GCR affirms Forte Oil Plc’s Issuer and Bond Ratings at A-(NG); Outlook Stable

12 Jul 2017 In Rating Notifications

GCR affirms Forte Oil Plc’s Issuer and Bond Ratings at A-(NG); Outlook Stable

Lagos, 12 July 2017—Global Credit Ratings has affirmed the national scale issuer ratings assigned to Forte Oil Plc of A-(NG) and A1-(NG) in the long term and short term respectively; with the outlook accorded as Stable. Concurrently, the Series 1 Fixed Bond rating has been affirmed at A-(NG) and placed on Stable Outlook. The ratings expire in June 2018.


RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Forte Oil Plc (“Forte”, “FO” or the “Group”) based on the following key criteria:

The ratings take cognisance of Forte Oil Plc’s top-tier position in the Nigerian downstream petroleum industry, underpinned by a visible brand, significant assets across the value chain, strong relationships with suppliers, experienced management team, as well as an extensive distribution and retail network.

The downstream petroleum industry is heavily reliant on imports, due to low levels of domestic refining. As a result, challenges were heightened by hard currency shortages (which resulted in product scarcity), adverse exchange rate movements and delayed subsidy payments in 2016. In addition, the harsh economic environment and reduced consumer spending power led to a temporary decline in demand for petrol (following a 67% increase in the pump price in May 2016). In a bid to reduce exposure to foreign exchange fluctuations, Forte significantly scaled back its refined petroleum product import volumes. As such, FY16 and 1Q FY17 revenue and earnings were significantly below initial forecasts.

Forte’s revenue increased by 19% to N148.6bn in FY16, underpinned by a general price increase across business segments and higher traded lubricant sales volumes. However, the partial cost pass through saw the gross margin decline to 13.9% in FY16, before rebounding to 17.6% in 1Q FY17. Effective cost management and focus on high margin, non-regulated products, saw operating margin increase from 5% in FY15 to 6.3% in FY16 edging up to 9.5% in the 3-month period to March 2017 (“1Q FY17”). The net finance charge spiked to N4.2bn in FY16 (FY15: N1.6bn), due to the impact of Naira devaluation on import finance facilities and higher lending rates. Accordingly, net interest cover reduced to 2.2x in FY16 (FY15: 3.6x), and further to 2x in 1Q FY17.

The N9bn Series 1 Bond Issue and funding raised for the Geregu Power plant overhaul pushed debt up to N49.4bn at FY16. Coupled with a reduction in distributable reserves (following a dividend payment), this drove net gearing up to 75% at FY16 and 80% at 1Q FY17. Positively, net debt to EBITDA improved to a respective 263% and 209% at FY16 and 1Q FY17, albeit behind target. Forte plans to raise additional capital of N20bn equity during 3Q 2017. Following the equity raise, management anticipates net gearing to reduce below 35% at FYE17 and FYE18 respectively, while net debt to EBITDA is projected to register around 100% for both years.

Despite the downstream petroleum industry challenges, prospects are enhanced by a strong baseline of demand, on the back of the country’s large urban population and heavy vehicular traffic. In addition, the completion of Dangote Group’s 650,000bbl/d refinery (set for 2019), is expected to materially reduce the dependence on imports, with the Ministry of Petroleum projecting the cessation of fuel importation once the plant is at full capacity. Forte plans to expand its retail network and diversify its non-fuel revenue streams with strong local and international brands. In this regard, the power generation business had increased capacity utilisation to 100% by 1H FY17 (1H FY16: 35%) and should contribute materially to earnings in the medium term. The Group also anticipates a rebound in the upstream oil and gas services business on the back of broader economic recovery in the medium term, and thus plans to expand service offerings.

Sustainable margin enhancement, on the back of the materialisation of current business plans could result in positive rating action if it translates to stronger credit protection metrics in the medium term. Conversely, adverse regulatory/policy changes, or other external factors could adversely affect earnings and result in liquidity strain and/or increased gearing metrics, placing downward pressure on the ratings. In addition, sustained increase in debt levels and gearing metrics would lead to negative rating action

As the Series 1 Fixed Rate Bond is a senior unsecured obligation of the Issuer, the Bonds will bear the same rating as the Issuer, and any change in the rating assigned to the Issuer will directly affect the Bond rating.

NATIONAL SCALE RATINGS HISTORY

ANALYTICAL CONTACTS

Primary Analyst
Adekemi Adebambo
Senior Analyst
Lagos, Nigeria
+234 1 462 2545
.(JavaScript must be enabled to view this email address)

Committee Chairperson
Dave King
.(JavaScript must be enabled to view this email address)


APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2017
Glossary of terms/ratios, February 2016


SALIENT FEATURES

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings expire in June 2018.

 

Forte Oil Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Forte Oil Plc with no contestation of the rating.

The information received from Forte Oil Plc and other reliable third parties to accord the credit rating included:
- audited 2016 financial statements and audited comparative results for the preceding four years,
- revised Income statement budget for 2017,
- 3-month unaudited management accounts to March 2017,
- corporate governance and enterprise risk framework,
-a breakdown of facilities available and related counterparties, and
-a completed rating questionnaire

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.COM.NG/RATINGS-INFO. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES.  GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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