One of the most impacted industries during the COVID-19 pandemic is the oil industry with global oil prices seeing one of the sharpest drops in history from a peak of $80.94 per barrel in December 2019 to $18.84 per barrel in April 2020.
But in the midst of these stormy waters, one company that has remained afloat is Seplat Plc, an independent indigenous Nigerian oil and gas exploration and production company.
In this interview, Seplat Plc Chief Executive Officer (CEO), Roger Brown, opens up on the impact of COVID-19 on the oil industry and what Seplat did differently to remain afloat even in a low oil price regime. Excerpts.
Staying afloat amid COVID-19, drop in oil prices
Globally, all businesses unless you are Amazon or Zoom, were heavily impacted by the pandemic. We saw in the second quarter of last year unprecedented crash in oil prices. So, last year, we showed the resilience of our business and the counterbalance of our gas business, which is delinked to the oil price, and that really helped us last year.
When you take a snapshot of the financial statements, you will see impairments – that is regulatory standard. If you look at most companies, they are taking billions of dollars of impairments. But for Seplat, most of our impairments are intangible. So, it is not a real loss; it is just an accounting loss. And we followed all accounting laws that was why we had those impairments last year.
If you look at our cash generation last year, which is an important measure we look at, we were cash positive. We actually funded all of our capital expenditure. We repaid $100 million revolving loan facility, and so we continued to deleverage even in difficult situations. That really speaks to what Seplat is all about, which is managing risks and getting ready for the battle times ahead.
We are seeing a recovery in oil prices now, and we certainly see a recovery coming in through 2021. The first quarter results of 2021 have shown that and you continue to see that in subsequent quarters.
Capital rise and M&As
We are sitting on a good cash flow because we just raised a new bond – a $650 million bond, which is one of the biggest bonds to be raised, particularly for a Nigerian oil company.So in terms of leverage, we are fine and in terms of cash flow we are fine as well. We have headroom on our debt facilities today. Presently, we don’t see any need to raise any equity or go to shareholders to raise money for our business. We are cash positive, and we are comfortable today.
Concerning M&As, we are very clear on our position because we are organic, growing and widening our business. But inorganic is also part of this as well. We are into gas, and we are going into renewables in the future. We are going to see in the next 12 to 24 months or even longer an unprecedented shift – we predicted this years ago and it is starting to happen now – where the major oil companies will start to move from the onshore and the shallow water offshore and focus on their skills sets which is deepwaters.
That plays to Seplat’s strength in terms of merger and acquisition activities. So, we are sensible; we look at every opportunity individually. We have got some high criteria at the board to make sure it is profitable and everything else. If it fits within our portfolio we are going for it.
Viability of our subsidiaries
Seplat does not set up subsidiaries for the sake of it. When Seplat concluded the Eland acquisition, it came with quite a number of subsidiaries. The process actually doubled our number of subsidiaries. And a lot of these subsidiaries don’t have much in them. So we are going to rationalize most of them going forward. But if you look at our group structure, there are not many subsidiaries.
Winning streak for repayment of $100m loan
The whole concept of the revolving loan is to revolve it as it is not meant to be sitting idle. Ideally, what you really want to be doing is draw down, utilise the money and then pay back. You have to look at the balance between how much cash you hold and how much debt you owe. What you do not want to be doing is hold a lot of cash and having debt outstanding because it is not efficient. The debt costs you a lot more.
So, what we need to do is balance it. We say, “How much cash do we need in case there is an event that we need to draw that cash, and how much can we pay down those revolvers?” That is what we do. Back in 2018, we put in place a five-year $350 million Eurobond, and then we put in place a similar sort of revolving credit facility. This year in the first quarter, we had to then refinance that; we put a $650 million bond in place with the intention of paying down that revolver this year. And that is what we have done as a business. That is a much more efficient way of doing it.
The sizing of the bond that we raised, which is a five-year Eurobond, is important because a previous-year bond had 9.5 per cent coupon on it. This year’s bond has a coupon of 7.75 per cent.So, it is a material reduction in borrowing cost, and as a business, we are rated the same as the Nigerian sovereign. We are rated by three rating agencies, and I don’t think many Nigerian companies are rated by all those agencies and have a sovereign-proven rating.We will draw down on the revolving credit facility when we need to. We are sitting on a very strong cash position, well over $200m. So, it is a balance between all of those as we look to utilise our balance sheet for growth.
Many operators suspended projects last year as a result of low oil prices. According to our financial statements, Seplat drilled and completed nine wells with eight brought on stream in 2020.
Strategy deployed for loan repayment
We drilled most of the wells in the first quarter of last year. So, we continued to complete them. Anything we were committed to doing, we did. Anything we could cut back on, we did that – that is the strength of our business. Last year, we really cut back the capital expenditure and then we increased it towards the end of the year.
So, that flexibility of capex deployment in drilling is very critical. The company’s capex in the 2020 business year was higher than the $125 million spent in 2019, which demonstrates the company’s commitment to growth.
2021 outlook for oil prices
In terms of guidance this year, we don’t guide on oil price obviously. Oil prices are coming back. We are cautiously optimistic about oil price. It has reached up to $65-$70 per barrel but we remember when it was $10.So, we set our budget at $50-$55. The oil price was hedged, andwith the hedging programme, we have 65 per cent of our production hedged as a downside protection. But in terms of guidance, we guide on production and capital expenditure.
For 2021, we expect to produce an average of 48,000 to 55,000 barrels of oil equivalent per day, taking into account the impact of OPEC+ quotas.We also hedge against oil price volatility and expect a higher proportion of revenues to come from long-term gas contracts at stable prices.We have significant cash resources and will continue to manage our finances prudently in 2021, expecting to invest $150 million of capital expenditure across the full year, with nearly $33 million already invested. We remain confident that our on-going cost-cutting initiatives and prudent management of cash will enable further reductions in debt, whilst supporting dividend payments and investment for growth.
Seplat performance so far
We have made a progressive start to the year, delivering oil and gas production volumes of 48,239 boepd, within our guidance range. With the Gbetiokun field at OML 40 now back in production, we are currently achieving average daily volumes of nearly 54,000 boepd so far in April and we will build on this as we add additional oil and gas wells this year.
Our flagship ANOH gas project is proceeding as planned and was fully funded in February when our joint venture company, ANOH Gas Processing Company successfully raised $260m of debt financing.Following its successful funding, the completion of the project remains a major priority. In addition, the success of our $650m Eurobond issuance in March demonstrates investor confidence in our prudent financial management and the exciting future ahead for the company and its stakeholders.
As we drive forward our strategy of being a low-cost energy provider delivering reliable, affordable and sustainable energy to the young, fast-growing population of Nigeria, energy transition – which delivers on Nigeria’s social development goals in tandem with the climate agenda – is essential.This is the backbone of Seplat’s strategy and we will be communicating how we plan to achieve this over the coming months.
To that end, the Board took the decision to change our name to Seplat Energy Plc, which more adequately reflects our ambitions of providing a broader energy mix.
Having proved our resilience again, and in the most challenging and unprecedented environment we have ever experienced, I am confident that Seplat will build on its strong foundations to become a larger, more diverse, and more sustainable energy company in the years to come.
Given Nigeria’s need to improve access to energy and the potential for significant market growth, we are very well positioned to consolidate and strengthen Nigeria’s energy champion.Gas is the lower-carbon feedstock for affordable electricity for Nigeria’s young and rapidly-growing population.Seplat is leading Nigeria’s transition away from spending scarce foreign currency on imported, expensive, high-emission diesel-generated electricity and we believe this will provide the necessary baseload for a functioning electricity grid that will allow renewable energy to take its place, as we see in the developed world, which in large parts is still fuelled by coal.
The energy transition in Nigeria must balance both the environmental and the social agenda.I believe that the move to change our brand to Seplat Energy Plc reflects our intention to be at the forefront of Nigeria’s energy transition in the next decade of our journey.We will continue to build value for our shareholders, either through organic growth or through carefully selected acquisitions that will deliver the scale or expertise we will need in the coming years.
