Lekoil : Half Year Results for the 6 Months to 30 June 2019

RNS Number : 8766N

Lekoil Limited

27 September 2019

27 September 2019

LEKOIL Limited

("LEKOIL" or the "Company" or the "Group")

Half Year Results for the Six Months to 30 June 2019

LEKOIL (AIM: LEK), the oil and gas explora on and development company with a focus on Nigeria and West Africa, reports its unaudited half year results for the six months to 30 June 2019. These results will be made available on the Company's website shortly.

Summary

Financial

• Operating profit of US$0.5 million (2018: US$3.0 million);
• Net loss of US$5.2 million (2018: net profit of US$1.8 million);
• Borrowings at period end of US$15.8 million (US$20.5 million at 31 December 2018);
• Period end cash of US$7.0 million ( US$10.4 million at 31 December 2018);
• Cash of US$8.3 million,and borrowings of US$13.9 million, as at 31 August 2019.

Production - Otakikpo*

• Otakikpo produc on averaged 5,822 bopd gross with 2,329 bopd net to LEKOIL (2018: 2,042 bopd net) and down me of zero days;
• Updated Otakikpo CPR released 26 June 2019 - gross 2P reserves of 48.6 MMbbl (19.4 MMbbl net to LEKOIL), an uplift of more than 200 per cent compared to 2015's CPR figure of 15.0 MMbbl. 2P NPV10 of US$226 million, a er income taxes, net to LEKOIL;
• Planning completed for the Phase Two development at Otakikpo to increase produc on towards 15-20,000 bopd (6- 8,000 bopd net to LEKOIL), subject to securing the necessary funding;
• MOU signed in July between the Otakikpo Joint Venture partners, Schlumberger and a Nigerian subsidiary of a major interna onal oil company ("IOC") which has been opera ng in Nigeria for more than 50 years to cover a project to provide comprehensive infrastructure sharing and a drilling programme around a group of marginal field assets, including Otakikpo, in OML 11;
• • phased development plan includes up to five new wells in Otakikpo and expanding processing infrastructure to comprise a new onshore terminal, to be located outside the Otakikpo field opera ons area, and the construc on of an export pipeline from the onshore terminal to an offshore buoy
  • the infrastructure will handle Otakikpo production and other fields in OML 11
  • project capex es mated at US$170 million, of which LEKOIL is expected to contribute US$68 million - to be provided to the Otakikpo Joint Venture by the IOC subsidiary and repaid from production revenues
  • investment by the IOC subsidiary, which will provide funding to the Otakikpo Joint Venture alongside the other funding partners, is subject to due diligence, project economics, entry into defini ve documenta on and final investment decision.

Appraisal - OPL 310*

• OPL 310 legal ac on withdrawn following judgement against LEKOIL in the Federal High Court to enable the Ministry of Petroleum Resources to consider re-award of the block;
• Post period end, on 30 August, the Company announced a legally binding agreement with operator Op mum to progress appraisal and development programme ac vi es at Ogo and to seek a funding partner using LEKOIL's disputed 22.86 per cent interest in OPL 310 as a potential funding and security vehicle;
• In September, LEKOIL announced the Ministry of Petroleum Resources had approved the extension of the licence for three years, subject to the holders of the licence paying an extension fee of US$7.5 million by the end of October 2019 which will be funded 100 per cent by LEKOIL.

Exploration - OPL 325*

• Awaiting the execution of the Production Sharing Contract for OPL 325 and readying one of the prospects for drilling
• • farm-downprocess to commence once these activities are complete.

Appraisal - OPL 276*

• Acquisition announced in August of a 45 per cent participating interest in the Production Sharing Contract in relation to OPL 276, covering a territory located onshore in the eastern Niger Delta basin;
• • total staged consideration of US$5.0 million, subject to certain milestones
  • four wells have been drilled in the licence area, resul ng in four discoveries (two oil and two gas) with preliminary resource es mates, based on data from the four wells, of gross recoverable volumes of 29 million barrels of oil and 333 Bcf of gas, with upside of 33 million barrels of oil and 476 Bcf of gas (recoverable).

* Held through LEKOIL Nigeria

Lekan Akinyanmi, LEKOIL's CEO, commented,"The recent se lement with Op mum, receipt of the OPL 310 licence extension from the Nigerian Government, and encouraging progress made in preparing to commence work on all our other interests, leads us closer to delivering on our commitment to mone se the significant value that we believe exists in both our exis ng and recently acquired opportuni es. We thank our shareholders for their con nued pa ence and remain op mis c that the outlook is set to improve. We are excited about what we see is in prospect for all of us over the next few years, and we look forward to delivering on this."

For further information, please visit www.lekoil.comor contact:

The informa on contained within this announcement is deemed by the Company to cons tute inside informa on as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

Chairman's and CEO's Statement

Introduction

The first half of 2019 was a busy period for LEKOIL. Despite challenging market condi ons and opera onal headwinds, we have put in place plans for value crea on in each of our producing, appraisal and explora on assets in the Dahomey Basin and the Niger Delta.

LEKOIL was formed as an indigenous Nigerian upstream company, set to exploit overlooked opportuni es in new and exis ng basins in Africa and through this create a balanced por olio of oil and gas explora on and produc on assets. We have sought to achieve this through leveraging a very strong technical team and our industry and investment market relationships and experience.

Over six years on from our IPO, we have a producing asset in Otakikpo in the eastern Niger Delta with near term upside, and two assets in the Dahomey Basin - an appraisal asset in Ogo in OPL 310; OPL 276, a poten al near-term producing asset with significant resource poten al; and addi onal explora on op onality provided by our majority interest in OPL 325. For Otakikpo and OPL 310, we have Memorandum of Understanding ("MOU") agreements in place with respect to developing the assets with partners Schlumberger, as well as a major IOC.

Production - Otakikpo

We have now completed planning for the Phase Two development at Otakikpo, which would see us, subject to securing the necessary funding, increase produc on towards 15-20,000 bopd (6-8,000 bopd net to LEKOIL). As part of the Otakikpo development process, we commissioned, and announced in June, an updated Competent Person's Report ("CPR") detailing recoverable volumes within the Otakikpo Marginal Field in OML 11. The CPR, prepared by McDaniel Associates & Consultants Ltd, focused on the discovered conventional oil accumulations only, with the field's significant gas resources expected to be reflected in a future update.

The CPR disclosed gross 2P reserves of 48.6 MMbbl (19.4 MMbbl net to LEKOIL), an upli of more than 200 per cent compared to 2015's CPR figure of 15.0 MMbbl. Gross aggregate stock tank oil in place (STOIIP) prospec ve volumes on a P50, unrisked basis, mean es mate was 331.6 MMbbl (132.6 MMbbl net to LEKOIL), compared to 2015's CPR figure of

163.0 MMbbl (65.2 MMbbl net to LEKOIL). The updated recoverable volumes produced a 2P NPV10 of US$226 million, after income taxes, net to LEKOIL.

We were delighted that the consultant's report confirmed our view of the a rac veness and future poten al of the Otakikpo project. The updated CPR increased es mates for unrisked oil resources and reinforced the already strong economics of the development.

We announced in early July a MOU between the Otakikpo Joint Venture partners, Green Energy Interna onal Limited as Operator and LEKOIL as Technical Partner, and Schlumberger and a subsidiary of a major interna onal oil company ("IOC") which has been opera ng in Nigeria for more than 50 years. The MOU covers a project to provide

comprehensive infrastructure sharing and a drilling programme around a group of marginal field assets, including Otakikpo. Standard Chartered Bank is to act as lead financial advisor for the project and supply the necessary financial advisory, security and banking services.

The phased development plan of the project consists of drilling up to five new wells in Otakikpo and expanding processing infrastructure to comprise a new onshore terminal, to be located outside the Otakikpo field opera ons area, and the construc on of an export pipeline from the onshore terminal to an offshore buoy. This infrastructure will handle production from Otakikpo and other fields.

Capital expenditure to be incurred by the Otakikpo Joint Venture is expected to be approximately US$170 million covering new wells and processing infrastructure, of which LEKOIL is expected to fund US$68 million. The Nigerian subsidiary of the IOC will provide funding to the Otakikpo Joint Venture alongside the other funding partners, subject to due diligence, project economics, entry into defini ve documenta on and final investment decision. Repayment will be made from produc on revenues from Otakikpo, in priority to any exis ng lending facili es (subject to agreement with existing lenders), future capital expenditure and returns to equity holders.

The MOU is a significant milestone for LEKOIL and the Otakikpo Joint Venture. It secures the necessary funding, subject to the various condi ons being sa sfied, to drill the addi onal wells required to unlock further value and it provides the opportunity, through the transforma on of opera ons infrastructure, to capture addi onal revenue along the value chain.

In September, the Joint Venture partners agreed to the phased development project. In a joint on-site review by Otakikpo Joint Venture and Schlumberger, it was verified that the exis ng produc on facility has capacity to produce 10,000 bopd and up to 12,000 bopd, gross with further debo lenecking. The Joint Venture expects the first two wells of the phased development plan of the project to bring production up to this level.

Produc on from Otakikpo in the first half of 2019 averaged 5,822 bopd gross with 2,329 bopd net to LEKOIL, compared to 2,042 bopd for the same period in 2018. Down me was zero days. Capital expenditure for the full year is currently expected to be US$5.1 million, principally focused on infrastructure upgrades, of which approximately US$2.7 million was spent in the first half (all amounts net to LEKOIL).

Appraisal - OPL 310

We announced at the end of March that a Federal High Court had ruled against the Company in its legal ac on to expedite the gran ng of Ministerial consent for our acquisi on of a 22.86 per cent stake in OPL 310 in November 2015. Our original 17.14 per cent interest received Ministerial consent in 2017. At the me of the ruling, we were in the process of reques ng an extension to the licence, which expired in February 2019. Subsequently, in May, we received a le er from the Ministry of Petroleum Resources sta ng that ownership of OPL 310 had reverted to the Government, in line with Petroleum Act and that re-award would not be considered un l the suit filed by LEKOIL was withdrawn. We decided to withdraw the legal ac on and con nued nego a ons with partner Op mum Petroleum Development Limited and the Ministry to seek re-award and to come to an agreement with our partner.

On the back of this approach, we were pleased to report post the period end, on 30 August, that we had reached a resolu on. The Company has executed a legally binding agreement with Op mum to progress appraisal and development programme ac vi es at Ogo. Op mum and LEKOIL are ini ally targe ng a two-well programme over the next twelve to eighteen months, subject to receiving an extension of the OPL 310 licence from the Ministry of Petroleum Resources for the block and securing the necessary funding for the programme. Under the terms of this agreement, LEKOIL will pay Op mum approximately US$12.5 million in respect of Op mum's past costs and fees, as previously announced on 30 August 2019. This amount includes US$2.0 million in outstanding G&A arrears, a US$5.0 million Operator's fee in regard to LEKOIL's 17.14 per cent par cipa ng interest and US$5.5 million for the Operator's sunk cost.

LEKOIL and Op mum have also agreed to drill two addi onal appraisal-development wells, con ngent on the results of the ini al two well appraisal campaign and the associated extended well tests to be undertaken. All wells will be designed to be compatible with an early production scheme.

LEKOIL and Op mum have agreed to use the disputed 22.86 per cent interest in OPL 310 as a poten al funding and security vehicle for the accelerated development of the Block by an industry partner or a third party that elects to farm-in to the block to fund field development ("the Poten al Funding Partner"). Although the agreement does not address the recovery of the US$13.0 million considera on previously paid by LEKOIL with respect to the acquisi on of the shares of Afren Oil & Gas (Nigeria) Limited ("AOGNL") in 2015 (which held the 22.86 per cent. par cipa ng interest in OPL 310), LEKOIL is working with Op mum on a resolu on of this ma er alongside the possible alloca on of the 22.86 per cent to a Potential Funding Partner, and remains hopeful that an agreement can be reached.

The understanding with Op mum enables us to start to work closely with them to unlock significant value for our investors and all stakeholders, not only with the appraisal poten al iden fied at Ogo, but also with the other promising exploration leads readily identifiable in OPL 310.

On 6 September LEKOIL announced that the Ministry of Petroleum Resources has approved the extension of the licence for three years, subject to the holders of the licence paying an extension fee of US$7.5 million, which will be funded 100 per cent by LEKOIL. The Company expects to fully fund this fee from a mix of exis ng financial resources and the Poten al Funding Partner as referred to above. The resolu on with Op mum and the recently announced licence extension allows the licence holders to progress and secure the Poten al Funding Partner before commencing the initial appraisal campaign.

Exploration - OPL 325

OPL 325 was initially identified as an area of interest to us in our proprietary Dahomey Basin study of the western side of the Niger Delta. We believe it to be a promising explora on asset containing an exci ng deep water turbidite fan play. The licence covers an area of some 1,200 square kilometres and has gross unrisked prospec ve resources estimated by Lumina Geophysical of 5,067 MMbbls. LEKOIL holds a 62 per cent indirect equity interest in OPL 325.

We are awai ng the execu on of the Produc on Sharing Contract ("PSC") for the licence, at which point LEKOIL is due to pay US$0.95 million to the seller as a back-cost reimbursement. In addi on we are performing some por olio work

to ready one of the prospects for drilling. Once these are complete we intend to begin the farm-down process.

Appraisal - OPL 276

In August, we announced that we would be acquiring a 45 per cent par cipa ng interest in the Produc on Sharing Contract ("PSC") in rela on to OPL 276, covering a territory located onshore in the eastern Niger Delta basin. The agreed acquisi on, from Newcross Petroleum Limited ("Newcross"), is for a total staged considera on of US$5.0 million, subject to certain milestones. The licence is covered by approximately 150 sq. kilometres of 3D seismic, shot in 2008 by BGP Inc., a subsidiary of China Na onal Petroleum Company, as well as various 2D seismic surveys. It is in close proximity to three existing producing fields, all less than 20 kilometres away.

Newcross has previously iden fied ten prospects and seven leads in the area covered by the licence. Four wells have been drilled in the licence area, resul ng in four discoveries (two oil and two gas). Preliminary resource es mates by Newcross, which have not yet been independently verified by the Company, based on data from the four wells, reported gross recoverable volumes of 29 million barrels of oil and 333 Bcf of gas, upside of 33 million barrels of oil and 476 Bcf of gas (recoverable).

The acquisi on of an interest in the OPL 276 PSC puts in place a poten al near-term producing asset with significant resource poten al. We are op mis c about the prospects here, which have shallow reservoirs and are cost efficient to develop. Our focus will now shift to moving plans quickly forward for oil and gas production.

Results

In the six months ended 30 June 2019, the Group recorded a profit from opera ng ac vi es of US$0.5 million (2018: US$3.0 million), a loss a er tax for the period of US$5.2 million (2018: US$1.8 million), and ended the period with cash and cash equivalents of US$7.0 million. Outstanding debt financing less cash was US$8.8 million, a decrease from US$10.1 million at the end of 2018. The Company con nues to target a 25 per cent run rate reduc on of general and administra ve costs, inclusive of Board remunera on. Post the repor ng period, OPL 310 licence extension no fica on was received, subject to the payment of the necessary extension fee of US$7.5 million by the end of October 2019. Increased activity on this and other assets during 2020 may impact elements of this G&A initiative.

Board Changes

Greg Eckersley, un l recently the Global Head of Internal Equi es at the Abu Dhabi Investment Authority and a Non- Execu ve Director of LEKOIL since IPO, has been serving in the role of interim Chief Financial Officer ("CFO") since July 2019. Greg was un l the appointment as interim CFO the Chairman of LEKOIL's Remunera on Commi ee and a member of the Company's Audit and Risk Commi ee. We are in the process of iden fying candidates for the role of a permanent CFO who will be based primarily in Nigeria. Aisha Oyebode, Non-Execu ve Director and a member of LEKOIL's Remunera on Commi ee, has replaced Greg on this commi ee, currently serving as Chairwoman. Addi onally, Tom Schmi , Non-Execu ve Director, has replaced Greg on the Audit and Risk Commi ee and has also joined the Remuneration Committee.

Outlook

The last three years have provided LEKOIL with the opportunity to secure a rac ve assets and prepare to mone se the significant value that we believe exists in both our exis ng and recently acquired opportuni es. Once the requisite financing has been secured, we feel confident that as we look forward, our team of talented, experienced employees will now be able to focus on growing the Company, developing our assets, and making their mark in our industry.

In the past we have o en commented on our belief that if given the opportunity, we would seek to successfully transform our assets into world class producers that generate a rac ve returns for our shareholders, our employees, our partners and all our stakeholders.

The recent se lement with Op mum, receipt of the OPL 310 licence extension from the Nigerian Government and encouraging progress made in preparing to commence work on all our other interests, leads us closer to delivering on this commitment. We thank our shareholders for their con nued pa ence and remain op mis c that the outlook is set to improve. We are excited about what we see is in prospect for all of us over the next few years, and we look forward to delivering on this.

On behalf of the Board, we would like to again thank all of our stakeholders for their con nued support and pa ence as we seek to create value from our high quality portfolio of assets.

Financial Review

Overview

For the six months ended 30 June 2019, the Group recorded a profit from opera ng ac vi es of US$0.5 million (30 June 2018: profit of US$3.0 million) and ended the period with cash and bank balances of US$7.0 million. Outstanding debt financing less cash was US$8.8 million, (a decrease from US$10.1 million at the end of 2018). Cash and bank balances as at 31 August 2019 were US$8.3 million, with debt financing amounting to US$13.9 million.

Interim results

The Group recorded a total comprehensive loss of US$5.2 million for the six months ended 30 June 2019 (30 June 2018: profit of US$1.8 million).

Revenue

The Group recorded revenue totaling US$22.3 million, represen ng the Group's share of crude oil sales from its Otakikpo opera on during the period, which is recognised as revenue ("equity crude"), (30 June 2018: US$22.4 million). The Group's share of equity crude was 362,077 barrels out of which it li ed 345,746 barrels (30 June 2018:

333,429 barrels). The balance of 16,331 barrels represents crude overallocated to partner Green Energy Interna onal Limited ("GEIL") during the May 2019 lifting allocation.

Cost of sales, operating expenses and administrative expenses

Cost of sales was US$8.2 million (30 June 2018: US$9.4 million). Opera ng expenses and general & administra ve

expenses were US$4.3 million and US$9.3 million respec vely (30 June 2018: US$1.1 million and US$8.9 million). The Company con nues to target a 25 per cent run rate reduc on of general and administra ve costs ("G&A"), inclusive of Board remunera on. Post the repor ng period, OPL 310 licence extension no fica on was received. Increased activity on this and other assets during 2020 may impact elements of this G&A initiative.

Income tax

Income tax expense for the six months ended 30 June 2019 amounted to US$4.0 million (30 June 2018: US$2.2 million).

Capital expenditure

The Group's capital expenditure during the six months ended 30 June 2019 amounted to US$2.7 million, compared to US$3.9 million for the corresponding period in 2018. This was mostly a ributable to expenditure at Otakikpo to expand storage and enhance production facilities.

Cash and bank balances

The Group had cash and bank balances of US$7.0 million as at 30 June 2019 (31 December 2018: US$10.4 million). Also included in other assets is US$3.3 million cash funding of the debt service reserve accounts of the FBN Capital Notes and the Shell Western facility.

Loans and borrowings

Principal repayments of US$5.2 million were made on the FBN Capital and Shell Western facilities during the period.

The balance on the loan facili es as at 30 June 2019 was the equivalent of US$15.8 million (31 December 2018: US$20.5 million). Accordingly, the Group's outstanding debt financing less cash was US$8.8 million, (a decrease from US$ 10.1 million at the end of 2018). The balance on the loan facili es as at 31 August 2019 was US$13.9 million and cash balances at that date were US$8.3 million.

Loans and borrowings

The Group had the following debt facilities in place as at 30 June 2019:

Summary statement of financial position

The Group's non-current assets decreased slightly from US$194.9 million as at 31 December 2018 to US$188.0 million as at 30 June 2019. Current assets, which represent the Group's cash resources, trade receivables, pre-paid development costs, other assets and other receivables, decreased from US$31.5 million as at 31 December 2018 to US$24.0 million as at 30 June 2019. The decrease is a result of a reduction in trade receivables and the GEIL cash call receivable.

Current liabili es as of 30 June 2019 were US$23.8 million (31 December 2018: US$30.2 million) consis ng of the

por on of the loan facili es due within twelve months, amoun ng to US$10.4 million (31 December 2018: US$11.4

million), trade and other payables amoun ng to US$9.4 million (31 December 2018: US$13.7 million) and current tax

payables amounting to US$4.0 million (31 December 2018: US$5.1 million).

Non-current liabili es consist mainly of the long-term por on of the loan facili es amoun ng to US$5.4 million (31 December 2018: US$9.1 million).

Accordingly net assets at 30 June 2019 amounted to US$180.7 million, down from US$185.3 million at 31 December 2018.

Dividend

The Directors do not recommend the payment of a dividend for the period ended 30 June 2019.

Accounting policies

The Group's significant accoun ng policies and the significant judgments and cri cal accoun ng es mates are consistent with those used in the 2018 annual financial statements.

Liquidity risk management and going concern

The Group closely monitors and manages its liquidity risk and ability to service debt as it falls due. Cash forecasts are regularly produced, and sensi vi es run for different scenarios including (but not limited to) changes in produc on rates and commodity pricing, and cost overruns for approved projects.

At 30 June 2019, the Group had liquid resources of approximately US$7.0 million, in the form of cash and bank balances which are available to meet capital, opera ng and administra ve expenditure. US$3.3 million of cash used for the debt service reserve accounts is included in other assets.

These interim condensed consolidated financial statements have been prepared on the going concern basis of accoun ng, which assumes the Group will con nue in opera on for the foreseeable future and be able to realise its assets and discharge its liabili es and commitments in the normal course of business. There is however a material uncertainty that can cast a significant doubt on the Group's ability to con nue as a going concern which is discussed below.

This is an excerpt of the original content. To continue reading it, access the original document here.