Kuwait Energy’s cash flow to improve in 2015: Fitch Ratings

Kuwait Energy, the Bahrain-based independent oil and gas company, should enjoy higher cash flows in 2015 as production from its Iraqi gas project starts and capital expenditure on development is scaled back, Fitch Ratings said in a statement issued on 11 July.

Fitch Ratings assigned Kuwait Energy a long-term Issuer Default Rating (IDR) of B- with a Stable Outlook. It simultaneously assigned an expected senior unsecured rating of B-(EXP) for Kuwait Energy’s proposed issue of notes. Proceeds from the notes are expected to be used to refinance existing debt, fund capital projects, including in Iraq, and for general corporate purposes, Fitch Ratings said.

Fitch Ratings said the ratings take into consideration Kuwait Energy’s good track record of producing hydrocarbons in difficult geographic areas in which it is present: Egypt, Yemen and Oman. Fitch Ratings says the company has experienced management and a prudent attitude to debt funding.

“Constraints on the company’s ratings include its small size, limited reserves, operations mainly through quasi-PSAs (production-sharing agreements) with national oil companies, as well as its focus on a limited number of production areas, dominated by Egypt, and a significant on-going gas development project in Iraq,” Fitch Ratings said.

“The Stable Outlook reflects our expectation that, over the medium term, Kuwait Energy will be able to maintain adequate liquidity and sustain or grow output despite operating in countries with high geopolitical and economic risks,” Fitch Ratings said.

Kuwait Energy produced an average of 22,500 barrels a day (b/d) of oil in the first quarter of 2014 from its interests in Egypt, Yemen and Oman. It is also developing assets in Iraq, mainly in gas. Fitch Ratings said Kuwait Energy’s production will remain under 30,000 barrels of oil equivalent a day and it will peak around 2016.

Most of Kuwait Energy’s 167 million barrels of oil equivalent in proved and probable reserves are in Iraq. About 63 per cent of its Iraq reserves are in the form of natural gas. The company is developing assets in the Siba field and Mansouriya Field.

“While the diversification of Kuwait Energy into gas is rating-positive, the company is entering a market that is highly dependent on its ability to obtain timely and full payments from its gas off-takers,” Fitch Ratings said. “Currently, the company has a long-term take-or-pay gas supply agreement with the Iraqi government. However, as this is a new venture for the company with no track record of production or payments, we treat the Iraqi gas assets as a future factor that may help improve Kuwait Energy’s creditworthiness once the project is in fully operational and becomes cash-generative.”

Fitch Ratings said the Egyptian General Petroleum Corporation (EGPC), Egypt’s national oil company, is a primary off-taker with respect to its production entitlement under the PSAs there.

“EGPC’s payments to Kuwait Energy have historically been made on an irregular basis, and typically several months in arrears,:” Fitch Ratings said. In 2011, on sales of $120m to EGPC, Kuwait Energy received only $46m in cash. The receivables due from EGPC peaked in mid-2012 and have gradually declined since. Kuwait Energy received a payment of $64m in the form of oil cargoes in April and June 2014.”

“We believe that although the receivables crisis has been largely resolved, the collection risk in Egypt remains given the weak state of the sovereign’s finances,” Fitch Ratings said.

Fitch Ratings said that Kuwait Energy expects to reduce its capital expenditure significantly after 2014 and that the Siba project is forecast to come on stream in mid-2015. The company could draw on an additional $50m from the convertible loans outstanding with Abraaj.

“However, this represents expensive financing for the company and hence we do not expect this facility to be used further,” Fitch Ratings said. “Liquidity may become a risk if the proposed bond transaction does not go ahead.”

Fitch said that factors that could lead to a positive rating of Kuwait Energy in the future are:

  • The successful launch of the gas business in Iraq
  • The renewal of licenses in Egypt which are set to expire in 2016-2017
  • The maintenance of strong liquidity and a conservative financial profile.

Possible negative factors include the continuation of cash collection problems in Egypt; a failure to launch the gas business on time and budget and a ratings downgrade of Egypt.

Kuwait’s executive chairman is Manssour Aboukhamseen. Its chief executive is Sara Akbar, who previously worked with the Kuwait Oil Company and the Kuwait Foreign Petroleum Exploration Company.