Oil & Gas Deal of the Year 2012

Kuwait Energy:

Receivables wisdom

Kuwait Energy’s $165 million reserves-based loan brought Egyptian assets back to market after the country’s revolution and introduced lenders to Ukrainian assets. The financing will give Kuwait Energy a solid backing for its 2013 priorities – developing its Iraqi reserves and closing a long-hoped-for initial public offering.

Kuwait Energy takes its name from the location of its headquarters rather than its assets. Former managers at Kuwait Petroleum founded Kuwait Energy in 2005, and have built it into one of a small number of independent exploration and production firms in the Middle East and North Africa region.

Until 2011, when it switched its registration to Jersey, Kuwait Energy was a Kuwaiti joint stock company. One of the requirements of a Kuwaiti registration is that firms use shariah-compliant financing. So in 2009 Kuwait Energy closed a $50 million commodity murabaha, of which $35 million was reserves-based, and $15 million was an income participation facility, with the International Finance Corporation.

After the move in domicile to Jersey, and the sponsor’s increasing expenditure requirements for its Iraqi assets, led it to start looking at a larger conventional reserves-based loan, and it signed mandate letters with Deutsche Bank at the end of 2011. At the beginning of that year Egypt went through revolution, a change in government, and noticeable disruption to the country’s oil and gas industry.

The Egyptian General Petroleum Corporation is the purchaser of oil from independent operators in the country. It has never been quick to pay its bills, and in the wake of the revolution delays in payments lengthened. These delays explain the six months that the deal spent in documentation, but was the source of the deal’s most interesting feature.

The model that Kuwait Energy put together for the financing, and the method used to calculate the financing’s borrowing base, incorporated more than the oil price and geology. The borrowing base calculation, which takes place every six months, incorporated the previous six months of payment history from the EGPC. The structure allowed the borrower to maximise the value of its Egyptian assets, compared to a simpler receivables-based deal.

Egypt accounts for over 70% of Kuwait Energy’s production, or 12,506 barrels of oil per day equivalent (boepd), as of September 2012. Oman accounts for 18%, or 3,103 boepd, while Russia accounts for 5%, or 877 boepd, and Yemen accounts for 3%, or 513 boepd. Ukraine, at 268 million boepd, was, at the end of September, the smallest of its producing portfolio.

According to Ajay Goyal, Kuwait Energy’s financial controller, it chose the Egyptian and Ukrainian assets for inclusion in the borrowing base because they made a significant contribution to its production and were cash positive during the period of the loan. Some of the other assets in the portfolio required significant investments in the initial years and were not cumulatively cash positive during the period of the loan.

It was, says Goyal, comparatively straightforward to include the Ukrainian reserves in the borrowing base. Lenders are comfortable with the country risk, and the biggest potential complication, the difficulty under Ukrainian law in perfecting security over assets in the country, can be solved with lenders accepting a pledge over the shares of the operating company in the country.

The presence of the International Finance Corporation, which has a long-standing relationship with the borrower, will have reassured the deal’s commercial lenders, particularly about Egyptian risk. The IFC’s sister organisation, the Multilateral Investment Guarantee Agency, agreed to reinsure some of the US Overseas Private Investment Corporation’s exposure to Apache Oil’s operations in Egypt.

According to Goyal, the borrower and Deutsche had sufficient commercial lender interest in the deal to meet the full $165 million debt requirement, but it maintained the IFC’s participation because of the existing relationship. Deutsche underwrote $90 million of the debt, selling down some of its exposure to Standard Bank, Ahli United Bank, and Credit Suisse, while the IFC underwrote and held another $75 million.

The financing signed on 28 June 2012, and met its conditions precedent and closed on 19 December. In the intervening period Qatar First Investment Bank made a $150 million convertible murabaha investment in Kuwait Energy, providing an equally substantial source of funding for upcoming drilling programmes.

The financing incorporates a mechanism under which the borrower can take additional assets to the lenders, and they can be incorporated into the borrowing base if all of them agree. This mechanism is most likely to work for assets that are in countries where the lenders already have exposure, but the lenders are not barred from incorporating less familiar assets.

The first test of this mechanism will be Iraq, where Kuwait Energy has 140 million barrels of oil equivalent in proven and probable reserves, and benefits from two 20-year gas development contracts. Almost ten years after regime change in the country, it has not been the source of borrowing base business. The borrower is likely to close a financing his year for the assets, either a separate project finance deal or under the umbrella of the 2012 financing.

The next 12 months may see the launch of Kuwait Energy’s delayed initial public offering in London. The 2011 change in domicile to Jersey, together with a contraction in the number of its shares outstanding, were meant to pave the way for this listing, but unrest in the region put paid to the idea. Given lenders’ vote of confidence in its operations, the listing may now have more chance of success. 

Kuwait Energy Corporation
Status
Signed 28 June 2012,
closed 19 December 2012
Size
$165 million
Description
Reserves-based loan secured on Egyptian and Ukrainian assets
Sponsor
Kuwait Energy
Debt
$90 million five-year commercial loan,
$75 million IFC loan
Bookrunners
Deutsche, IFC
Participants
Standard Bank, Ahli United Bank, Credit Suisse
Sponsor legal adviser
Allen & Overy
Lender legal adviser
Herbert Smith Freehills
Market and technical consultant
ERC Equipoise