Strategising for Growth

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By Hamid Ayodeji

The year 2018 is one that LEKOIL is putting behind it quickly. In 2018, the exploration and production company saw profitability dip significantly, a lingering court case came to a close; and closer ties had to be forged with hitherto estranged partners.

“The priority for 2019 is to grow production volumes at Otakikpo through Phase Two development (subject to funding) to reach gross volumes of between 15,000 to 20,000 bopd,” the company’s Chief Executive Officer, Olalekan Akinyanmi, said in a note to shareholders.

Akinyanmi, also said the first step has already occurred, with 3D seismic data acquisition and interpretation now completed.

“We also continue to advance towards the start of the appraisal drilling programme on Ogo in OPL 310. We will work with our joint venture partner, Optimum to negotiate agreements that will allow us make progress on the block, after securing all relevant regulatory extensions and approvals.
An analysis of the company’s 2018 results tells the story of inevitable pain and rewards of re-positioning for long-term growth.

In its Otakikpo field, sited in a coastal swamp location in oil mining lease (OML) 11, adjacent to the shoreline in the south-eastern part of the Niger Delta, production levels averaged approximately gross 5,345 bopd in 2018 even though it only started drilling in the first quarter of 2017.

During the course of the 2018, the company began the second phase of preparations for development with acquisition of 3D seismic in February, with an updated conditional prepayment rate being finalised ahead of publication.

Subject to agreement on funding with one or more industry partners, the company in a note to investors said plans are underway for a three to five well drilling programme, targeted at increasing production levels to approximately gross 15,000 to 20,000 bopd.

In its OPL 310 located in the Nigeria Dahomey basin, LEKOIL has advanced plans for the Ogo appraisal drilling programme with well locations selected. It had also begun funding discussions with certain industry partners.

For LEKOIL and other exploration companies in Nigeria, navigating through the maze of regulatory approvals represents the biggest challenge in operations in Nigeria. This also largely accounts for why the company has not taken the Ogo fields, offshore Lagos, to production even after spending $200 million along with its partners to develop it.

“Slow pace of regulatory approvals has been the single biggest challenge that I faced since I returned to Nigeria to start LEKOIL. The single biggest challenge we have faced as a company has not been technical, it has not been money, it has been regulatory approvals,” Akinyanmi said.

Wood Mackenzie, a leading energy research organisation said the Ogo field which lies in the Keta-Togo-Benin Basin discovered in 2013, yielded a P50 reserves estimate of 770 mmboe, well in excess of the pre-drill 200 mmboe estimate. The field was the third largest oil discovery in the world in 2013 and the largest discovery in Nigeria within the past ten years.

LEKOIL applied for Ministerial Consent to acquire 23 per cent participating interest in OPL 310 block, in Ogo fields, from Afren Nigeria Holdings in 2016, but the consent was neither given nor denied.

So, in May 2017, Acting President Yemi Osinbajo, issued an executive order which among other things provided that any application not approved or rejected by a government agency or official within the agency’s specified timeline shall be assumed to have been approved. Relying on this provision, the company proceeded to complete the acquisition.

However, a Federal High Court ruled that the acquisition still requires consent from the Minister of Petroleum Resources. Based on the judgement, OPL 310 interest is still held by the seller, Afren Investments Oil and Gas Nigeria Limited. LEKOIL still holds a 17.14 per cent participating interest in the block.

In response LEKOIL has withdrawn its lawsuit and continues engagement with its partner, Optimum Petroleum Development Limited, and the regulator, to conclude agreements and resolve all outstanding issues.

The company reported that it has completed technical evaluation on OPL 325 in January 2018 by consultants Lumina, identified and recorded 11 prospects and leads which were estimated to contain potential gross aggregate Oil-in-Place volumes of over 5,700 mmbbls (un-risked, Best Estimate case).

Financial Position
LEKOIL reported a loss in 2018 as against record profit of $6.5 million in 2017. The company alluded to huge investments it made in developing its fields dragging down its profits, which is understandable in the oil and gas industry. It recorded $48.7 million in proceeds from equity crude sales in 2018. The Group lifted 1,305,888 barrels of its entitlement, realising an average sales price of approximately $66 per barrel. Total entitlement crude consisted of 1,346,525 total barrels net to LEKOIL.
Analysis of its financials indicated that it had cash and bank balances of $10.4 million as at 31 December 2018 as against $6.9 million the preceding year. Cash at 31 May 2019 was $13.1 million. As at 31 December 2018, total outstanding debt financing, net of cash, was US$10.1 million as against $22.6 million in the same period in 2017.
To keep its finances stronger, the company targets a 25 per cent reduction of general and administrative costs annually. In June 2018, LEKOIL and its bankers re-denominated approximately N3.1 billion of debt facilities into one new $8.55 million facility which reduced the high financing costs of local currency debt. The documentation to complete this was finalised in March 2019.
The company reported that it made concerted effort during the year to pay-off vendor financing from prior periods, as can be seen in the improved gearing position and reduction in liabilities.

The Board and Management regularly monitors the Company’s cashflow projections. The cash balance as at the end of May 2019 was $13.1 million. In light of delays with progressing key assets, we have decided to take action in order to reduce our overheads. Management has created a project team to review costs with the aim to decrease general and administrative costs by 25 per cent. This included a 25 per cent reduction in board remuneration.

This perhaps informs the company’s optimism that it will soon bounce back to winning ways.
“The next year should therefore provide key catalysts for value appreciation for shareholders as we move forward in building a leading Africa-focused exploration and production business,” Akinyanmi said.