Seven Energy International Limited as Fitch Ratings has downgraded the company’s Issuer Default Rating (IDR) to ‘CC’ from ‘B-‘ as a result of the impact of militant attacks on the company’s oil and gas facilities.

The rating agency blamed Seven Energy’s poor performance on the attack of the 48-inch Forcados pipeline, which was carried out by the Niger Delta Avengers in February this year.
A‘CC’ rating is an indication that the company is at a great risk to default in its financial obligations to actual and prospective creditors.

Fitch has also downgraded the senior secured rating of wholly-owned subsidiary, Seven Energy Finance Limited’s 10.25 per cent $300 million secured notes due for maturity in 2021 to ‘C’ from ‘CCC’.

According to a statement by Fitch, the Recovery Rating on the notes remains at ‘RR6’.
“The IDR downgrade reflects our re-assessment of the significant ongoing liquidity, security and execution risks that Seven Energy continues to face,” said the rating agency.

Fitch noted that while the company is making progress in its negotiations with lenders to defer repayments under the $377 million Accugas IV facility, which when completed should improve its short-term liquidity, the rating agency insisted that liquidity over the medium-term is likely to remain very tight and will remain largely determined by external developments.

“The external developments include a ramp-up in natural gas sales to around 150 million cubic feet per day (MMcfpd) by end-2016, from 95MMcfpd in 1H16 (first half of 2016; the Forcados oil terminal re-opening in 4Q16 (fourth quarter 2016) following its closure since February 2016; and a reduction of the oil under-lift position under the Strategic Alliance Agreement (SAA) with Nigerian Petroleum Development Company (NPDC) that reached $312 million as at 30 June 2016,” Fitch said.

“If any of these developments fail to materialise by end-2016, we believe that Seven Energy may be forced to start re-negotiations with all its creditors, including the bondholders,” Fitch added.
Describing Nigeria’s onshore-based Seven Energy as a small oil and gas production and gas processing, distribution and marketing company with a complex structure, Fitch said the company’s oil business in the Nigeria’s North West had been hampered by NPDC’s weak financial position and security issues leading to the prolonged shutdown at the Forcados oil terminal.

In the first half of 2016, Fitch stated that Seven Energy’s earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses (EBITDAX), which is an indicator of a company’s financial performance, was $66 million, and its free cash flow (FCF) was a negative $81 million.

According to the rating agency, Seven Energy’s equity-raising of $100 million in February 2016 allowed the company to continue making interest and principal payments in the first half of 2016 of $50 million and $14 million, respectively. However, absent another equity raise or debt restructuring Seven Energy may run out of cash by end-2016.

Highlighting the key rating drivers, Fitch stated that the deteriorating liquidity led to downgrade Seven Energy’s cash on hand at June 30, 2016 to $33 million, well below the company’s short-term debt of $97 million. In addition, the company reclassified $303 million of long-term debt as short-term at end-June 2016 after it failed to comply with financial covenants.
Fitch further stated that the company is actively working to improve its liquidity, citing the plan to extend the Accugas IV maturity profile and to replace a portion of the Accugas IV facility with longer tenor debt following ongoing discussions with various development finance institutions (DFIs).

But Fitch insisted that these measures may not be enough to restore Seven Energy’s liquidity over the medium term as current operating cash flows predominately from gas sales are insufficient to cover capex and interest payments.

Apart from the debt maturity extension, Fitch said the company’s liquidity in 2016-17 largely rests on the ramp-up of gas sales volumes, the successful completion of the Oron to Creek Town gas pipeline, and the re-opening of the Forcados terminal in the fourth quarter of 2016.

“All these are subject to uncertainty and increase the likelihood of debt restructuring, in our view. Developing Natural Gas Business in the first half of 2016, Seven Energy’s average deliveries of natural gas were 95MMcfpd, up from 70MMcfpd in 2015. Its gas offtakers include three power stations (Alaoji, Calabar and Ibom), a cement plant and a fertiliser factory in Nigeria. The company projects gas sales of 150MMcfpd by end-2016, as power stations commissioning works and electricity transmission infrastructure are being completed,” Fitch explained.