Seplat Maintains Performance Guidance, Hedged Oil Price at $45
Seplat Petroleum Development Company Plc said it maintains 2020 guidance at the time when there are uncertainties around global price of oil.
Follow the decision of the Nigerian government to comply with oil cartel’ membership supply cut, Seplat said it has been advised of production quota cuts of between 20%-30% across its assets in July and August.
At the earning conference for first half, Austin Avuru, the former Chief Executive Officer, said: “Seplat has delivered a robust performance despite the unprecedented crises we have experienced since March.
“Our continued resilience is possible as a result of our financial strength, our careful management of risk and our prudent approach to capital allocation.
“Unlike many in our industry, we were able to protect our 2019 dividend and increase our capital investment to ensure continued growth”.
The now ex-Chief executive explained that the indigenous oil giant hedged oil price using put option deal at $45 per barrel.
Oil business performance:
The management explained that Seplat’s oil operations produced an average 34,117 barrel of oil per day (bopd) on a working-interest basis in the first half of 2020.
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This 48.5% increase reflects a maiden contribution of 10,861 bopd which accounted for 31.8% of Group volumes, from the recently acquired Oil Mining Lease (OML 40) and Ubima assets, as well as higher production from OML 53 compared to H1 2019.
The management said the average price realised was US$34.94/bbl compare to US$65.16/bbl in the comparable period.
“The Company has hedged 1.5 million of barrel of oil (MMbbl) per quarter at US$45/bbl for the first three quarters of 2020 and 1.5 MMbbl at US$30/bbl for the final quarter of the year, using put options.
‘We continue to address costs across the oil business and are renegotiating supplier contracts in line with directives from our Government partners to achieve cost savings of at least 30%”, the management stated.
At OML40 Seplat said it has successfully reduced barging costs from US$14/bbl to US$9/bbl and believe further cuts will be achievable with the use of larger barges to evacuate liquids from Gbetiokun.
During the period, Seplat completed five oil wells (Sapele-35, Ovhor-6ST, Ovhor-20, Ohaji South-5, Ohaji South-6).
Management stated that Eland completed the Gbetiokun-5 well, which is producing c.5,000 bopd from two strings and the Extended Well Test for Ubima is in progress with a production of c.1,200 bopd, which is expected to continue until the end of 2020.
OPEC+ quota
Following disruption to the oil market caused by the pandemic and market competition between Saudi Arabia and Russia, the Organization of Petroleum Exporting Countries and its allies (OPEC+) agreed in April 2020 to cut supply by 9.7 million barrels per day from May to June 2020.
This was an agreement by member countries to stimulate oil prices that had collapsed as a result of the disruption.
However, Nigeria did not fully comply with the OPEC+ cut and so it exceeded its production quotas in May and June.
On 6 June, at the same time as OPEC+ agreed to extend the record output cuts by another month to further support oil price recovery, it was also decided that Nigeria and other countries that had not complied with the May and June cuts would be penalised with extra cuts from July to September 2020.
Nigeria had previously reaffirmed its commitment under the existing global agreement of 9.7 MMbbl cuts and had already committed to making additional cuts from July to September to compensate for exceeding its quotas in May and June.
Management said as a result, Seplat has been advised of production quota cuts of between 20%-30% across its assets in July and August.
“Seplat is compliant with the required quota for July and the quota for August is similar to Seplat’s average output for the first half of the year.
“In the context of our full-year expectations, the impact of these quota cuts is not expected to be significant and therefore Group guidance of 47 thousands oil barrel equivalent per day (kboepd) – 57 kboepd is maintained.
“We maintain our previous guidance of 47,000 to 57,000 barrel of oil equivalent per day (boepd) and remain confident of market recovery in the coming months”, the management explained.
Seplat said the business is hedged against low oil prices using put options and a significant proportion of our revenues now come from gas, which offers additional protection from oil price volatility.
The Company noted that it has low production costs and continues to focus on cost savings in line with Government partner directives to reduce costs, to maintain profitability even at the lower prices we have seen this year.
“We have significant cash resources available and will continue to manage our finances prudently in 2020, expecting now to invest US$120 million of capital expenditure across the full year (of which US$86 million has already been invested), including two new gas wells to be drilled in H2”, the management held.
It said the timely completion of the ANOH project remains a major priority, despite the COVID-19 crisis and we recently launched a financing RFP that has already generated significant expressions of interest.
Seplat’s hedging policy continues to focus upon assuring appropriate levels of cash flow in times of oil price weakness and volatility.
The H2 2020 hedging programme consists of put options at a strike price of US$45.0/bbl protecting a volume of 1.5 MMbbl for the third quarter of 2020, with an additional 1.5 MMbbl being hedged more recently for the final quarter at US$30/bbl.
“Seplat has been tested in previous adverse conditions, including a lengthy shut-in, and we are confident that the stronger and more diverse business we operate today will be even more resilient against the unprecedented market events of 2020”, the management noted.
Avuru said: “Our oil hedging strategy and gas revenues continue to protect the business from price volatility; we are achieving substantial cost reductions from our suppliers and are managing our own costs even more carefully in this challenging period.
“Thanks to the excellent relationships we have with our Government partners and supply chain, our NPDC receivables have fallen and we are managing our payments equitably.
“The cash position is also robust because our careful management of debt has ensured that the majority of obligations mature in 2022 and 2023.
“We are operating within our covenants on all our lines of debt”.
Seplat Maintains Performance Guidance, Hedged Oil Price at $45
