AIM listed 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

• 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 at 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 cashflow 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."

Otakikpo - producing asset

Despite the wider impact of COVID-19, operations at Otakikpo continued to run effectively. For the first half of 2020, production from Otakikpo averaged approximately gross 5,676 bopd, (2,271 bopd net to LEKOIL Nigeria) compared to 5,822 bopd (2,329 bopd net to LEKOIL Nigeria) for the same period last year. The sixth lifting for the year is currently ongoing with cash proceeds of US$4.0 million expected to be received by the Company in the first week of November 2020, through an early payment option available from the Group's nominated offtaker, Shell Western Supply and Trading Limited ("SWST"). The next lifting is expected to occur in December 2020.

On 13 July 2020, on behalf of the Otakikpo Joint Operation ("Otakikpo"), the Group announced the execution of definitive agreements for the next phase of the Otakikpo marginal field development. These definitive agreements are made up of service agreements with Schlumberger which cover the comprehensive infrastructure upgrades and field management services in relation to the planned upstream drilling programme.

The upstream drilling programme consists of the following:

• Phased drilling of up to seven new wells in Otakikpo with project capital expenditures estimated at US$110.0 million, of which the technical Partner, LEKOIL Oil and Gas Investments Limited ("LOGL"), in which the Company has a 90 per cent. economic interest, is expected to provide funding of US$44.0 million.
• Drilling of the first two wells, estimated at US$25.0 million (US$10.0 million net to LOGL), is expected to increase gross production to approximately 10,000 bopd which can be accommodated by existing infrastructure.

As announced on 13 July 2020, LOGL expects to raise, according to its participating interest, its own portion of the required funding for the first two wells from a combination of offtake financing from a subsidiary of a major international oil company and cashflow from existing production. Funding for subsequent wells are expected to come from the cashflow generated by incremental production. Rig mobilization is expected to occur as soon as the partners of the Joint Operation have both raised funding for the first two wells, according to their respective participating interest.

OPL 310 - appraisal and exploration asset

On 2 January 2020, the Company announced that it had secured funding for the appraisal drilling and the initial development programme on the Ogo field through a loan agreement with the Qatar Investment Authority ("QIA"). However, the Company discovered on 13 January 2020 that the loan agreement was instead signed with certain individuals falsely purporting to represent the QIA. As such, there was no valid loan agreement entered into with the QIA. To respond to this, the Board established an independent committee to investigate the origination of the loan agreement and commenced steps to recover the funds paid for its execution to an intermediary. A detailed review of the Company's wider corporate governance practices and procedures for the approval of major transactions was also conducted. As a priority, the Board will improve its standards of corporate governance and has already begun to implement the recommendations received.

As part of the planned two-well appraisal programme with the objective of obtaining dynamic flow data from well testing while preserving the drilled wells as producers, a site survey was required for the evaluation of top-hole drilling, jack-up rig and potential platform foundation hazards and any seabed obstructions. Approval for the site survey was granted by the Department of Petroleum Resources ("DPR"), in accordance with provisions of the Petroleum (Drilling and Production) Regulations. On 9 January 2020, the marine vessel conducting the site survey arrived at location and commenced the operation. The site survey was successfully completed in the first quarter of this year without any reported personnel injuries or damage to the environment. All data acquisition objectives were met during the operations which were completed before the scheduled expiration of the approval received from the DPR. With the site survey completed, selection of the appropriate rig to commence appraisal drilling can be concluded.

On 21 January 2020, pursuant to the Cost and Revenue Sharing Agreement (CRSA), LEKOIL was required to pay US$5.6 million to the Operator of OPL 310 Licence, Optimum Petroleum Development Company ("Optimum"). The payment represented a portion of Optimum's sunk costs. Optimum and LEKOIL agreed for this payment and the balance of consent fees (US$4.0 million) which comes to a total of US$9.6 million to be deferred such that US$2.0 million and US$7.6 million are paid by the 20 March 2020 and 2 May 2020, respectively.

Following the payment of US$2.0 million to Optimum due in March 2020, a further agreement was obtained for a deferred payment schedule for the final payment due in May 2020 of US$7.6 million such that US$1.0 million was to be paid on or before 15 July 2020, US$2.0 million to be paid by 30 September 2020 and the balance of US$4.6 million by 30 November 2020. As announced on 15 July 2020, the Company confirmed the payment of US$1.0 million as agreed.

The Company is in discussions with Optimum regarding a deferment of the payment due on the 30 September 2020 of US$2.0 million. The intention is to focus the Company's resources on securing funding for the second phase of the Otakikpo development as well as the Ogo appraisal programme. The Company is hopeful of a mutually acceptable solution being reached between the Parties and will update shareholders as and when appropriate.

OPL 276 - appraisal and exploration asset

OPL 276 covers a territory located in the eastern Niger Delta basin which is partly onshore (land and swamp) and partly shallow marine (tidal river estuary). The Licence area is within 20 kilometres from three existing producing fields: Effiat-Abana, Stubb Creek and Uquo.

The asset represents an excellent opportunity to further build our growing production base in line with our stated strategy to create a balanced portfolio of assets. The Company sees a clear opportunity for re-entering one or more of these discovery wells, with the potential for rapid monetisation of resources thanks to close proximity to existing export facilities.

The acquisition of the 45% participating interest in the Production Sharing Contract ('PSC") in relation to this asset is conditional upon, among other things, the extension of the term of the Licence and the PSC, obtaining the consent of the Nigerian National Petroleum Corporation ("NNPC") and obtaining the approval of the Minister of Petroleum Resources of the Federal Republic of Nigeria. The application for extension has been filed with the NNPC and awaits approval from both the NNPC and ultimately the Minister of Petroleum Resources.

OPL 325 - exploration asset

OPL 325 located in the offshore Dahomey Basin, was identified as an area of interest to us in our proprietary Dahomey Basin study of the western side of the Niger Delta. The asset which lies approximately 50km to the south of OPL 310, is believed to be a promising exploration asset containing an exciting deep water turbidite fan play. The Company holds a significant indirect interest in the asset via our subsidiary, Ashbert Oil and Gas Limited. The Licence covers an area of some 1,200 square kilometres and has gross unrisked prospective resources estimated by Lumina Geophysical of 5.7 billion Boe.

Terms for a PSC in relation to OPL 325 have been negotiated and agreed between the NNPC and the contractor parties which is made up of the National Petroleum Development Company ("NPDC") and Local Content Vehicles. Execution of the PSC is expected to occur in the second half of this year. Subsequent to the execution of the PSC, the Company intends to farm-down a portion of its interest following a detailed prospect and lead risking study which is almost complete.

KeyFacts Energy: Lekoil Nigeria country profile