Fitch rates Afren plc's secured notes 'B+(EXP)'

Nov 18 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Africa-based oil producer Afren plc's (Afren) USD secured notes an expected senior secured rating of 'B+(EXP)' with a Recovery Rating of 'RR4'. It has affirmed Afren's Long-term Issuer Default Rating (IDR) at 'B+' and its senior unsecured rating at 'B+'. The Outlook on the Long-term IDR is Stable.

The notes' rating is in line with Afren's IDR to reflect average recovery prospects in the event of default. Fitch will assign a final rating to the notes upon receipt of completed documentation.

The agency has simultaneously revised the debt-class rating of Afren's 2016 and 2019 secured notes to a senior secured rating of 'B+'/RR4 from a senior unsecured debt-class rating of 'B+/RR4'. Given expectations of average recoveries across both debt classes, Fitch has affirmed the senior unsecured rating at 'B+'.

Afren's ratings reflect Fitch's expectations of positive cash generation over 2013-16 driven by production expansion and sound profitability, which are balanced by Afren's strong exposure to political risk in Nigeria (BB-/Stable) and Iraq. The agency expects the company will successfully implement future production expansion plans in Kurdistan and Nigeria. Afren achieved a proven and probable reserves (2P) growth of 14% in 2012 to 210 million barrels (representing a 265% reserves replacement ratio), prior to the consolidation of First Hydrocarbon Niger (FHN). On consolidation of FHN, a further 60 million barrels (mmboe) of 2P reserves would have been added, and in addition the completion of exploration and appraisal work at Okoro East (Nigeria) and at the Ebok North Fault Block should in the short- to medium-term contribute further 2P reserves.

The new discoveries are located near the infrastructure of the existing fields and thus could be developed and monetised more quickly and efficiently. The step-up in production level also demonstrates a shift in the company's scale of operations putting it on a par with peers such as Russia's Alliance Oil Company Ltd (B/Stable).

KEY RATING DRIVERS

Strong Operational Performance

Afren more than doubled its oil and gas output to 43.1 thousand barrels of oil equivalent per day (mboepd) (excluding FHN) in 2012, outperforming Fitch's estimates. Production in 3Q13 increased 20% year on year to 48.6 million barrels per day and Fitch expects that the company should be able to increase production again in 2013, in addition to material production increases at Barda Rash in Iraq and OML 26 no later than 2015. At end-2012, Afren reported discoveries and extensions in its 2P reserves of 39mmboe (prior to the consolidation of FHN).

Cash Generative Assets

Fitch believes that the successful development of the Nigerian Ebok field and the commencement of production at the Iraqi Barda Rash field have enhanced the company's operational and financial profile by diversifying its operations across three main producing assets and establishing a solid foundation for cash flow generation in the medium term. The agency believes that expansion of the cash flow-generative asset base should reduce the execution risk inherent in Afren's operations.

Stable Financial Profile

Fitch expects the company to generate positive free cash flow over 2013-16, driven primarily by production expansion and sound profitability. The agency forecasts funds from operations (FFO) adjusted leverage will decrease and stay below 2x in 2013-16.

Political Risk Remains

Fitch discounts the positive aspects of Afren's exposure to two resource-rich countries - Nigeria and Iraq. While these countries underpin its growth potential and geographic diversification, they also bring legal, political and security risks to its operations in these countries. The operations in both countries are characterised by political instability and uncertainty and ambiguous legal and regulatory frameworks in the oil and gas sector. These factors largely constrain Afren to the 'B' rating category.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Larger operating scale (for example through geographical diversification or larger operational footprint in existing fields), while maintaining a solid financial profile

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Material deterioration of financial profile due to, for example, large-scale acquisition and/or more aggressive dividend policy. This deterioration may be manifested in FFO adjusted gross leverage rising above 2.5x (3Q13: 1.5x) and FFO fixed charge coverage falling below 4.5x (3Q13: 6.1x) on a sustained basis.

- Severe delays and/or cost overruns in fields development

- Failure to replace proved reserves and maintain at least stable reserves life

LIQUIDITY AND DEBT STRUCTURE

Afren's cash position of USD458m at end-3Q13 was sufficient to cover short-term debt of USD65m. In 2013, the company has refinanced its Ebok Reserves Based lending facility. The company's debt repayment schedule is not onerous until 2016 when its USD500m eurobond falls due.