The preceding year is perhaps one Lekoil will quickly love to put behind it. The ambitious, oil and gas exploration and development company with a focus on Nigeria and West Africa more generally, saw its profits dip and lost a lingering court case but its optimism remains infectious.
“The priority for 2019 is to grow production volumes at Otakikpo through Phase Two development (subject to funding) to reach gross volumes of 15,000 to 20,000 bopd,” says OlalekanAkinyanmi, the company’s CEO in a note to investors.
Akinyanmi also said that the first step has already occurred, with 3D seismic data acquisition and interpretation now completed.
“We also continue to advance toward the start of the appraisal drilling programme on Ogo in OPL 310. We will work with our joint venture partner, Optimum to negotiate agreements that will allow us to make progress on the block, after securing all relevant regulatory extensions and approvals.
An analysis of the company’s results tells the story of inevitable pain of positioning for long-term growth. In its Otakikpo field, sited in a coastal swamp location in oil mining lease (OML) 11, adjacent to the shoreline in the south-eastern part of the Niger Delta, production levels averaged approximately around 5,345 bopd in 2018 even though it only started drilling in the first quarter of 2017.
During the course of the year, the company began the second phase of preparations for development with acquisition of 3D seismic in February, with an updated conditional prepayment rate being finalised ahead of publication.
Subject to agreement on funding with one or more industry partners, the company in a note to investors said plans are underway for a three to five well drilling programme, targeting to increase production levels to approximately 15,000 to 20,000 bopd.
In its OPL 310 located in the Nigeria Dahomey basin, the company has advanced plans for the appraisal drilling programme with well locations selected. It has also began funding discussions with certain industry partners until the Federal High Court ruling nullifying its acquisition of Afren Oil and Gas (Nigeria) Limited (and its 22.86% interest in OPL 310) inchoate and invalid given the failure to obtain Ministerial consent.
It is easy to see how these investments will impact the bottom-line in the short term but the company stands to benefit in the long-term if oil prices rise as fallout of geopolitical tensions.
For Lekoil and other exploration companies in Nigeria, navigating through the maze of regulatory approvals in Nigeria represents the biggest challenge in operating in Nigeria. This also largely accounts for why the company has not taken the Ogo fields, offshore Lagos to production even after spending $200m along with its partners to develop it.
“Slow pace of regulatory approvals has been the single biggest challenge that I faced since I returned to Nigeria to start Lekoil. The single biggest challenge we have faced as a company has not been technical, it has not been money, it has been regulatory approvals.” Akinyanmi said.
Wood Mackenzie, a leading energy research organisation said the Ogo field which lies in the Keta-Togo-Benin Basin discovered in 2013, yielded a P50 reserves estimate of 770 mmboe, well in excess of the pre-drill 200 mmboe estimate. The field was the third largest oil discovery in the world in 2013 and the largest discovery in Nigeria within the past ten years.
Lekoil applied for Ministerial Consent to acquire 23% participating interest in OPL 310 block, in Ogo fields, from Afren Nigeria Holdings in 2016, but the consent was neither given nor denied.
So in May 2017, Acting president YemiOsinbajo, issued an executive order which among other things provided that any application not approved or rejected by a government agency or official within the agency’s specified timeline shall be assumed to have been approved. Relying on this provision, the company proceeded to complete the acquisition.
However, a Federal High Court ruled that the acquisition still requires consent from the Minister of Petroleum Resources. Based on the judgement, OPL 310 interest is still held by the seller, Afren Investments Oil and Gas Nigeria Limited. Lekoil still holds a 17.14 per cent participating interest in the block.
In response LEKOIL has withdrawn its lawsuit and continues engagement with its partner, Optimum Petroleum Development Limited, and the regulator, to conclude agreements and resolve all outstanding issues.
Meanwhile OPL 310 licence has lapsed, but Optimum in its capacity as operator has begun the extension process and whereas there is no guarantee that the licence will be renewed, LEKOIL is hopeful for a favourable response from the regulators in this regard.
The company reports that it has completed technical evaluation on OPL 325 in January 2018 by consultants Lumina identified and recorded 11 prospects and leads which were estimated to contain potential gross aggregate Oil-in-Place volumes of over 5,700 mmbbls (un-risked, Best Estimate case)
Strong financial position
Lekoil reported a loss of US$7.8 million for the 2018 financial year as against a record profit of US$6.5 million in 2017. The company alluded to huge investments it made in developing its fields as dragging down its profits.
The company’s fundamentals appear strong. It recorded US$48.7 million as proceeds from equity crude sales. The Group lifted 1,305,888 barrels of its entitlement, realising an average sales price of approximately US$66 per barrel. Total entitlement crude consisted of 1,346,525 total barrels net to LEKOIL
Analysis of its financials indicate that it has cash and bank balances of US$10.4 million as at 31 December 2018 as against US$6.9 million in the same in the preceding year. Cash at 31 May 2019 was US$13.1 million. As at 31 December 2018, total outstanding debt financing, net of cash, was US$10.1 million as against US$22.6 million in the same period in 2017.
To keep its finances stronger, the company targets a 25% reduction of general and administrative costs annually, including Board remuneration. In June 2018 Lekoil and its bankers re-denominated approximately N3.1 billion of debt facilities into one new US$8.55 million facility which reduced the high financing costs of local currency debt. The documentation to complete this was finalised in March 2019.
The company reported that it made concerted effort during the year to pay off vendor financing from prior periods, as can be seen by the improved gearing position and reduction in liabilities.
The Board and Management regularly monitor the company’s cashflow projections. The cash balance as at the end of May 2019 was US$13.1 million. “In the light of delays with progressing key assets, we have decided to take action in order to reduce our overheads. Management has created a project team to review costs with the aim to decrease general and administrative costs by 25 per cent. This includes a 25 per cent reduction in Board remuneration,” the company said.
This perhaps informs the company’s optimism that it will soon bounce back to winning ways. “The next year should therefore provide key catalysts for value appreciation for shareholders as we move forward in building a leading Africa-focused exploration and production business,” Akinyanmi said.
