Seplat Energy Plc (SEPL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Seplat Energy 2023 Half Yearly Results Presentation. My name is Jotin, I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Roger Brown, CEO.

Thank you, and good morning, everyone, and delighted to be coming out with our first half of 2023 results. So we just lay out on the first slide, some of the metrics. And you can see there that we are uplifting our quarterly dividend. This is a continuing -- this is our core dividend. So it's now up 20% to $0.03 a share. Our total production for the half was 9.2 million barrels of oil equivalent, which is slightly up on the equivalent period. Revenue of $547 million, which again is slightly up. And net debt, which is slightly up, again at $380 million, but at good levels. And looking on the right side of that slide, just the highlights. You can see there in terms of operating uptime improving year-on-year. We're finding that we're getting reduced losses and benefits from additional export routes. And certainly, our COO, will cover that in his slides. Progress on OB3 pipeline with our partner, and this is quite a critical catalyst for the ANOH gas project. Revenue, you can see there in terms of 6.1 million barrels of oil lifted, and modestly improved production, offset by lower realized oil prices and then gas price is relatively stable through the period and the volumes are slightly up. It shows that we are a cash-generative business, particularly these commodity levels, MPNU, we'll talk about it in a second. But really, we announced that we extended that sale and purchase agreement in May, and we're now also engaging with the new administration with a view to getting that closed out this year. And the last one to say here is on this slide is just in terms of a bit of a Board update in line with our good governance and flagging and [indiscernible] early Board changes, our current CFO will step down for retirement next year. And the Board has approved Eleanor, who is the current VP Finance, who will then be now appointed the CFO-designate and then will over from Emeka when Emeka step down next year. Okay. Just want to talk quickly about the new government. We see obviously in the 29th of May, President Tinubu came into power. And we've seen a lot of activity in the first 2 months I think you'll see there -- focus on the right-hand side of the slide there. You can see from the 29th of May to the week of the 5th of June, a number of actions we're taking the petrol subsidies -- fuel subsidies were removed, and that's been talked about for quite a number of years, but no one has actually done it. That's quite a material step. There is 4 executive orders signed and we highlighted this on the left-hand side of the slide and the special advisers were appointed, which we see is a real direction of this President -- of this administration is to really put in experts into the various ministries. On the 19th of June, there were appointments of service chiefs and dissolution of all the boards in preparation for what we're seeing now is the Ministerial lists are coming out. They're not appointed yet, but there will be appointed in the coming weeks. And we're starting to see some of those Ministerial lists up here, I think it was yesterday, and we'll see that, we'll track that over the coming weeks. You can see there's a number of orders. There's Electricity Act was is quite critical in terms of sort of -- more of a deregulating of that market. The FX market was liberalized and you'll have seen that, obviously being investors and where the now at the minute. So lot of activity and aligns to where we are going in the business in terms of our transition. So let me hand over to Sam, who will then go through the operating review.

Thank you very much, Roger, and good morning everyone. Our operational performance for the first half of the year has also been very solid, being the second highest in the last decade, if you look at the numbers and the charts on the left-hand of this slide. This is underpinned by our Escravos to Amukpe pipeline that continues to deliver value to the business. Since -- the [indiscernible] has delivered will push through about 3.2 million barrels of crude through that line. And just to give you some context, the value loss if we didn't have that line is about 1.6 million barrels. So really delivering value to the business. Also, we've noticed and witnessed some reduced losses in the Western asset, in particular, and then also improved gas performance in terms of operational efficiencies. If I don't go down on asset by asset basis, the OMLs 4, 38, and 41 that we call the Western assets continue to produce, but we have not been able to already decline because of some wells that had not come on stream, and I'll talk to you subsequently about that. Our OML 53 evacuation continues value to the Waltersmith Refinery. And our TNP, the evacuation line also hasn't come back since and that actually negatively impacted our performance in the period. But overall, if you look at OML 40, production is up by 24% and this is also supported by timely delivery of our wells and higher production uptimes. So in essence, when you pull all this together, you will see very strong production performance in the first half of this year. So if I go to the next slide, just to give you a bit of flavor on the drilling performance Year-to-date, we have completed 5 wells, 4 of those on the OML 40. The rigs -- we have 2 rigs currently in OML 4, 38 and 41, in 2 of the locations. And then we have 1 rig on OML 53. So the world -- in terms of our revised plan, you can see where we are headed to. But 1 of the most significant things that you will see just to address the shortfall in OML 4, 38 and 41, is that in the coming -- in this quarter that we just entered, we are mobilizing 3 additional rigs to the asset to ensure that we recover fully by the end of the year. So if I just go straight into the midstream performance for Seplat. On Oben, our vision continues to be for us to fully market manage the installed capacity in Oben. While we -- our current performance in this period is -- our current performance in this period continues to be very strong. We've delivered 120 million scf of gas per day average in the first half of this year. And average gas price continues to be also very strong, $2.87 per thousand scf of cash. So overall, in the operated assets, in Oben we continue to show very strong delivery. And ANOH, Roger has spoken too, but I [ will ] give you a bit more flavor. So far, we've complete -- achieved 93% mechanical completion of the plant installation and the grouting process has also witnessed a very strong progress in the first half of this year with the engineers that build in London Underground on site in Nigeria, helping us to complete the grouting of the Island Section that we already put behind us. The spur line as well is making some good progress between the OB3 and spur line. We now have quarter 3, 2023 as completion dates for those 2 major lines. And in terms of being ready for operations as well, 1 additional well has been delivered by SPDC while they are on location for the second well. The last that I would like to talk to is the Sapele gas plant. If I just take you on [ 11 ], we have commissioned the associated gas compressors that we have installed in the plant, which is what we used to call the accelerated AG solution. So we are now on cruise control to ensure that we deliver the overall Sapele AG by next year. The project is about 75% complete, and this will bring in another $85 million scf of gas into the local domestic market. And additionally, this will also improve and bringing an LPG product into the market. So overall, I would like to end by just highlighting that the strong operational performance that Seplat recorded in the first half of this year is also underpinned by very strong safety record. And on this point, I will hand over to Emeka who will take you through the financials.

Thank you very much, Sam and Roger. Good morning all. We have presented a very strong financial outcome for this half year for Seplat. The revenue is up on the back of higher production despite the lower oil prices for this period. You can see our [indiscernible] price $79 [indiscernible] was $107 last year. We sustained gas prices improved achieved about $2.87 on gas prices. However, unit OPEX went up on account of AEPP utilization. AEPP cost about $2 higher than the [indiscernible] cost in terms of [indiscernible]. Also, EBITDA went down on account of on account of lower oil prices, closing cash of $380 million, yes it's down, but is affected by the devaluation in terms of the [indiscernible] = balance of about $14 million. The devaluation effect and also a higher dividend paid out for this half year, I guess 2022. Our net debt $380 million is still strong [indiscernible] went up. Our lev rate is still very good. I'll speak to that on this following slide. I would say 1.2x in terms of net debt-to-EBITDA. On the next slide, you'll see the details of the financial, particularly on the P&L side, we have -- we have [indiscernible] revenues, [indiscernible] cost of sales, cost up -- higher CH on the AEP line. G&A [indiscernible] except for unexpected legal cost to defend the company against the some shareholders that actually -- which was quite intense this half year. The [indiscernible] I've spoken to about $40 million. This is on naira balance sheet. I have a slide on the exchange rates. I will speak to that when I get to that. In terms of other financial assets. And -- Naira other financial assets and Naira liabilities [indiscernible]. So where we start the impact of devaluation in terms of the cash we are holding at the end month of July. The tax expense you can see just about $2.8 million. We have [indiscernible] equivalent of Elcrest that has moved -- the tax move from [indiscernible] tax bracket [indiscernible]. And I have as to stabilize the profit after tax during this period. [indiscernible] cash generation was quite strong about $404 million and also generated about $259 million from operation, digitalization of the cash [indiscernible] CapEx dividend payment and also during this period on the Elcrest side, it's translated by the RBL $11 million during this period. And we closed at $381 million cash. The Naira currency in the country [indiscernible] currency fluctuations due to the evaluation of the market, unification of rates and then also the implementation of a single window for FX transaction [indiscernible] any window. And as far as, the rates have gone up about for the [ 456 ] to it's moving every day, but I think we ended up about [ mid 700 ] for the end of June. In terms of our -- it's impact on our business for gas revenues, it's less because the gas price is in dollars, but is based on our new windows. So we expect that we'll continue to receive increased naira for our gas sales. G&A is going to go down [indiscernible] for naira expenditure in terms of its conversion, it will be lower. So we would have a positive impact on G&A going forward on account of the exchange rate devaluation that we've seen. Cash balance goes negative. And of course, in terms of trade receivables and other financial assets. However [indiscernible] go to positive. We will continue to optimize our contracts to align look at currency retail transaction to be set with in naira. And that's the way we can manage the foreign currency risk out of our balance sheet. I don't know what -- you are aware that in terms of production, liquid and gas on average about 60% liquid and 40% gas and also in terms of revenue on the average about 80-20 in terms of foreign currency and naira. We will use naira to settle other naira obligations [indiscernible] naira balances to dispose off the devaluation going forward. On that capital structure, [indiscernible] to this, we have $381 million, $650 out in the market and paid back of $11 million on the RBL side, our -- our leverage is still strong at 1.2x composites in terms of net-debt-to-EBITDA. The best I would say that we continue to manage the finances of Seplat and continue to mitigate the risk, we see in the economy in Nigeria gets more active because we will have the passive economic effects [indiscernible] of course we believe that will continue to show strong performance. I'll hand over to Roger.

Thank you. Okay. So let me go to the final 2 slides. The first slide is really setting out the priorities for the second half of this year, obviously, we're in that now. So it really is to -- with the wells delivery, it's a focus to get us back on track -- of delivering those remaining wells. And again, that will -- that drilling will then actually address the natural decline we have and then focus on the export routes is to make sure we continue to get revenue performance improvements. It really will be focused on the ANOH gas plant the final part of this year and get it into first, gas. And then obviously, a real focus on MPNU the acquisition with this new administration. Just on the sustainability side of the business or not side of the business, but overall, we're obviously looking at the new energy pillar and looking at a number of opportunities. We are obviously going to work through those due diligence with a view to get into FID, through the Board. Flaring heights our gas, obviously, that's quite a big part of our CO2 emissions. And all of those Flares Out projects are on track and focusing on that. And we have some solar power being deployed in our communities and as part of also as our focus on delivering access to energy, to our skills and the hospitals in the areas that we operate. In terms of CapEx guidance, we'll give you a range there, $160 million to $190 million in the half year, we're on track in that range, and that's why we have put it here. We expect the second half CapEx to be similar to the first half. So on the final slide, we just laid out our 3x3 in terms of our metrics. And so obviously, the first 1 is delivering guidance. We've [lessed] the guidance of 45 to 55 kboepd right slightly to the positive on middle there. We expect that to continue. In terms of the capital investment, I've just talked about that. And the drilling again, we've talked about that. And really, actually get from 5 wells in the first half to 16 wells overall. In the middle, 3 areas. We want to look at gas monetization, first gas. Look at MPNU, which we've talked about there and also the new energy, some of these opportunities and really there's opportunities a bit maturing the best ones for our overall strategy. And then the final 3 there is on fiscal strength. So you can see that we are a cash-generative business $259 million of cash, and we expect that obviously to continue through the year. Net debt. Again, that is to really reduce that bring it down. It's reduced down to $380 million and our low net debt-to-EBITDA ratios to continue those. And then the final 1 for shareholders we've got a core dividend increase by 20%. That doesn't [indiscernible] talk through the special dividends, which we still retain. And we would make obviously a decision that at the end when we do the year-end results. So the $0.12 is a core committed, and we're paying $0.03 this quarter. Okay. So let me just hand it back to the operator for questions. Thank you.

[Operator Instructions] The first question comes from the line of Alexander Sychev with GSAM.

Gentlemen, I have a few questions. I'll go one by one, if you don't mind. So in Forcados Terminal, there were headlines that it was out for 2 weeks in July and the recent attempt by Shell to bring it back online was unsuccessful. I'm just wondering if you had any engagement with them on the terminal and what's their outlook to bring it back online? And if you mind sharing how much oil did you ship via the terminal in the first half, please.

Okay. That's it? This one question, okay.

Yes. That's the kind first and a second one probably.

Okay, thank you. Sam?

All right. Thank you very much for that question. Yes, indeed, you are absolutely correct. The Forcados Terminal, out due to some of [ absorption ] around 1 of the loading platforms. We are in constant engagement with SPDC and they are working towards the delivery and a recovery of that line. We will also confirm that -- we engaged with them almost on a daily basis. They have lined out activities that they need to carry to repair and restore or evacuation via the terminal. The only negative impact they are having at the moment is the weather condition that is affecting the divers that go underwater to fix the leak. And they've given us a time line to restoring the terminal into operation. The second part of your question is how much volume we exported via the terminal in the first half of the year. We exported a total of roughly about 2 million barrels of crude through the terminal in the first half of this year.

My second question is on gas business. Just looking at the segment breakdown, it seems gas business is loss-making in the first half. Can you elaborate on the reason behind it? And if we expect it to come back to being profitable going forward?

Yes. Okay. Let me just hand that across to Emeka.

You talked about the...

[indiscernible] move it in here. Okay, he's just in the first half, the gas business, it looked like loss making as part of the -- when we do a separate reporting of it, so that's the first question. And the second question is just how is it look like going forward in terms of...

Yes. What the gas business, as I say, remain profitable. I'm trying to see exact the segment -- let's pause this up, I'll come back to you later, later today.

I think like [indiscernible] this generally, I think when we strip out quarterly segmental reporting, sometimes you get anomalies in it. I think just fundamentally underlying the gas business, it is a profitable business for us. A lot of the expenditure obviously has been committed in the Oben plant. And with these gas prices sitting at an average around $2.85 thereabout to $.2.90 in Mscf, it is a profitable business. So sometimes, you can get anomalies into it, but we'll certainly look into and revert back before the end of the call.

Okay. And my last 1 on G&A. So just for modeling purposes, so I do understand that -- there has been a one-off this quarter with litigation. And since last year, there is also some element of additional costs related to MPNU transaction. But if we are thinking about long-term trends, some normal quarterly level probably for that line is around $20 million ballpark. I'm just wondering what's -- was FX rate looks and assuming one-offs are gone, what should be the kind of normal level we'll be looking at going forward?

Yes. Maybe I'll answer that quickly. I mean, just -- yes, I mean we saw -- last year, we did have MPNU costs going through there as a part of this. And the G&A this year, you're rightly identified as obviously litigation, which we did not foresee any of that. And that's probably put the quarter up by about $20 million in total, $15 million to $20 million. So we strip that out -- and I think you'll start to see that is probably and then annualize that, that's kind of the levels we would expect. We've driven through a lot of G&A changes -- on the back of last year, our G&A levels were, in our view, too high. And therefore, we brought a lot of cost savings through there in terms of cost control around travel, training and everything else, other cost line items. So you just need to take that $15 million to $20 million anomaly out for the first half, and then that should give you a sort of run rate going forward.

Alex, I can come back to [ ask ] a question.

Sorry. I think we've got an answer o this specific segment, on the gas.

On the gas. Yes, it's just a devaluation impact. That's what we have caused -- gases price in dollars were received in naira. So also the [indiscernible] level as well, we have to better priced based on the current rate, yes and that's what led to that here.

And just obviously adding to that. Obviously, the timing of the one-to-one exchange rate, there was a massive move in the CBN rate to where the I&E window is. And that is our I&E [indiscernible]. The -- that then meant in the half year, you had a translation of the balance sheet effectively because the timing of that, you have a one-off hit through rate hikes. When you get to in the year yields, you'll see probably more of an averaging of that because then you'll be doing over the year in question. So therefore -- so that's just exemplified and just magnified that. But as I said before, the underlying gas business is profitable.

[Operator Instructions] The next question comes from the line of Nikolas Stefanou with REDD.

It's Nick Stefanou from REDD [indiscernible]. Can you hear me?

Yes, we can hear you.

So I've got 3 questions to ask, I'm going to ask 2 of them then a follow-up. The first is on the dividend policy. Roger, I remember, it was maybe a couple of years ago, you had this the policy that the dividend will move in line with cash revenues. And obviously, last year, you kind of liked up the core dividend. And now you make mention that, I mean, it might be -- there might be kind of like more regular like special dividend as well. So I'm just trying to understand if this is kind of like a deviation from what I thought was maybe past sort of like -- policy that when ANOH is kind of like back up, get up and running, that's when you're going to start giving big dividends? Or is that still kind of -- is that still like a part of the plan? That's the first question. And then the second question is on the CapEx. I'm a bit confused about what happened there because you initially want to drill 8 wells and now it looks like it's going to be 16 wells for the year, and yet CapEx is -- the range is up by $30 million. So what happened there? Because especially after the devaluation of the naira, I would expect it to actually be even lower not higher. So if you can comment on that as well, please. And I'm going to ask a follow-up later.

Okay. Let me just go to Emeka for the first question.

Yes. Thank you, Nick, nice to talk to you again. When we went to the market, the -- our dividend policies that we communicated is, core dividend of $0.05 and the top up depending on the performance of [indiscernible]. And that has been what we've done over the years, that this year -- last year, we then move to quarterly dividend and move our dividend to $2.5. So that [indiscernible] will determine, we committed a core dividend going up to $0.10 last year. And then this year, we are taking up to $0.12 or we did it in the first quarter. In terms of dividend policy communication, we will do that later in the year, where we reveal a capital efficient framework. We are thinking about that, and you will see a more definitive and precise communication in relation to cash generation at the time.