GCR Upgrades Aradel Holdings on Improved Operating Performance, Credit Profile
GCR Ratings (GCR) has upgraded Aradel Holdings Plc’s national scale long-term and short-term issuer ratings to AA-(NG)/A1+(NG) from A+(NG)/A1(NG) previously.
Concurrently, the rating agency upgraded the national scale long-term issue rating accorded to Aradel Holdings Plc’s N10.318 billion series 1 senior unsecured Bonds to AA-(NG), from A+(NG) previously.
The outlook on the ratings is stable, according to GCR which noted that the upgrade of Aradel Holdings Plc reflects its sustained and robust earnings growth and cash generation.
The rating note said its robust earnings and cash have supported stronger leverage metrics and aided internal funding of expansion projects without recourse to additional debt.
However, GCR said the Holding company’s ratings are limited by the group’s modest competitive positioning relative to the larger oil and gas companies within the sector.
“Our assessment of Aradel Holdings’ competitive position is anchored on the group’s diversified business operations across the oil and gas value chain, which has supported consistent improvement in its operating performance and cash flow generation”.
The rating noted stated that a supportive competitive strength is its refining business, with capacity utilisation rate increasing to 42.0% in 2023 from 24.0% reported in the prior year.
GCR maintained that the group remains a mid-sized player when compared with the major international oil companies operating within the Nigerian oil and gas industry.
As part of the group’s plan to enhance its competitive stance, Aradel Holdings has upheld continuous investments across its business segments.
Notably, the group successfully drilled additional two oil wells bringing the total producing wells to 15 as of August 2024 from 13 in 2023 with further plans to venture into the production of Premium Motor Spirit and Liquified Natural Gas.
“We take cognisance of the group’s effort to decentralize its assets portfolio and minimize the concentration risk to a single location through the purchase of some additional marginal fields, with other major acquisitions underway.
“These developments and the successful execution of the planned investments across its business segments could potentially improve the group’s competitive strength”, GCR said.
The rating note revealed that Aradel Holdings reported strong improvement in its operating performance over the review period.
This is bolstered by the continuous investment in its drilling operations, significant reduction in oil theft through its Alternative Crude oil Evacuation System, notable growth in gas delivery volumes as well as increased productivity in its refining business.
Aradel revenue spiked by 119.2% to $342 million in 2023 and further by 20.5% annualized, during H1 2024.
The strong revenue growth, combined with economies of scale and strong operating efficiencies, have sustained the EBITDA margin above 60% in 2023 and H1 2024, according to GCR.
The firm said although, the group’s revenue generation is inherently susceptible to fluctuations in the international oil prices, analysts expect the strong momentum to be sustained for the full year 2024 and 2025 on the back of increased production from its existing and new wells as well as improvement in gas and refinery businesses.
“This should be complemented by the established cost control measures. We have positively viewed our assessment of the group’s leverage and capital structure, underpinned by the sustained conservative debt position, and stronger cash flows”.
GCR said Aradel Holdings’ gross debt reduced significantly by 42.3% to $69.4 million in 2023 and further by 20.3% to $55.4 million in June 2024 due to the repayment of the matured loans.
The lower debt level and the higher earnings have sustained the net ungeared position in 2023 and H1 2024, the rating note said.
Similarly, operating cash flow coverage of debt improved to 300.2% in 2023 and further to 512.8% in June 2024 from 58.6% in 2022, while net interest cover remains strong above 20.0x.
Looking ahead, GCR analysts expect these strong metrics to be sustained on the back of the anticipated improvement in earnings and well conserved debt position.
GCR stated that Aradel has maintained strong liquidity over the review period, benefiting from persistent strong organic cash flow generation.
The company’s liquidity coverage is estimated at 2.6x over the six-month period to December 2024 and 2.5x over the 18-month period to December 2025.
This is premised on the anticipated higher cash flow from operations and robust cash holding of $286.0 million as of June 2024 which are adequate to cover the small maturing debt of $18.8 million, estimated dividends payments of $34.6 million, and anticipated higher capital spending of $139.4 million relating to the proposed acquisitions and expansion projects.
GCR said the group has a sizable unutilised committed facilities of USD111.0 million obtained from two financiers for additional liquidity support.
Aradel Holdings’ existing bond includes NGN10.3 billion Series 1 Senior Unsecured Bonds raised under its NGN20.0 billion Bond Issuance Programme.
The Series 1 Bonds have a tenor of five years, with 24 months moratorium on principal repayment to January 2025, and legal maturity date of January 2028.
GCR said principal repayment is on an amortising basis, payable semi-annually following the expiration of the moratorium.
According to the rating note, the coupon is 17% fixed rate, payable semi-annually in arrears and commencing from the issue date up to and including the maturity date.
The Series 1 Bonds constitute direct, unconditional, senior, unsubordinated and unsecured obligations of the issuer and at all times rank pari passu and without any preference among themselves.
“We have reviewed the Trustee’s report as of September 2024, regarding the Series 1 Bonds performance and noted that Aradel Holdings has complied with the transaction terms and conditions in respect of the payment obligations on the bonds”.
Being senior unsecured debt, the bonds bear the same probability of default as the issuer and would reflect similar recovery prospects to senior unsecured creditors in the event of a default.
As such, the long-term rating for the Series 1 Bonds is equalised with Aradel Holdings’ long term senior unsecured rating, GCR said.
Outlook statement
The stable outlook reflects GCR opinion that Aradel Holdings’ integrated business operations and continuous investments will support strong earnings and cash flows. This will allow the group to maintain its strong financial profile. #GCR Upgrades Aradel Holdings on Improved Operating Performance, Credit Profile
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