Seven Energy is a leading Nigerian integrated gas company

Chairman's statement

Year in review

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Steering a steady course towards our vision

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Reinforcement of the business model

The turmoil that the oil industry, and the exploration and production sector in particular, is currently experiencing due to the sharp fall in the oil price and the weakened long term outlook has in many ways emphasised the strength in our business model and our long term strategy.

Our gas business in south east Nigeria, which is fully integrated with our upstream assets in this region, will generate sustainable earnings and cash flow under long-term fixed price gas processing, transportation and sales arrangements, sheltering us from oil price volatility and the ongoing capital expenditure that is typically required by E&P companies to sustain production and growth. Our infrastructure also provides us with first mover access to significant opportunities in the growing domestic gas-to-power market in Nigeria. We are, therefore, sharpening our focus on the infrastructure business, restructuring our business and organisation and, in the process, reducing our cost base. We expect that this will also better position us to attract additional equity and longer term, lower cost debt capital, at a time when the sector as a whole is suffering from capital flight and depressed valuations.

Whilst the midstream gas business is our core focus, we remain fully committed to our upstream business and to our existing joint venture arrangements, which are an integral part of our business model and growth strategy, and to the Strategic Alliance Agreement with NPDC. 

Strengthening the balance sheet

We have continued the programme that we initiated in 2014 to strengthen the balance sheet through the renegotiation and refinancing of our existing debt facilities and the issue of additional equity. During 2015 we successfully refinanced the Accugas infrastructure debt, closed a new $52 million debt facility, put in place a $30 million local currency working capital facility and, in February 2016, we closed an equity issue to raise $100 million from existing investors and a new infrastructure fund. The focus of this ongoing programme is an initiative to put in place a tranche of longer term debt more suited to our midstream infrastructure assets so as to align the debt obligations and availability with the revenue and cash flow profile of the midstream business. Further details can be found in the Financial review.

One of the biggest risks in our business model is the creditworthiness of our gas off-takers and their ability to pay, particularly those in the power sector where the value chain stretches beyond our direct counterparty to the market regulator, the distribution companies and the end users.

This has been and continues to be an area of focus and we have made good progress in renegotiating our gas sales agreements to reduce our risk through enhancing the credit support packages. 

Operational performance

During 2015 we continued to make good progress operationally to be in a position to meet the growing demand of our gas customers as and when they come up to fully operational capacity. Whilst the build-up in demand from these customers during the course of the year was slower than expected, gas sales had increased by over 300% to in excess of 100 MMcfpd by 2015 year end. Construction of the final leg of our pipeline network in the south east Niger Delta region is on budget and on schedule for completion this year, which will position us to supply in excess of 200 MMcfpd from mid-2016, all of which is contracted under long-term fixed price take-or-pay arrangements.

First oil production from both the Uquo and Stubb Creek fields commenced during 2015 and field performance has been in line with expectations. 

We also achieved exploration success on the North East-1 prospect on the Uquo field with commercial discoveries of both oil and gas, adding 20 MMboe gross 2P reserves and extending our reserve life under existing gas sales contracts by a further two years. 

Corporate social responsibility

We place a high priority on the health, safety and security of our workforce and the local communities impacted by our operations. We continue to implement best practice in our daily activities in compliance with the highest standards and our track record has been second to none. However, it is with deep regret that I have to report the fatality of a community member in a road traffic accident involving one of our contractors. We are providing support to the family and have introduced additional safe-driving procedures, testing and training to prevent similar tragic accidents. 

Financial performance

In the short term, whilst the Group’s gas business builds up to full operational capacity, the Group’s financial performance is still materially influenced by the oil price and this is reflected in the financial performance for 2015.

Total revenue decreased by $24 million to $354 million (2014: $378 million), but this decrease masks a significant 171% increase in gas revenues to $92 million (2014: $34 million). Oil revenues declined by 24% to $261 million (2014: $344 million) with the lower realised oil price being compensated to some extent by increase lifting volumes under the terms of the Strategic Alliance Agreement on OMLs 4, 38 & 41. EBITDAX was 77% lower at $62 million (2014: $273 million). The lower oil price has also impacted on the carrying value of our interest in OMLs 4, 38 & 41 which has resulted in an impairment charge of $90 million (2014: nil) which is a contributing factor in the reported loss after tax of $182 million (2014: profit after tax $55 million). Net cash flow generated from operations increased by 52% to $215 million (2014: $141 million), predominantly as a result of increased cash flow from our integrated gas business. Capital investment in 2015 amounted to $238 million (2014: $912 million), of which $125 million (2014: $408 million) related to OMLs 4, 38 & 41. 

Board changes

We remain committed to high standards of corporate governance, whilst recognising that it should always be fit for purpose. Following the most recent equity raise we now have nine shareholder representatives (including designate Chairman and Executive Director) on the Board of Directors, recognising the significance of their ongoing financial and strategic support to the Company, representing as they do approximately 75% of the issued and voting share capital. Given the diversified nature of the shareholder base the rationale for the Company to also retain all of its independent Non-executive Directors at this stage in the Company’s development is significantly diminished so Clare Spottiswoode, Fidelis Oditah and myself will be stepping down as Directors of the Company at this year’s Annual General Meeting, with Matthew Harwood succeeding me as Chairman of the Board. I would like to thank Clare and Fidelis for their valuable contribution to the Company. 

Outlook

The oil price hiatus will continue to present short-term challenges, adversely impacting our cash flow and market sentiment generally as we look to continue to strengthen our balance sheet, at a time when our gas business is still growing to full operational capacity. However, we will see our capital expenditure programme for 2016 decrease significantly in the south east Niger Delta as we complete our distribution network, and we are continuing to closely examine our cost base to achieve sustainable savings as we restructure our business. During 2015 we reduced our operating cost base by 20%, and we expect to realise further annual cost savings of 20 – 30% as we sharpen the focus of our business to maximise shareholder value. This will position us with a leaner, more efficient organisation, to exploit what I believe is a strong and sustainable business model, with excellent long-term growth potential.

Finally, I would like to thank shareholders, management and employees for their continued support, contribution and commitment in these very challenging, yet progressive times.

Dr Andrew Jamieson OBE
Chairman