S&P Credit Rating - B - Outlook StableYou will find below the
S&P credit rating analysis (similar as Moody's) that establishes the 'cost' of high-yield bonds. The report highlights very interesting but known facts. Modest reserves; a lot hanging on GSA. High risk (as indicated by the B rating) but the return could be quite good. I believe in the story even though this is not a slam dunk yet... AIMO
| U.K.-Based Oil And Gas Company Ithaca Energy Assigned Preliminary 'B' Rating; Outlook Stable |
| Publication date: 24-Jun-2014 08:53:45 EST |
U.K.-based oil and gas development and production company Ithaca Energy
Inc. is planning to issue $300 million of senior unsecured notes to pay down existing debt and to finance an acquisition.
We are assigning our preliminary 'B' long-term corporate credit rating to Ithaca, reflecting our view of the company's "vulnerable" business risk profile and "significant" financial risk profile.
The stable outlook reflects our view that Ithaca will deleverage following a peak in Standard & Poor's-adjusted debt to EBITDA of above 2.5x at year-end 2014, as the Greater Stella Area (GSA) starts producing in mid-2015.
LONDON (Standard & Poor's) June 24, 2014--Standard & Poor's Ratings Services
said today that it assigned its preliminary 'B' long-term corporate credit
rating to U.K.-based oil and gas development and production company Ithaca
Energy Inc. (Ithaca). The outlook is stable.
The final ratings will depend on our receipt and satisfactory review of all
final transaction documentation. Accordingly, the preliminary ratings should
not be construed as evidence of final ratings. If Standard & Poor's does not
receive final documentation within a reasonable time frame, or if final
documentation departs from materials reviewed, we reserve the right to
withdraw or revise our ratings.
The preliminary rating reflects our view of Ithaca's "significant" financial
risk profile and "vulnerable" business risk profile.
Our assessment of Ithaca's business risk profile and competitive position as
"vulnerable" reflects our view of the company's limited but fast growing scale
of production and low diversity of operations. Ithaca operates almost
exclusively on the U.K. Continental Shelf (UKCS) with an interest in 11
production fields, increasing to 13 upon completion of the Summit acquisition.
Ithaca's business model is to focus on production and development rather than
riskier exploration activities.
Ithaca's oil reserves and production are relatively very low with commercial
reserves (2P; proven plus probable reserves) of 58 million barrels of oil
equivalent (boe) and average production of just 10,390 boe per day (boepd) in
2013. These figures exclude contribution from the Summit acquisition, which
will add approximately 12 million boe to reserves (according to Ithaca's
estimates). The company's significant forecast production growth is heavily
dependent on the GSA development hitting targets and coming online without
further delays. Ithaca plans to use the proceeds from its proposed $300
million of senior unsecured notes to pay down existing debt facilities, which
will then be partly redrawn to finance the acquisition of small, non-operated
interests in three U.K. oil fields from Summit Petroleum (about $160 million).
We assume that these interests will further augment Ithaca's production
profile, with the company targeting production of approximately 25,000 boepd
in 2015.
We view Ithaca's production at 95% oil as favorable given the currently high
oil price, although we expect the proportion of gas to increase going forward.
Furthermore, any changes to local tax rules and allowances are inherent as
with peers. However, we understand that the U.K. government remains supportive
of efforts to invest in and stimulate production in new developments and
mature fields on the UKCS. We assess Ithaca's management and governance as
"satisfactory" reflecting its experienced management team.
Ithaca's "significant" financial risk profile reflects our forecast that
Ithaca will deleverage following a peak in adjusted debt to EBITDA of above
2.5x, and a low in funds from operations (FFO) to debt of below 40% at
year-end 2014, with negative free operating cash flow generation in 2014 due
to acquisition spending and capital expenditure (capex). We further factor in
potentially highly volatile cash flows, given that oil prices can be
unpredictable and the oil industry is associated with heavy capital intensity.
However, the company has a rolling commodity price hedging program, which
helps to mitigate this risk to some extent.
Our base-case scenario assumes that there are no material further delays to
production start-up in the GSA and that the non-operated interests are
acquired from Summit Petroleum, which together results in a material increase
in production in 2015 and 2016.
Our base-case scenario incorporates the following assumptions:
- A Brent Oil price of $110 per barrel (/bbl) in 2014 and $105/bbl in 2015.
- Production of approximately 25,000 boepd in 2015.
- Capex of about $340 million in 2014, and $180 million in 2015.
- No material cash income tax over the medium term. Ithaca benefits from
- tax incentives and carried forward tax losses.
- No dividends. Ithaca has not paid any dividends since its incorporation
- and does not plan to pay any in the near term.
- Acquisitions are likely to play a significant role in the company's
- future reserves and production growth, but we understand that such
- spending will be restricted to the company's financial policy of reported
- net debt to EBITDA of less than 2x on a sustained basis.
Based on these assumptions, we arrive at the following credit measures at
year-end 2014:
- Adjusted debt to EBITDA of above 2.5x in 2014 but below 2.0x from 2015.
- Funds from operations to debt of below 40% in 2014 and about 60% in 2015.
- Negative free operating cash flow (FOCF) in 2014 as a result of
- acquisition spending and capex, returning to positive from 2015 as the
- GSA comes online.
We view Ithaca's liquidity as "adequate" under our criteria, assuming the
transaction is completed as expected. Under our base-case scenario, we
forecast that liquidity sources will surpass uses by more than 1.2x in the 12
months following the notes' issuance.
During this 12-month period, our forecast liquidity sources comprise:
- Unrestricted cash of $39 million as of March 31, 2014;
- Reserves Based Lending (RBL) and revolving credit facility (RCF) headroom
- of about $500 million; and
- FFO generation of above $300 million.
We estimate that Ithaca's cash needs over the 12 months will include:
- Acquisition spending of about $160 million;
- Capex of about $340 million in 2014, and $180 million in 2015;
- A low working capital outflow;
- No dividend payments; and
- No short-term debt maturities.
The above calculations assume that proceeds from the $300 million senior
unsecured notes will be used to pay down the RBL facility. This will then be
partly redrawn to fund the acquisition.
The stable outlook reflects our forecasts that Ithaca will increase its
production in the U.K. North Sea materially, once the GSA comes online in
mid-2015. We forecast that Ithaca will deleverage below 2.0x following a peak
in adjusted debt to EBITDA of above 2.5x at year-end 2014. We anticipate that
liquidity will remain "adequate" over the 12 months following the notes'
issuance.
We could lower the rating if Ithaca does not meet its forecast material
step-up in production growth, which could occur as a result of unexpected
operational issues, or if GSA is subject to further material production delays
or start-up issues. Downside pressure could also result from large debt-funded
acquisitions, or liquidity issues.
We view the likelihood of an upgrade as remote in the near term, due to
Ithaca's lack of diversification and limited scope of operations. However, if
the company continues to aggressively grow its production levels, without
materially increasing debt leverage, we could consider raising the rating over
the medium to longer term.