LEKOIL, the oil and gas exploration and production company with a focus on Nigeria and West Africa, reports its unaudited interim results for the six months ended 30 June 2020.
Operational Highlights
Otakikpo production averaged 5,676 bopd gross with 2,271 bopd net to LEKOIL Nigeria; as at 30 June 2020, the Group’s share of equity crude was 408,800 barrels. The latest lifting is currently ongoing with US$4.0 million cash proceeds expected to be received by the Company; Phase Two plans are underway, subject to securing funding, for the drilling of up to seven wells where the first two wells are expected to increase gross production to 10,000 bopd; Successful completion of site survey operation on OPL 310; with most of the preparatory work concluded for the Ogo appraisal drilling programme and well locations selected, funding discussions are currently underway with industry partners.
Financial Highlights
Revenue of Lekoil Dips by 38%, Scraps Shareholder Payout in Q2 net loss for the period of US$7.9 million (30 June 2019: loss of US$5.2 million); significantly lowered general and administrative expenses, and as a result, reduced current monthly run rate to approximately US$1.0 million;
Period end cash and bank balances of US$4.6 million (31 December 2019: US$2.7 million); as of 30 June 2020, total outstanding debt financing, net of cash, stood at US$15.6 million (31 December 2019: US$16.5 million); total cash balance as at 30 September 2020 of US$2.9 million, with US$1.3 million recognised as restricted cash.
Post Reporting Period Events
Renewed the offtake agreement with Shell Western Supply and Trading Limited for two years and included the provision of a US$3.5 million prepayment facility to aid short term liquidity. The facility, which is repayable from future crude oil liftings, has a tenor of five months and charges a market margin over LIBOR; restructured the existing three interest-bearing term bank loans into one secured loan with FBNQuest Merchant Bank. The restructuring provided an extension of loan tenor with new term loan maturity date of 31 March 2024 representing an increase on the average maturity of the three existing bank loans by 15 months; executed in conjunction with Green Energy International Limited (“GEIL”), the Operator of the Otakikpo Marginal Field, definitive agreements for the next phase of the Otakikpo marginal field development, which are made up of service agreements with Schlumberger, covering the comprehensive infrastructure upgrades and field management services in relation to the planned upstream drilling programme.
Lekan Akinyanmi, LEKOIL’s CEO, commented, “Despite the challenges of the first six months of the year, we have navigated this demanding period with steady production and cash flow generation from Otakikpo while implementing a range of significant cost reduction initiatives across our operations.
“We are excited and encouraged by the interest received and the progress made towards raising the requisite financing to develop our high-quality portfolio of assets and delivering on our drive to unlock the significant value that exists within them. We remain committed to creating value and generating attractive returns for our shareholders, our partners, employees and all our stakeholders.”
Financial Review – For the Period Ended 30 June 2020
Overview
The Group recorded a total comprehensive loss of US$7.9 million for the six months ended 30 June 2020 (30 June 2019: loss of US$5.2 million) and ended the period with cash and bank balances of US$4.6 million. Total outstanding debt financing, net of cash, was US$15.6 million, a decrease from US$16.5 million at the end of 2019.
Revenues
The Group recorded revenue totalling US$13.9 million, representing the Group’s share of crude oil sales from its Otakikpo operation during the period, which is recognized as revenue (“equity crude”). The total revenue was 38% lower compared to US$22.3 million reported for the corresponding period of last year.
The decrease was mainly due to the significant drop in crude prices experienced during the COVID-19 pandemic. The realised average sales price for the first six months of this year was approximately US$33.9 per barrel, down 45% from the same period last year of US$61.6 per barrel.
The Group’s share of equity crude was 408,800 barrels (30 June 2019: 362,077 barrels), out of which it lifted 384,936 barrels (30 June 2019: 345,746 barrels). The balance of 23,863 barrels (30 June 2019: 16,331 barrels) representing the Group’s share of overriding royalty crude, was lifted on its behalf by its joint operating partner GEIL based on an agreed lifting arrangement.
Cost of Sales, Operating Expenses and Administrative Expenses
The underlying cost of sales was US$7.3 million (30 June 2019: US$8.2 million). Operating expenses and general and administrative expenses were US$3.6 million and US$8.4 million, respectively (30 June 2019: US$4.3 million and US$9.3 million, respectively). Operating expenses captures the Group’s share of expenditure incurred on production operation support activities such as accommodation for field personal. Following from lower crude oil prices due to the COVID-19 pandemic, the Group recognised an impairment charge of US$3.5 million (30 June 2019: Nil).
In line with previous announcements and due to significant drop in oil prices in the first half of 2020, the Board approved on 3 April 2020, the immediate and accelerated implementation of cost reduction measures aimed at targeting an annual reduction of US$8.0 million or at least 40% in general and administrative expenses.
Over the first six months of the year, the Group has significantly reduced rent and facility management expenses, headcount, travel costs and IT and telecommunication expenses. Subsequent to the reporting period, the Group’s current general and administrative expense monthly run rate has been reduced to US$1.0 million, reflecting further execution of our strategic initiatives.
Capital Investment
The Group’s capital expenditure during the six months ended 30 June 2020 amounted to US$5.5 million, compared to US$2.9 million for the corresponding period in 2019. This was mostly attributable to the expenditure on-site survey on OPL 310 and production facilities at Otakikpo.
Taxes
As a Nigerian producing business, the Group is subject to the Petroleum Profit Tax Act of Nigeria (PPTA) and the Company Income Tax Act of Nigeria (CITA). Income tax benefit for the six months ended 30 June 2020 amounted to US$2.2 million. (30 June 2019: tax expense of $4.0 million).
Cash and Bank Balances
As at 30 June 2020, the Group’s cash and bank balances stood at US$4.6 million (31 December 2019: US$2.7 million). Restricted cash of US$0.3 million (31 December 2019: US$1.1 million) represents cash funding of the bank guarantee for MT Nox and Busy Snail contract. Restricted cash has been reported as part of other assets.
The offtake agreement with Shell Western Supply and Trading Limited (“SWST”) which was due to expire in the second quarter of this year, was renewed for two years and included the provision of a US$3.5 million prepayment facility to aid short term liquidity. The facility, which is repayable from future crude oil liftings, has a tenor of five months and charges a market margin over LIBOR.
In August 2020, the Group restructured the existing three interest-bearing term bank loans into one secured loan with FBNQuest Merchant Bank. The restructuring provided an extension of loan tenor with new term loan maturity date of 31 March 2024, representing an increase in the average maturity of the three existing bank loans by 15 months. Interest on the restructured loan will be paid quarterly in arrears with the pricing remaining at 10% over LIBOR. A cash saving of over US$3.0 million over the next 15 months was also delivered from the new sculpted loan principal repayment schedule compared to the previous loan structure. The restructured loan now comprises all of the Group’s outstanding external bank debt.
Assets and Liabilities
The Group’s non-current assets increased from US$206.1 million as at 31 December 2019 to US$208.9 million as at 30 June 2020. Current assets, which include the Group’s cash resources, other assets and other receivables, increased from US$11.4 million as at 31 December 2019 to US$12.2 million as at 30 June 2020. The increase in current assets were as a result of the significant increase in period-end cash balance which outweighed the reduction in cash call due to receivables from Otakikpo joint operating partner (GEIL) and inventory. Inventories which consist of the Group’s share of the crude stock increased marginally from US$2.8 million as at 31 December 2019 to US$3.4 million as at 30 June 2020.
Current liabilities as of 30 June 2020 were US$44.5 million (31 December 2019: US$28.8 million) and consisted of the portion of the loan facilities due within twelve months, amounting to US$12.5 million (31 December 2019: US$7.1 million), trade and other payables amounting to US$30.5 million (31 December 2019: US$20.6 million) and current tax payables amounting to US$1.5 million (31 December 2019: US$1.1 million).
Non-current liabilities consist mainly of the long-term portion of the loan facilities amounting to US$7.8 million (31 December 2019: 12.0 million) and provision for asset retirement obligation of US$2.1 million (31 December 2019: US$2.3 million). Accordingly, net assets as at 30 June 2020 amounted to US$166.7 million, down from US$174.3 million as at 31 December 2019.
Dividend
The Directors do not recommend the payment of a dividend for the period ended 30 June 2020.
Accounting Policies
The Group’s significant accounting policies and details of the significant judgments and critical accounting estimates are consistent with those used in the 2019 annual financial statements.
Liquidity risk management and going concern
As at 30 June 2020, the Group had liquid resources of approximately US$4.6 million in the form of cash and bank balances available to meet capital, operating and administrative expenditure. Restricted cash of US$0.3 million used for bank guarantees is included in other assets.
There is, however, material uncertainty that can cast significant doubt on the Group’s ability to continue operating as a going concern which is discussed below.
The Directors draw the attention of the recurring losses after tax of US$7.9 million incurred in the current period (30 June 2019: US$5.2 million). The Group has a negative working capital position of US$32.3 million (31 December 2019: negative working capital of US$17.5 million), which is an indicator of a possible liquidity concern.
In addition to the Group’s current working capital deficiency, the Directors are cognizant of the potential impacts of COVID-19 on the Group as there are unprecedented market conditions with significant oil price volatility.
The Group will not be able to meet its financial obligations if the price of crude oil should drop as low as US$25 per barrel. Considering there is no price hedging currently in place, we have concluded that there is a material uncertainty that may cast significant doubt on the Group’s ability to continue operating as a going concern.
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The Group closely monitors and carefully manages its liquidity risk and ability to service debt as it falls due. Cash forecasts are regularly produced, and sensitivities run for different scenarios including, but not limited to, changes in commodity prices and different production rates from the Group’s producing asset.
Cash forecasts have been updated in light of the oil price volatility seen in 2020. The Group’s base assumptions show that it will be able to operate within its contractual debt facility taking into consideration the Group’s debt restructure agreement announced on 17 August 2020, as well as its costs reduction strategy and as such have sufficient financial headroom for the 12 months from the date of approval of the interim financial statements.
The Group continues to closely monitor cash flow forecasts and would take mitigating action in advance including further reducing its operational costs; deferment of capital activities on OPL 310 and other capital projects until it has raised the required funds to execute them; to further renegotiate its debt obligation, and to raise additional funds if the need arise from either the equity or debt markets.
Notwithstanding the material uncertainty, the Directors’ confidence in the Group’s forecasts and the mitigating actions above, supports the preparation of the unaudited condensed financial statements on a going concern basis of accounting, which assumes the Group will continue in operation for the foreseeable future and be able to realise its assets and discharge its liabilities and commitments in the normal course of business.
Outlook
While the first six months of the year has been challenging for the oil and gas industry with the detrimental effects of the COVID-19 pandemic and the subsequent drop in oil price, LEKOIL has navigated this demanding period with steady production and cash flow generation from Otakikpo in conjunction with significant cost reduction initiatives which are beginning to pay off as the wider global economy improves.
We remain committed to creating value and attractive returns for our shareholders, our partners, employees and all our stakeholders.
We are delighted with the progress being made towards increasing production at Otakikpo and the support we are receiving from our financial partners.
On our world-class asset, OPL 310, we have kept our financial commitments and are currently holding discussions with industry partners and service providers on a combination of direct investment into the asset and cost-effective vendor financing options.
We continue to strive to be responsible with our communities and efficient in our operations, acknowledging the importance of gas in our portfolio to solve energy solutions in a sustainable manner.
Finally, on behalf of the Board, we would like to again thank all our stakeholders for their dedication, commitment, fortitude and patience as we continue moving forward in building a leading Africa-focused exploration and production company.
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