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Seplat Petroleum cuts debt leverage by $100m as low oil prices hit profit

Graph 1 page News 1st Edition Monay 02 November 2020pdf

Nigeria’s largest listed Oil & Gas firm by market value, Seplat Petroleum Development Company Plc, is expecting the reduction of its debt leverage and other cost-cutting strategies to help it cope with low oil prices.

The slump in oil price cost Seplat a loss after tax of $130.1 million in the first nine months of 2020.

To soften the blow of low oil prices on profitability, Seplat has announced that it reduced its debt leverage by $100 million, which means the company is reducing the use of loans and other debt instruments for investment or the company’s operational business.

The above development means Seplat’s gross debt stood at $692.8 million as at 30 September 2020 ( from $550 million 9m2019), with cash at bank of $213.0 million, leaving net debt at $479.8 million.

“Seplat’s third-quarter performance has again demonstrated the resilience of our business in challenging times and in addition to voluntarily reducing our debt leverage by $100 million, the company’s CEO Roger Brown said in the firm’s newly released nine-month 2020 financial report.

“We are maintaining our commitment to shareholders by declaring an interim dividend of $0.05 per share, as we have in previous years.”

With oil price roughly halving to $38.60 from $64.20 per barrel in the first nine months of 2020, Seplat is aiming to reduce costs by at least 30 percent across the firm’s business as all operational expenses have been reduced to the essentials while third-party and service contracts are being renegotiated to reduce costs.

“We expect the benefits of the cost reductions implemented across assets in the period to be reflected from the fourth quarter of 2020. Drilling of oil wells has been suspended, with all non-essential capex under review to consider only activities that can be supported in the new oil price environment,” Seplat said in its latest financial report.

The era of lower oil price is also affecting the company’s margin as Total revenue for the period was $387.8 million, down 21.6percent from the $494.8 million achieved in 2019 while Crude oil revenue was $305.6 million which was a 5.3percent reduction compared to $322.8 million recorded in 2019.

The Group’s oil operations continued despite the coronavirus crisis and produced an average of 33,327 bopd on a working interest basis for the period. This 40.8percent increase reflects a maiden contribution of 9,151 bopd (27.5percent of Group volumes) from the recently acquired OML 40 and Ubima assets, as well as higher production from OML 53 compared to nine month 2019.

Following the planned shutdown and maintenance work in the first quarter of the year, Seplat’s gas business contributed $82.2 million to the total group revenues while working-interest production stood at 100 MMscfd at an average selling price of $2.88/Mscf in 9month 2020 compared to 136 MMscfd at an average selling price of $2.82/Mscf in the corresponding period last year.

An impairment loss of $179.7 million was booked in the period. This includes a non-financial asset charge of $158.2 million and financial asset charges of $21.4 million (IFRS 9).

Financial asset charges include charges against a deposit made for a potential investment that the Company will no longer pursue. This was offset by other income of $42.2 million that includes an adjustment for a $39.1 million underlift position and the $1.5 million tariff income generated from the use of the Company’s pipeline.

 

 

The Group’s tax position for the period was a credit of $33.8 million, compared to a tax expense of $3.4 million for the same period in 2019. The tax credit is made up of a deferred tax credit of $44.5 million and a current tax charge of $10.4 million.

Following a reassessment of the business models and assumptions to establish their reasonableness and practicality, particularly in the current and expected oil price environment, Seplat decided to book a provision of $158.2 million across its non-financial assets in the period.

The company’s capital expenditures in the period were $108.6 million comprising $74.4 million in relation to the drilling and completion of eight wells- two gas wells (completion of Oben 48 and Oben 49) and Six development oil wells while associated facilities and engineering costs amounted to $19.4 million and other gas business costs including the Sapele Gas Plant upgrade project totalled $14.7 million.

The Group received total proceeds of $4.7 million in the period under the revised OML55 commercial arrangement with Belema Oil for the monetisation of 68 kbbls while the joint venture payment of $30.0 million reflects an additional equity contribution towards the ANOH Gas Processing Plant project.

Net cash flows from operating activities, after movements in working capital, stood at $187.4 million compared to $306.3 million in nine-month 2019 while an income tax payment of $10.4 million was made in the period.

Seplat received a total of $147 million from Nigerian Petroleum Development Company Ltd (NPDC) towards the settlement of outstanding dollar-denominated cash calls and $100 million (Naira equivalent) to offset Naira cash calls.

The NPDC receivable balance now stands at $151.6 million, down from $222.4 million at the end of 2019.

“Seplat maintains a good dialogue with NPDC to ensure that receivables are settled promptly. The Group continues to receive the proceeds of gas sales from NPDC in lieu of Naira cash calls for ongoing operations,” Seplat said.

Net cash outflows from financing activities stood at $180.5 million compared to $146.7 million in the corresponding period last year.

This reflects a further $10.0 million drawn from the Westport RBL facility, interest and lease payment totalling $61.3 million and the payment of $29.2 million for the 2019 final dividend.

In August 2020, the Company repaid $100.0 million of the Revolving Credit Facility (RCF), with $250.0 million currently drawn. The $100.0 million remains available for drawing if required.

Following a review of Seplat’s operational, liquidity and financial positions the Board declared an interim dividend of $0.05 per share, in line with Seplat’s normal dividend distribution timetable.

Seplat’s CEO noted that the business will continue to operate effectively despite the restraints of the COVID-19 pandemic and the recent unrest in Nigeria.

Seplat’s hedging policy aims to assure appropriate levels of cash flow in times of oil price weakness and volatility.

Concerning its hedging policy, Seplat’s 2020 hedging programme involves a strike price of $45.0/bbl protecting a volume of 4.5 MMbbl (in aggregate) for the first three quarters of 2020.

For the fourth quarter of 2020, 1.5 MMbbl are protected at $30/bbl and 0.5 MMbbls at $35/bbl.

“We are hedged through Q1 2021 with 1.0 MMbbl at $30/bbl and 1.0 MMbbl at US$35/bbl,” Seplat announced.

Seplat said its board and management team will continue to closely monitor prevailing oil market dynamics and will consider further measures to provide appropriate levels of cash flow assurance in times of oil price weakness and volatility.

“Seplat remains at the forefront of Nigeria’s exciting energy transition and provides sustainable energy for a young and rapidly growing population,” Brown said.