Fitch Ratings is maintaining Ithaca Energy plc’s (Ithaca) Long-Term Issuer Default Rating (IDR) of ‘B’ and senior unsecured rating of ‘B+’ on Rating Watch Positive (RWP). The Recovery Rating is ‘RR3’.
The RWP reflects Fitch’s view that Ithaca’s merger with Eni Spa’s (A-/Stable) UK assets will be credit-positive and could lead to an upgrade of up to two notches following its expected completion in early 4Q24. The Eni UK assets will increase Ithaca’s scale and operational diversification without adding any debt. We expect the combined Ithaca to benefit from improved financial flexibility, aided by its low leverage and conservative financial policy. We forecast Ithaca’s EBITDA net leverage to remain low on average at 1x in 2024-2027.
These strengths are counterbalanced by combined Ithaca’s short reserve life relative to peers at around six years, concentrated exposure to the mature UK Continental Shelf (UKCS) with high operating costs of over USD20 per barrel of oil equivalent (boe) and high taxation and a less predictable tax regime.
We expect to rate Ithaca post-transaction on a standalone basis given its envisaged diluted shareholding structure.Fitch expects to resolve the RWP following the expected completion of the merger in early 4Q24.
Key Rating Drivers
Assets to Boost Business Profile: The merger will boost Ithaca’s business profile by increasing its scale and operational diversification. The projected 2024 pro-forma production is 100-110 thousand barrels of oil equivalent per day (kboe/d) with no single asset/hub accounting for more than 20%. The target assets’ gas-weighted production will provide a better balance between Ithaca’s exposure to oil and gas prices with liquids/gas mix of around 60%, versus 65% before the merger. Further, the target assets’ lower operating costs of around USD15/boe will stabilise Ithaca’s unit operating expenses.
Moderate Reserve Life: The combined reserve base will increase to 219 million barrels of oil equivalent (mmboe) on a proved (1P) basis and to 342mmboe on a proved and probable basis (2P). However, the reserve life is expected to be unchanged from Ithaca’s reserve life of around six years, which is lower than at peers. This is partly mitigated by substantial contingent (2C) resources including greenfield projects (e.g. Cambo) that could support Ithaca’s business profile in the long term and also brownfield projects linked to existing assets that offer short payback periods. Ithaca’s low leverage should also allow for M&A to replenish reserves.
Decommissioning Obligations Diluted: The Eni UK assets carry some decommissioning obligations (USD8/1P boe), but these are lower and longer term than Ithaca’s (USD12/1P boe). This, combined with the lower capital intensity of the Eni assets owing to their mostly developed status (around 85% of 2P), should enable strong cashflow generation in the short term.
Costs Remain High: Although typical for the UKCS, Ithaca’s pre-merger cost position of USD27/boe in 1H24 is high relative to peers’ and may be a disadvantage if oil prices fall. Beyond 2024, we expect operating spending to improve and average around USD22/boe in 2025-2027 as a result of the lower-cost Eni assets, brownfield production growth absorbing fixed costs and decommissioning of older high-cost fields.
Standalone Production to Increase: Ithaca’s production fell sharply to 53kboe/d in 1H24 from 76kboe/d in 1H23 as a result of extended turnaround activity in the wider UKCS in light of the UK government’s energy profit levy but also operational issues in non-operated assets. Ithaca expects production to resume to around 60kboe/d as operational issues are resolved in 2H24.
For 2025-2026, excluding the merger impact, we anticipate production to be maintained at around 60kboe/d as brownfield projects such as Captain contribute to production and around 70kboe/d in 2027 as Rosebank reaches first oil. We expect the combined business to maintain production at over 100kboe/d in 2025-2027.
Supportive Shareholders: We view the addition of Eni as Ithaca’s shareholder a positive development. Eni will own around 38% of Ithaca’s shares, reducing Delek’s ownership to around 50% from around 90%. Ithaca will also benefit from Eni’s industry expertise and capabilities as Eni will appoint the CEO, two non-executive board members and other senior technical management roles. We believe the two shareholders are supportive of Ithaca’s independent strategy and financial policy. We would rate Ithaca on a standalone basis without any credit links to its shareholders due to the diluted shareholding structure.
Disciplined Capital Allocation: Ithaca’s capital-allocation priorities have remained consistent since its IPO, with no changes announced as part of the Eni UK deal. We view these priorities as credit-positive given management’s commitment to low leverage and a flexible dividend policy tied to cashflow and operational and market conditions.
It prioritises capex to maintain production over 100kboe/d, followed by a strong balance sheet with a debt ceiling of below 1.5x EBITDAX and common dividends at around 15%-30% of post-tax cash flow from operations (CFO). Excess cashflows may be used for special dividends or inorganic business growth.
Low Leverage: We forecast Ithaca’s EBITDA net leverage to remain low at around 0.7x in 2024-2025 and to rise to 1.2x in 2026-2027 as we assume hydrocarbon prices to decline towards mid-cycle levels. Increased capex for Rosebank, decommissioning costs, tax charges and dividend payments in line with Ithaca’s dividend policy will turn free cash flow (FCF) consistently negative until 2027. Nonetheless, we expect Ithaca to maintain adequate rating headroom.
Tax Burden Manageable: We believe the UK government’s combined tax rate of 78% following revisions in July 2024 will be manageable for Ithaca, due to its material tax losses, which should allow Ithaca to offset future profits. We estimate annual tax charge to average about USD290 million in 2024-2027 (or about 23% of Fitch-defined EBITDA). However, the pending tax changes and lack of clarity over their evolution reduce its longer-term cash flow visibility. It can also affect its ability to secure partners for large projects, such as Cambo, and influence investment decisions on non-operated assets.
Derivation Summary
Following completion of the transaction Ithaca’s scale (2023: 70.2kboe/d) will increase to around 100kboe/d for 2024 (on a pro-forma basis) and its reserve base will increase to 219 mmboe from 156 mmboe on a 1P basis and to 342 mmboe from 242 mmboe on a 2P basis. This yields a reserve life of around six years on a 1P basis and around nine years on a 2P basis. Its operating costs will improve due to the Eni UK assets’ lower cost at around USD15/boe based on 2024 guidance versus Ithaca’s USD20.5/boe for 2023.
Ithaca’s scale as measured by production will be larger than Kosmos Energy Ltd.’s (B+/Stable; 2023: 63kboe/d) even after the latter will ramp up production towards 80kboe/d at end-2024. Kosmos’s 1P reserves of around 280 mmboe and 1P reserve life of 11 years is higher than that of Ithaca. However, Ithaca maintains lower leverage metrics through the cycle than Kosmos.
Ithaca will be smaller by production than Harbour Energy plc (BBB-/Stable) with pro-forma production of around 480kboe/d. Harbour’s 2P pro-forma reserve life of around eight years is similar to that of Ithaca at around nine years after the Eni UK transaction. Harbour’s pro-forma operating cost is lower at around USD13-USD14/boe versus Ithaca’s USD20.5/boe as of end-2023.
Following ongoing divestitures Energean plc’s (BB-/Stable) scale (2023: 123kboe/d) will be comparable to Ithaca’s. Energean benefits from a longer reserve life of around 21.2 years on a 2P basis and 2024 pro-forma guidance production and lower production costs in the low teens. However, it is less diversified by resources (mainly gas after disposals) than Ithaca’s balanced liquids/gas product mix. We expect Ithaca to maintain lower leverage in 2024-2025 than Energean.
Source:https://www.fitchratings.com