Kuwait Energy’s US$250mn bonds are quickly approaching maturity, 80 days until redemption. The company’s tight liquidity has frequently come into the spotlight, raising questions about Kuwait Energy’s ability to pay. United Energy Group’s (UEG) recent acquisition of the company created a bigger, less leveraged entity, with unrestricted access to liquidity. We believe the acquisition has removed concerns around the KUWAIE 19s repayment. Questions remain around the shape a refinancing deal could take, but, importantly, we expect it to be voluntary for KUWAIE 19s bondholders. KUWAIE 19s are indicated around par, suggesting that, between now and the 4 August maturity, the bonds could generate c2% total return, mainly from the share of the last coupon payment.
UEG pre-acquisition: a debt-free, highly cash-generative business. UEG is a Hong-Kong-listed company with a market cap of US$4.2bn, producing 66,453boepd of mainly gas (84%) and liquids in Pakistan. UEG’s revenues amounted to US$674mn, EBITDA to US$495mn and free cash flow before M&A to US$255mn, according to our calculations. The company carried a cash balance of US$321mn and had over US$700mn undrawn credit lines (Tables 1 and 2). UEG’s hydrocarbon reserves, however, were low, with average estimated life of under four years, based on the 2018 production and proved (1P) reserves of 95.3mmboe.
Kuwait Energy brings geographic diversification and vast reserves. In 2018, Kuwait Energy’s achieved 28,000boe of daily output, developing 376mmboe proved (1P) and 783mmboe proved and probable (2P) reserves. Block 9 in Iraq, in which the company holds 60% working interest, is its most valuable asset, accounting for c90% of 2P reserves. Kuwait Energy and Dragon Oil are in arbitration regarding a 15% working interest in Block 9. The parties decided to settle in 2018. However, when by the backstop date, the Iraqi government had not granted its approval for the transfer of the interest, Dragon Oil terminated the agreement, taking its case back to court. Kuwait Energy has long had difficulty securing steady funding to develop Iraqi gas fields. Operating cash flows, bonds, farm-outs, convertible loans and trade finance facilities have all been deployed for the purpose. Kuwait Energy has been free-cash-flow negative since 2014.
UEG post-acquisition: low debt, high reserves and access to funding. We estimate that, on a pro-forma basis, the combined entity would have had c95,000boepd working interest production, US$879mn in revenues, US$600mn in EBITDA and a US$238mn free cash flow in 2018. Taking into account the acquisition price paid and redemption of Kuwait Energy’s convertible loans, we estimate UEG’s pro-forma net leverage at 0.8x (Table 1). In 2019, UEG increased its liquidity pool by raising US$200mn for working capital, taking the total amount of available credit lines to cUS$700mn, according to our estimates.
KUWAIE 19s refinancing is still in the making. There is still no clear-cut plan as to the form of the liability management exercise, if any. With the amassed liquidity, UEG may use it to repay the bonds or refinance both KUWAIE 19s and loans to finance acquisitions with a bigger, potentially benchmark size, bond issue.