While most companies in the economy, and oil & gas industry especially, are on the edge over historic declines in crude oil price, Seplat Petroleum Development Company plc says it will remain very profitable even at lower oil prices given its low production costs and strong investments in gas.
CEO Austin Avuru says Seplat will draw from its experience with a similar crisis to surmount headwinds in a challenging phase for the global economy.
“Seplat will benefit from being a resilient company built on the solid foundations of prudent financial management and the careful mitigation of risk,” he said. “We are a low-cost producer and will continue to manage our finances prudently.”
In 2014/2015 Seplat was faced with oil price shock, and thereafter the 16-month Trans Forcados shut-in, said Avuru, who points to history, production efficiency and a diversified portfolio in the face of the business-disrupting COVID-19.
The impact of the COVID-19 outbreak has been severe for many countries; the United States in a bid to avert a recession passed the largest stimulus in its history into law last week.
On Friday, Russia was reported by Reuters as calling for a new enlarged OPEC deal to tackle oil demand collapse.
The non-compliance of the OPEC ally to an earlier proposed deeper production cut which could have balanced the oil market had resulted in crude price falling to as low as $25 per barrel from around $65 per barrel.
At such price, it becomes less profitable – if at all – for participants in upstream activities in the oil industry.
Avuru said with the recent addition of Eland and the availability of new pipelines, Seplat’s oil business is broadening and derisking its production fields and routes to market to assure even greater security of revenues in the future.
On a cost-per-barrel basis, production operating expenses were higher at $6 compared to $5.77 because of the decrease in production volumes compared to 2018. Emphasis on careful cost management led to an 11 percent reduction year-on-year in general and administrative expenses, which stood at $71 million in 2019 compared to $80 million to 2018.
“The challenges before us may be significant, but we are confident that the resilience and discipline of our business will help us consolidate our position as Nigeria’s leading independent oil and gas producer,” he said.
Even at a low unit cost of production of Us$6.20/boe and with working interest production of 46,498 boepd (in line with 2019 revised guidance of 45,000 – 48,000 boepd) coupled with liquids production of 23,935 bopd and gas production of 131 Mmscfd, Seplat says it is good to go.
The company estimates that its acquisition of Eland Oil & Gas PLC wills Increase WI liquids production by 9Kbopd, increases WI 2P liquids reserves by 36Mmbbls
In December 2019 Seplat completed the acquisition of London- listed independent exploration company Eland Oil & Gas.
With the final investment decision ( FID) taken for 300Mmscfd ANOH gas processing facility, Seplat’s first gas is expected for Q4 2021.
Company performance
Seplat rode on a tax holiday to increase its profit by 13.5 percent despite lower production and oil price.
Despite an average oil price of $64 in 2019 compared to the $71 in the previous year and a 6.8 percent decrease in oil production, Seplat was able to increase its profit before deferred tax by 13.5 percent to N83 billion ($270 million) thanks to tax incentives.
“The financial statements have been prepared taking into consideration the impact Seplat Petroleum Development Company Plc 10 Full-year 2019 financial results of the additional tax holiday and this forms the basis for the Group’s current income taxation and deferred taxation for the year ended 31 December 2019,” Seplat’s said.
In line with sections of the Companies Income Tax Act, which provides incentives to companies that deliver gas utilisation projects, Seplat was granted a three-year tax holiday with a possible extension of two years in 2015.
Tax expense for 2019 was $29 million, compared to $117 million for 2018. Previously unrecognised deferred tax assets of $20 million from prior years’ tax losses and unutilised capital allowances were recognised after an assessment of the relevant entity’s future profitability showed recoverability of the deferred tax assets.
This resulted in a deferred tax charge of $6 million for the year compared to $92 million in 2018.
Upon review of the performance of the business in 2018, Seplat provided notification to the Federal Inland Revenue Service (FIRS) for the extension of claim for the additional twoyear tax holiday.
Profit before tax adjustments, was $293 million, up 11 percent compared to $263 million in 2018 while Finance charges for the period were lower due to the positive impact of deleveraging in the year.
The net finance charge was $20 million, compared to $47 million in 2018 while the Net profit for 2019 was $277 million. The resultant basic Earnings Per Share (EPS) was $0.49 in 2019, compared to an EPS of $0.26 in 2018.
Operating profit for 2019 was N95.7 billion ($ 312 million) compared to N94.9 billion ($310 million) last year, helped by the gas-tolling revenue recognised but set against the reversal of previously recognised accrued interest of $40 million on Nigerian Petroleum Development Company Ltd (NPDC) receivables due to the settlement of these receivables.
Gross profit increased slightly to $396 million from $391 million the previous year as a result higher gas processing revenues and lower nonproduction costs primarily consisting of royalties and DD&A, which were $188 million compared to $244 million in the prior year.
Depreciation, Depletion and Amortisation (DD&A) charge for oil and gas assets decreased to $91 million during 2019 compared to $119 million last year, reflecting lower depletion of reserves because of decreased production compared to the prior year.
Direct operating costs, which include crude-handling fees, rigrelated costs and operations and maintenance costs amounted to $105 million in 2019 and remained flat against $105 million in 2018.
Lower crude-handling fees offset the higher rig-related costs that mostly relate to workovers which form part of expenses for the relevant reporting period.
Company outlook
Seplat says it is expects production to hit between 47-57 kboepd (including Eland 6-10kbopd) for 2020, although this is subject to market conditions.
It projects 1.5Mmbbls/quarter hedged at Us$45/bbl from Q1 to Q3 2020 noting that significant cash balance available and Low cost of production will ensure profitability at levels below current oil price.
The company said it would manage 2020 drilling programme to suit market conditions and preserve liquidity, minimum of three wells.
So far in 2020 Seplat shares has plunged 17.22% compared to 18.94 percent broad-market decline as COVID-19 hits hard on the stock market.
