SEPLAT: Oil & Gas Asset Depreciates as Low Oil Prices Hit Revenue
Seplat Plc, an independent oil and gas producer in Nigeria, had a rough ride in the first half of 2020 as Oil and Gas asset depreciate due to impacts of outbreak of coronavirus on global prices of oil assets.
In its earnings presentation, the group said it recognised impairment loss of N50.1 billion on its non-financial asset as result.
Seplat highlighted that the impairment is primarily as a result of re-assessment of future cash flows from the Group’s oil and gas properties due to significant fall in oil prices.
The management added that the financial position and performance of the Group was particularly affected by events and transactions during the six months to 30 June 2020
The company with dual listing on Nigerian and London Stock Exchange traded at N310.20 on the local bourse and £59 per share respectively as at close of trading session last week.
The management stated the price of oil recovered strongly in Q2 2020, with Brent averaging around US$41/bbl in June.
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It said the increase was driven by the recovery in global oil demand following the easing of COVID-19 lockdown measures around the world, along with OPEC+ imposing further production cuts that contributed to a gradual rebalancing of the global oil market.
“These recent events will continue to have an impact on oil price volatility.
“The Group will continue to monitor the oil prices and take adequate steps to manage its business and any financial impact of same.
Total revenue for the period was US$233.5 million, down 34.2% from the US$355.1 million achieved in 2019.
This came as crude oil revenue dropped to US$180.1 million which represents a 16.6% reduction compared to compare to US$216.0 million in 2019.
The decline according to the management reflects lower realised oil prices of US$34.94 per barrel litre (bbl) for the period as against US$65.16/bbl in the comparable period in 2019.
Seplat explained that a US$49.3 million oil underlift was recorded under other income in the period, compared to US$5.7 million in H1 2019.
Total working-interest sales volume for the period was 9.3 MMboe as against 8.7 MMboe in H1 2019 with the total volume of crude lifted in the period being 5 million barrel per litre (MMbbl), compared to 3.3 MMbbl in 2019.
“The higher volume was due to a maiden contribution from Oil Mining Lease (OML) 40 and Ubima, and higher production from OML 53”, Seplat stated.
The management revealed that the Seplat experienced reconciliation losses of 8.6% for the six-month period, and the company expects these to fall when the Amukpe-Escravos underground pipeline comes on stream.
Also, Gas sales revenue decreased by 25.9% to US$53.5 million from US$72.2 million in H1 2019, due to lower gas sales volumes of 18 Bscf compared to 26 Bscf in the comparable period in 2019.
Seplat stated that the lower volumes reflect higher downtime at third-party infrastructure and a planned 15-day shutdown of the Oben Gas Plant for turnaround maintenance in March.
There were no gas processing revenues in H1 2020, compared with the one-off gas processing revenue of $66.9 million in H1 2019, which was the Oben gas plant tolling payment by the NPDC.
Gas sales contributed 22.9% of total Group revenue in the period (H1 2019: 20.3%) and the average realised gas price was US$2.88/Mscf (H1 2019: US$2.75/Mscf).
Seplat stated that to adapt to current market conditions and as directed by its Nigerian Government partners, the Company seeks to significantly reduce costs by at least 30% across the business.
Seplat said to achieve reduction in operating expenses, the company’s administrative and travel costs have been reduced to the essentials and all third-party and service contracts are currently being renegotiated in line with Government directives to reduce costs.
Meanwhile, drilling of oil wells has been suspended, with all nonessential capital expenditure under review, to consider only activities that can be supported in the new oil price environment.
In the H1 2020, Seplat’s gross profit decreased to US$37.7 million from US$207.0 million in H1 2019 due to lower revenues and higher non-production costs primarily consisting of royalties and DD&A, which were US$119.7 million compared to US$96.6 million in the prior year.
The management stated that Eland revenues and costs were included in H1 2020 but not reflected in H1 2019.
According to Seplat, it stated that production evacuation from the Gbetiokun and Ubima fields resulted in barging and trucking costs of US$10.7 million.
“These increased costs reflect the additional production volumes from the Eland assets and resultant increase in royalties and crude handling fees”, the management added.
On a cost-per-barrel equivalent basis, production operating expenses was higher at US$7.60/boe as against US$5.41/boe in the comparable period in 2019.
Meanwhile, the management stated that cost cutting was implemented on OML40 and Ubima during Q2 and the benefits will be reflected from Q3 onwards.
Higher general and administrative expenses of US$47.6 million compare to US$42.1 million relate to one-off termination payments of US$2.3 million made to the Directors of Eland following its acquisition, as well as the inclusion of Eland staff and office costs.
Seplat said: “These were partially offset by lower professional fees and travel costs during the period”.
Seplat explained that the operating loss of US$112.9 million compare to US$139.1 million profit in H1 2019 resulted mainly from the US$146.0 million IAS 36 impairment charge detailed above and a US$14.9 million net charge against a deposit receivable made for a potential investment that the Company will no longer pursue.
The management added that this was offset by adjustment for a US$49.4 million underlift position (shortfalls of crude lifted below the share of production, which is priced at date of lifting and recognised as other income) and the US$6.6 million fair value gain in relation to the Company’s oil price hedges.
The Company’s tax position for the first half of 2020 was a credit of US$35.1 million, compared to a tax expense of US$1.4 million for the same period in 2019.
The company’s tax credit in the period was made up of a deferred tax credit of US$39.0 million and a current tax charge of US$3.9 million.
“The deferred tax credit is mainly driven by the underlift position and tax loss for the period”, the management stated.
The net finance charge was US$34.8 million, compared to US$18.9 million in 2019. The loss before tax adjustments was US$145.3 million from US$120.4 million profit before tax in H1 2019.
However, the net loss for the period was US$110.2 million from US$122.2 million net profit in H1 2019.This resulted to loss per share was US$0.19 from earnings per share of (EPS) US$0.21 in H1 2019.
Cash flows from operating activities:
Net cash flows from operating activities, after movements in working capital, were US$165.8 million from US$255.2 million in H1 2019. This was a reflection of lower activities, revenue.
Meanwhile, the company reported that an income tax payment of US$10.4 million was made in the period.
In the period, Seplat received a total of US$111 million towards the settlement of outstanding dollar-denominated cash calls and US$66 million (Naira equivalent) to offset Naira cash calls.
The management stated that the NPDC receivable balance now stands at US$174.4 million, down from US$222.4 million at the end of 2019.
The management explained that Seplat maintains good dialogue with the NPDC to ensure that receivables are settled promptly.
Though, it stated that the Group continues to receive the proceeds of gas sales from NPDC in lieu of Naira cash calls for ongoing operations.
Cash flows from investing activities:
Capital expenditures in the period were US$85.9 million and included US$64.6 million drilling costs in relation to the completion of development wells,
…pre-drill and ongoing drilling operations costs for two development wells and associated facilities development, and engineering costs of US$18.9 million.
The management explained that the Gas project costs was included the Sapele Gas Plant upgrade project.
The Group stated that it received total proceeds of US$4.7 million in the period under the revised OML55 commercial arrangement with Belema Oil for the monetisation of 68 kbbls.
Seplat said the joint venture payment of US$30 million reflects an additional equity contribution towards the ANOH Gas Processing Plant project.
After adjusting for interest receipts of US$1.8 million, the net cash outflow from investing activities for the period was US$109.5 million.
This represent a reduction when compared to a net cash outflow in 2019 of US$262.7 million, when AGPC’s cash balance deconsolidated from the Group in April 2019.
Cash flows from financing activities:
Net cash outflows from financing activities were US$54.8 million from US$147.0 million in H1 2019.
The management stated that this reflects a further US$10.0 million drawn from the Westport RBL facility, interest and other financing charges totaling US$34.9 million and the payment of US$26.5 million for the 2019 final dividend, net of withholding taxes.
Overall, Seplat’s aggregate indebtedness was US$799.2 million as at 30 June 2020, with cash at bank of US$342.6 million, leaving net debt at US$456.8 million.
As per the company’s hedging strategy amidst increasing risk in the industry, Seplat said its hedging policy aims to assure appropriate levels of cash flow in times of oil price weakness and volatility.
The management stated that the 2020 hedging programme consists of put options at a strike price of US$45.0/bbl protecting a volume of 4.5 MMbbl (in aggregate) for the first three quarters of 2020.
An additional 1.5 MMbbl has been hedged for the final quarter at US$30/bbl.
Following the oil price crash at the end of Q1 2020 and in line with IFRS, these hedges were fair-valued, leading to a mark-to-market gain of US$6.6 million.
Similarly, the management explained that in July Seplat hedged 1.0 MMbbl for Q1 2021 at US$30/bbl.
SEPLAT: Oil & Gas Asset Depreciates as Low Oil Prices Hit Revenue