GCR Assigns Initial Rating to Lekoil Nigeria Limited, Outlook Stable
GCR Ratings said it has assigned national scale long-term and short-term issuer ratings of BBB (NG) and A3 (NG) respectively to Lekoil Nigeria Limited, one of the indigenous and independent upstream players in the country with the outlook accorded as stable.
The ratings assigned to Lekoil Nigeria Limited reflect its simplified corporate structure and the improvement in leverage and capital structure following the settlement agreement with the former shareholder, GCR said.
It noted however that the ratings are constrained by the group’s modest market share when compared with larger Nigerian oil companies and the inherent volatility within the oil and gas upstream sector.
Lekoil engages in exploration, development and production of crude oil, with four oil producing assets across the Dahomey Basin and the Niger-Delta region, according to the rating note.
GCR said in the note that prior to December 2022, Lekoil was jointly owned by Lekoil Limited (now Fenikso Limited) and the Nigerian shareholders.
However, following the disputes and the subsequent legal settlement between both parties, Lekoil has since evolved into a stand-alone group, now comprising fifteen direct subsidiaries, from ten previously.
The group’s competitive position is constrained by its relatively small size and business concentration, with operations comprising solely of crude oil production of 9,000-10,000 barrels per day, according to the rating note.
“We have positively viewed the strong relationships with industry partners, the host communities, and the benefits it enjoys as an indigenous player under the nation’s local content policy which has supported steady earnings.
“Over the short to medium term, Lekoil is constructing three additional wells on its producing assets and two wells on its appraisal assets, which along with gas monetization initiatives, should support business diversification and future earnings.
“We have viewed its environmental, social and governance risks consideration to be in line with the major peers, with an established framework and clear targets towards building an environmentally friendly and sustainable business”, GCR ratings stated.
The rating note explained that the company’s revenue increased consecutively over the last three years, registering at USD101.8 million in the financial year to 31 December 2023, underpinned by higher traded volumes and firmer crude oil prices.
Prior to this period, GCR wrote that the company revenue dipped due to COVID-19 related issues and the high fluctuation in global demand and prices, reflecting the vagaries of the sector.
It however noted that Lekoil’s earnings before interest tax depreciation and amortisation (EBITDA) margin is lower than its major peers, which have more diversified earnings sources.
However, the margin expanded to 39% in 2023, from an average of 28% over the last five years, on account of higher operating efficiencies.
“We project a firmer margin position over the outlook period as the group moves into a further business expansion phase”.
The company’s revenue growth should register around 20%-30% over the medium term if Lekoil experiences no delays in crude oil lifting at the various evacuation terminals, GCR Ratings forecasted.
The rating note further explained that prior to 2022, Lekoil reported recurring net losses, which completely eroded shareholders equity. These losses were largely driven by high finance charges on the intercompany loans with the former shareholder, the rating note added.
However, following the settlement agreement between the parties, the intercompany loan agreements were novated, and the debt was reduced to USD51.9 million at December 2022. Since 2022, Lekoil has been profitable, and has maintained a good balance sheet position.
The group’s gross debt has reduced to USD45.2 million at December 2023, mainly relating to loan due to Fenikso after all other debts were fully settled.
Based on the settlement agreement with Fenikso, the debt is classified as non-interest-bearing debt and will be settled by utilising 8.653% of the gross proceeds from each lifting from the Otakikpo marginal field, until fully settled, GCR said in the rating note.
Looking forward, Lekoil is in the process of raising up to NGN30 billion or USD20 million from the Nigerian debt capital market to finance its expansion drive.
“This notwithstanding, we expect the group to continue to demonstrate strong funding flexibility, with modest leverage metrics”, GCR Ratings said.
The stable outlook reflects GCR view that Lekoil’s modest debt level and sufficient committed bank credit lines will continue to underpin strong leverage metrics, solid funding flexibility and liquidity coverage. Nigeria to Wind Up Companies Linked to $9.6bn P&ID Scam
