KEY RATING DRIVERS
Stable Performance at MBPS
MBPS's petroleum services business continued to see stable operating performance in 2014 despite a significant drop in oil prices in the second half of the year. EBITDA increased 5% to USD55m in 2014 as declining revenue was offset by cost savings. Its order book at end-March 2015 remained strong.
MBPS operates mainly in the Middle East, where oil and gas production costs are low and output remains high, despite a more challenging economic environment, and which should support MBPS's revenues. In 2014 MBPS refinanced its USD198m senior notes with a seven-year loan. The resulting decrease in interest costs and extended debt maturity profile are supportive of ratings.
Parental Support Vital
MBPS's standalone credit profile corresponds to a 'B-'/'CCC' rating range, reflecting high leverage as well as strong operational and strategic ties with MBHC, as demonstrated in past equity injections and shareholder loans.
E&P Key Cash Contributor
Petrogas remains the most important operating division of the group and was responsible for 80% of MBHC's EBITDA in 2014. Fitch expects that the E&P segment will remain the main contributor to consolidated EBITDA, despite a projected weakening in financial performance on lower oil prices. In 2014 Petrogas acquired from Chevron Exploration and Production B.V. assets in the Dutch North Sea. The transaction was financed with proceeds from the disposal of MBHC's stake in Ahli Bank. The acquisition increased Petrogas's oil and gas output by 30%, which we consider positive for MBHC's credit profile.
Potential Sizeable Mining Investments
MBHC is diversifying Mawarid Mining (MM) through investments outside traditional Omani copper and gold mining as MM's resources in Oman will no longer be operated post-2015. Diversification is achieved through stakes in the Sandpiper Phosphate project in Namibia (effective 85% stake) and Nautilus Minerals Inc (Nautilus, 27.71% shareholding).
Capex to develop the Sandpiper project is not expected to be significant in 2015 but should ramp up in subsequent years if MBHC makes a final investment decision to develop the project. Although our forecasts currently do not include the investment, initial estimates suggest that the investment could lead to leverage metrics exceeding our guidance. MBHC has taken steps to reduce the overall project cost while the final spend to develop Sandpiper will be determined once the project and funding structure is completed.
Nautilus plans to explore the ocean floor for polymetallic seafloor sulphide deposits. The company aims to produce copper, gold and silver in its first deposit, Solwara I, in the territorial waters of Papua New Guinea (PNG). Nautilus is in the process of building the seafloor production equipment and vessel. Funding for the project will come from PNG's government and the company's own funds. Potential funding from MBHC is not significant relative to the size of overall investment spending.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Underperformance at the company's E&P division that reduces group cash flow.
- Large debt-financed acquisitions that materially increase leverage.
- Significant increase in capex that reduces the company's free cash flow (eg the Sandpiper marine phosphate project).
- Deterioration in the company's liquidity position (slowing cash flow generation used to service short-term debt).
- FFO adjusted net leverage consistently above 2.5x.
- FFO interest coverage consistently below 5x (2014: 4.6x).
Positive: The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. Future developments that could lead to the Outlook being revised to Stable include:
- Better-than-expected performance at the services and mining segments.
- FFO adjusted net leverage consistently below 2.5x.
LIQUIDITY AND DEBT STRUCTURE
Cash of USD319m and undrawn committed credit lines of USD63m at end-December 2014 covered near-term debt maturities of USD284m (including bank overdraft).
In November 2014, the group refinanced notes maturing in 2015 with a bank loan at lower interest rates. Access to financing via local banks is satisfactory and Fitch expects MBHC will refinance upcoming maturities with local banks. Fitch believes that MBHC could also make additional cash available by cutting back capex or dividends.
Fitch's key assumptions within our rating case for the issuer include:
- E&P division key contributor to revenues and EBITDA
- Stable oil and gas production and Fitch oil price deck (2015: USD55/bbl, 2016: USD65/bbl, 2017: USD75/bbl, 2018:USD80/bbl)
- MBPS's EBITDA to decline in 2015 due to a more challenging economic environment, before improving from 2016 on the back of new contracts signed
- Negative free cash flow in 2015 and 2016, and improving thereafter mainly due to higher oil and gas prices
- FFO adjusted net leverage of around 3.0x in 2015 and improving to below 2.5x post-2016
Roma Patel, CFA
+44 20 3530 1465
Jakub Zasada, ACCA
+48 22 338 6295
Fitch Polska SA
+44 20 3530 1709
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: email@example.com.
© Press Release 2015