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Seplat Suffers N37.782bn Half-Year Loss On Assets Impairment

Except a miracle happens in the second half of this year, shareholders of Seplat Petroleum Development Company Plc should forget any hope for a dividend, judging by the very numbers presented to the Nigerian Stock Exchange (NSE) for the first half of 2020 by its directors, with revenue declining by 26.49%, a situation the board blamed on lower oil prices and demand in the period.

The situation was made even worse by the N50.086bn impairment of non-financial assets, compared to the previous N12.3bn, including $146m impairment on revaluation of assets and $14.8m impairment of financial asset in the period.

The company, in a statement also on Wednesday, said it drilled two gas wells, even as cash reserves rose to $343m, as it maintains $120m capital expenditure.

Revenue for the period fell from N108.97bn in the corresponding period of 2019, to N80.106bn; as cost of sales grew by 47.88% to N67.189bn from N45.436bn; resulting in a gross profit of N12.9bn, as against the previous N63.5bn.

Other income stood at N17.622bn, compared to the previousN12.916bn; general and administrative expenses climbed to N16.336bn from N12.916bn; while impairment loss on financial assets dropped from N12.318bn to N5.101bn

The revaluation resulted in an operating loss of N38.7bn, as against the previous profit of N42.7bn. Finance income fell from N1.81bn to N601m; finance cost jumped to N12.536bn from N7.61bn, resulting in net finance cost of N11.935bn, as against the N5.8bn of 2019

Loss before tax fell by 234.86% to N49.838bn, as against the prior half-year’s N36.956bn profit; while a tax credit of N12.056bn, up from the N437m expense in the preceding half year, reduced the net loss to N37.782bn, 200.76% worse than the profit of N37.496bn reported in the prior half-year of 2019.

The company said its integration process with the recently acquired Eland Petroleum could take a year to complete, while conducting “detailed reviews to assess how best to combine the operations of Eland and Seplat in the most optimal manner.

The technical reviews, it said, “have focused upon the operational and exploration aspects of both businesses with a focus on how to implement best practices from each across the wider Group, as well as how to reduce operating and exploration costs where possible.

“Non-technical reviews are designed to identify how to merge the organisations and their supporting infrastructure for aspects such as IT, HR, payroll, and offices,” while seeking ways to help Eland’s joint venture, Elcrest, implement whatever best practices may be beneficial from the wider experience of Seplat, such as health and safety, operations management, community relations and external affairs, among others.

The company’s statement quoted the Chief Executive, Austin Avuru, as saying that Seplat “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,” he said.

Seplat’s oil hedging strategy and gas revenues, Avuru said, have continued to protect the business from price volatility, with the Company achieving substantial cost reductions from its suppliers while managing own costs even more carefully in this challenging period.

“Thanks to the excellent relationships we have with our government partners and supply chain, our Nigerian Petroleum Development Company (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,” the Seplat CEO said.

Speaking further, he noted: “this is my final set of results as Chief Executive of the Company I helped to found ten years ago. I thank all my staff, past and present, for working to make Seplat a major force in Nigerian energy production. I hand a robust and successful company over to Roger Brown, the incoming CEO, in the confidence that he and everyone at Seplat will make its second decade even more successful than its first.”

Highlights

Operational:

• Working interest production comfortably within guidance at 51,177 boepd despite market volatility 

• Eland OML40/Ubima assets produced 10,861 bopd, 32% of Group oil volumes, integration progressing well

• Low unit cost of production at US$7.60/boe, with cost-cutting initiatives ongoing, particularly at OML40/Ubima

• Liquids production of 34,117 bopd, gas production of 99 MMscfd

• ANOH project remains on track for Q4 2021 first gas, financing RFP launched

• Amukpe-Escravos Pipeline delayed due to access to the Escravos terminal, expected operational in H2 2020

Financial:

• Cash increased to US$343 million despite lower revenues, US$29 million 2019 dividend, and US$86 million capex

• Net debt steady at US$457 million with most maturities after 2021

• Revenue US$234 million

• IAS 36 impairment provision of US$146 million (non-cash) in line with IAS 36 COVID-19 impact assessment

• Business continuity and re-opening plan successfully mitigating the impact of COVID-19 lockdowns

• Oil field operations largely unaffected, 28-day rotations in force 

Outlook:

• Full-year production guidance reiterated at 47-57 kboepd, subject to market conditions. We expect to narrow  the guidance range in Q3

• Oil hedging: 1.5MMbbl at US$45/bbl Q3 2020, 1.5MMbbl at US$30/bbl Q4 2020, 1.0MMbbl at US$30/bbl Q1 2021

• Full-year capex of US$120 million (US$86m already invested) to include two gas wells and related infrastructure

Outlook for 2020

We maintain our previous guidance of 47,000 to 57,000 boepd and remain confident of market recovery in the coming months. 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 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 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.  

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