Press Release: S&P Assigns UK-Based Ithaca Energy Prelim ‘B’ Rtg; Otlk Stable
The following is a press release from Standard & Poor’s: — 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. RELATED CRITERIA AND RESEARCH — Methodology And Assumptions: Liquidity Descriptors for Global Corporate Issuers, Jan. 2, 2014 — Key Credit Factors For The Oil And Gas Exploration And Production Industry, Dec. 12, 2013 — Corporate Methodology, Nov. 19, 2013 — Corporate Methodology: Ratios and Adjustments, Nov. 19, 2013 — Methodology For Crude Oil And Natural Gas Price Assumptions For Corporates And Sovereigns, Nov. 19, 2013 — Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Complete ratings information is available to subscribers of RatingsDirect at http://www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor’s public Web site at http://www.standardandpoors.com. Use the Ratings search box located in the left column. 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