Addax Petroleum: Biggest base

Addax Petroleum completed its $1.6 billion reserves-based refinancing in January 2007, the largest reserves-based deal ever in Africa, and one of the largest borrowing base financings of any type. It closed the deal just as Nigeria, where many of its assets are located, went to the polls. Nevertheless, by targeting almost every bank active in the independent oil and gas sector, it was able to close the deal comfortably, and still introduce a number of interesting features to the mix.

Addax, a Toronto-listed independent exploration and production specialist, that was founded in 1994, listed on Toronto Stock Exchange in 2006, and on the LSE main market as a secondary listing in 2007. It has always maintained a focus on the Middle East and West Africa, centred on Nigeria.

It last closed a $300 million borrowing base facility in 2004, and has since grown both through the development of its own properties and through acquisitions. Nevertheless, the July 2006 acquisition of Pan-Ocean Energy marked a huge increase in size for Addax. More importantly, Pan-Ocean's focus on Gabon complemented and diversified the existing Addax assets.

Addax paid C$1.605 billion ($1.582 billion at today's rates) for Pan-Ocean, which it funded through cash on hand and a 364-day $1 billion bridge loan from BNP Paribas and Standard Chartered Bank, in which Natixis participated. The acquisition brought in 10,000 barrels per day of production, 54 million barrels of possible reserves, and roughly 715,000 acres of development rights, through Pan-Ocean's operating subsidiary PanAfrican.

The refinancing was designed both to retire this debt and to allow for some additions to the asset base through internal development efforts. So Addax mandated BNP Paribas (administrative agent), Natixis (technical bank) and Standard Chartered (modelling bank and syndication agent) to provide a $1.5 billion total package on the back of their roles in the bridge.

The refinancing initially consisted of a five-year $1.2 billion revolving borrowing base, and a $300 million letter of credit facility. The maximum available amount under the loan is calculated as the lower of the total amount and the borrowing bases, an annual or semi-annual estimate of the discounted cashflows from the assets.

The borrowing base is notable for including a wider reserve base than comparable deals in emerging markets, or at least the 2004 Addax deal. While in the US reserve-based lenders tend to concentrate only on proven reserves, in the North Sea most lenders will give credit to both proven and probable reserves. Addax persuaded lenders to include probable reserves in their calculations. As of the end of 2006, Addax' proven reserves were 182 million barrels, its probable reserves were 171.7 million, and its possible reserves were 126.7 million. Iraq, both Kurdistan and the Joint Development Zone, accounts for roughly 66 million of the probable and possible reserves.

The letter of credit facility will be used primarily to back performance bonds issued by Addax' operations. Normally lenders demand that these lenders be counted against the total borrowing base, but for this financing the letter of credit was closed separately.

Addax has been able to demand such terms from its lenders because it has a track record of raising the production from its assets by impressive amounts. Its total production has increased from 8,800 barrels per day in 1998 to an average of roughly 90,000 barrels per day in 2006. The Gabonese Pan-Ocean assets, for instance, have already increased from 8-10,000 barrels per day to nearer 30,000 now.

But the financing did close against the backdrop of an uncertain political situation in Nigeria, where at the time of closing over 70% of the Addax reserves were located. Nigeria's general election, which took place in April, as the deal launched syndication, experienced some violence, and the results were hotly disputed, and condemned in many quarters. But they did not result in prolonged instability. Addax benefits from the fact that 95% of its Nigerian production is located offshore, and that it is an operator of much of its production from the country.

Still, Addax leant on essentially every European bank with an interest in the sector, and also brought in two US and two Asian banks into its 25-strong syndicate. Demand was strong enough for the leads to increase the borrowing base to $1.3 billion.

In syndication, BNP Paribas and Natixis committed $150 million each, and Standard Chartered took $125 million. Two banks joined at senior level, committing $120 million and four banks joined as lead arrangers committing $82.5 million. One arranger committed $75 million, while two co-arrangers committed $70 million. Four senior managers committed $50 million, three lead managers came in for $35 million and six managers committed $15 million.

Of the $1.3 billion borrowing base, only $900 million went towards the Pan-Ocean acquisition, while the remainder will be spent on its other development properties, and thus provides Addax with a lot of room to grow. In the first quarter of 2007 its production was 116,000 barrels per day, but given the rate at which Addax has reached this level, another record-size acquisition deal could be ruled out in the future.

Addax Petroleum
Status: Closed January 2007, syndicated June 2007
Size: $1.6 billion
Location: West Africa and Middle East
Description: Borrowing base facility for upstream independent
Sponsor: Addax Petroleum                                                                                                                                                      Lead arrangers: BNP Paribas, Natixis, Standard Chartered
Debt: $1.3 billion borrowing base, $300 million letter of credit
Banks' legal advisers: Allen & Overy, Herbert Smith
Sponsor legal advisers: Paul Hastings, Fasken Martineau