Flash Fixed Income Report /

ShaMaran: Liquidity issues resolved, but long-term resilience remains a concern

  • Liquidity guarantee to be invoked to cover July interest payment

  • Bondholders agree to defer principal amortisation

  • We upgrade SNMCN bonds to Hold as the imminent risk of default is gone

Tellimer Research
26 June 2020
Published byTellimer Research

ShaMaran disclosed that two thirds of the company’s bondholders indicated their support for the proposal which amends debt amortisation schedule, calls on the liquidity guarantee and waives the breach of covenants.  This means that the company will avoid default on the interest payment and principal amortisation due on 5 July 2020 and as long as the oil price stays around its current level and the Kurdistan Regional Government (KRG) continues to make monthly payments, there should be no liquidity concerns in the next 12 months. However, current oil prices are not sufficiently high for ShaMaran to build up liquidity reserves and reduce vulnerability to external shocks. We upgrade SNMCN to Hold as there is no imminent risk of default, but remain concerned about the company’s financial resilience. The positive triggers for the bonds would be Brent tending to US$50/bbl or the KRG settling deferred receivables. The main downside risks for the bonds are Brent falling below US$34/bbl, the operating breakeven in 2020, or the KRG delaying payments to the oil companies. 

Bondholder proposal addresses liquidity shortfall .  On 5 July 2020, a US$11.4mn interest payment and US$15mn scheduled bond amortisation fall due, but with US$5mn on the balance sheet at the end of Q1 20 and substantially reduced cash flows due to low oil prices, the company does not have enough liquidity to meet its financial obligations. Management engaged in discussions with the bondholders several months ago and have recently reached an agreement to push back the amortisation payment to 5  December 2021 and to call on the liquidity guarantee to top up the debt service retention account (DSRA). Nemesia, a company affiliated with Lundin Family Trust which through various companies controls c23% of ShaMaran, will transfer US$22.8mn to the DSRA. This amount  will cover the upcoming interest payment and potentially one more. A cash sweep mechanism will be introduced to distribute unrestricted cash (in excess of US$15mn) to the bondholders to speed up the repayment of the deferred amortisation. In addition, the bondholders will agree to waive the breach of the equity ratio covenant until 5 July 2021.  

Long-term liquidity issues are yet to be resolved. According to our estimates, ShaMaran requires the benchmark oil price (Brent) to be over US$44/bbl to cover lifting costs, general and administrative expenses, downwardly revised capex and hefty interest payments in 2020. In June 2020, Brent averaged US$41/bbl falling slightly short of the company’s FCF-breakeven level. The agreement reached with bondholders means that with interest payments for the next 12 months covered by Nemesia’s guarantee, the company should be able to cover its running costs if Brent trades over US$34/bbl and the KRG continues to make monthly payments. However, unless oil prices recover further, the company will remain on tight budget and highly susceptible to market shocks. The KRG deferred payments for November 2019-February 2020 shipments and owes US$42mn to ShaMaran. It is not clear yet, when the deferred receivables will be settled, but it is unlikely to happen before the year-end. 

Financial summary. ShaMaran is a small E&P company holding 27.6% interest in Atrush oil field in the Kurdistan Region of Iraq. Taqa, a diversified energy company majority owned by the government of Abu Dhabi, is the operator of the license. In 2020,  Atrush gross production doubled reaching 52,055boepd at the end of March. According to management, the average production is expected to be in the range of 44,000-50,000boped in 2020, corresponding to 12,144-13,800boped net to ShaMaran. In Q1 20, the company  reported US$20mn in revenues, US$7mn in EBITDA, a total debt of US$190mn and cash balance of US$5mn. According to our calculations, the FCF-breakeven oil price was just below US$50/bbl in Q1 20. High costs and low liquidity make ShaMaran particularly vulnerable in the face of low oil prices and highly sensitive to the timely settlement of receivables.