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Fitch Ratings-London-March 05: The liquidity position of Kuwait Energy (CCC on Rating Watch Evolving) remains under pressure as its acquisition by United Energy Group Limited (UEG) is still in progress and the maturity of its USD250 million bond due in August 2019 approaches, Fitch Ratings says. While its acquisition by UEG could be positive for Kuwait Energy's rating, delays in the completion of the transaction or in the refinancing in the coming months would likely result in a negative rating action.
Kuwait Energy's acquisition by UEG was initially announced in September 2018, with a targeted completion by 30 June 2019. Kuwait Energy is a small-scale exploration and production (E&P) producer with 2017 output at 27,000 barrels of oil equivalent per day (kboepd) and significant proved oil reserves in Iraq. UEG is a Hong Kong-listed E&P producer operating in Pakistan with a production of 62kboepd in 2017 and EBITDA of around USD400 million.
We continue to view the completion of Kuwait Energy's acquisition by UEG as a positive development for the Middle Eastern E&P producer. Given UEG's available liquidity at end-2018 (estimated by the company at around USD900 million) we believe that UEG should be able to refinance Kuwait Energy's bond, if needed. UEG has committed to assuming all Kuwait Energy's borrowings currently in issue. On a consolidated pro-forma basis, the business and financial profile of the combined entity would probably be in the 'B' rating category, though its credit quality could be impacted by the recent downgrade of Pakistan (B-/Stable), where UEG operates.
The main hurdles to the transaction, such as obtaining approval by shareholders of both UEG and Kuwait Energy and endorsement from the relevant authorities in Iraq (including Basra Oil Company) and Egypt, have been cleared. However, the deal is to satisfy certain conditions before it can be sanctioned by the Jersey court, which is now scheduled to take place on 20 March. Kuwait Energy management sees outstanding conditions as largely procedural.
Kuwait Energy's USD250 million notes mature on 3 August 2019 and we estimate the company's cash or existing undrawn facilities are not sufficient to cover this redemption. The company is continuing to review its refinancing options in parallel with the on-going acquisition process. We believe it may be critical for the company to secure funding or for the acquisition to be completed in the next two to three months. Otherwise we may downgrade Kuwait Energy to reflect a higher risk of default given the approaching bond maturity and the long stop date for the deal, which is currently set at 30 June.
Kuwait Energy's liquidity position can also be impacted by the outcome of a dispute with Dragon Oil over a 15% participating interest in Block 9. Dragon Oil is now part of ENOC, the national oil company of Dubai. The best case scenario for Kuwait Energy would probably be the effective sale of the interest to Dragon Oil for around USD100 million, in line with the settlement agreement previously reached between both parties. However, as Dragon Oil has decided to re-commence the arbitration the outcome is now difficult to predict. The worst case scenario for Kuwait Energy would be the need to compensate Dragon Oil for its losses in cash, which could bring the company's liquidity under even more stress.
Contact:
Dmitry Marinchenko, ACCA, CFA
Director
+44 20 3530 1056
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Niels Vanden Bussche
Analyst
+44 20 3530 1971
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at
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