Reviewed Condensed Consolidated Interim Results for the six months ended 31 August 2015
24 Nov 2015
SACOIL HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1993/000460/06)
JSE share code: SCL AIM share code: SAC
(“SacOil” or “the Company” or together with its subsidiaries “the Group”)
REVIEWED CONDENSED CONSOLIDATED INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2015
- Refund of $10 million on expiry of the OPL 233 performance bond
- Lagia: Commencement of installation of steam facilities
- Agreement reached on the settlement of the EERNL loans
- Completion of exit from OPL 233
Commenting on the results, SacOil’s CEO Dr. Thabo Kgogo said:
“The transformation of SacOil into a production company remains the priority of the Board. In this regard, significant progress has been made in advancing the Lagia development activities to ensure that we reach the targeted production of 1 000 bbl/d by the end of the 2016 financial year.
We look forward to an exciting run to the end of the financial year. Our key priorities for the next six months are the completion of the Lagia development activities and the advancement of our other exploration assets.”
SacOil Holdings Limited
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SacOil is a South African based independent African oil and gas company, dual-listed on the JSE and AIM, with business operations in Egypt, the Democratic Republic of Congo (“DRC”), the Republic of Malawi and the Republic of Botswana. SacOil also operated in Nigeria until 19 May 2015. The Company has partnered with the Public Investment Corporation SOC Limited and the Instituto de Gestão das Participações do Estado on a project that entails the construction of a gas pipeline from Mozambique to South Africa and the distribution and marketing of gas in southern Africa. The Company continues to evaluate opportunities to secure high impact acreage in other established and prolific hydrocarbon basins in Africa.
Chief Executive’s report
During the period, we continued to execute the Group’s revised strategy to rationalise its portfolio of assets with the exit from OPL 233 in May 2015. This marked a significant improvement in the Group’s financial stability due to the reduction in commitments and the refund of the $10 million cash collateral which previously secured the OPL 233 performance bond. The cash resources of the Group of R196 million (at 31 August 2015) are now available to facilitate the growth of its operations and to expand the Group’s footprint on the African continent. Furthermore, the conclusion of a settlement agreement with Energy Equity Resources Norway Limited (“EERNL”) in March 2015 reflects the restructuring of the loans advanced to the EERNL Group relating to OPL 281 and OPL 233.
The transformation of SacOil into a production company remains the priority of the Board. In this regard, significant progress has been made in advancing the Lagia development activities to ensure that we reach the targeted production of 1 000 bbl/d by the end of the 2016 financial year.
We look forward to an exciting run to the end of the financial year. Our key priorities for the next six months are the completion of the Lagia development activities and the advancement of our other exploration assets. The SacOil board and management team continue to vigorously defend the claims from Transcorp and Nigdel in relation to OPL 281 and OPL 233, respectively, and we remain committed to recovering all amounts owed by Transcorp and Nigdel and to institute the requisite counterclaims accordingly. On 28 August 2015, SacOil filed a notice for arbitration with the Nigerian Chartered Institute of Arbitrators, Nigeria Branch to recover farm-in and related fees plus contractual interest thereon from Transcorp. Arbitrators have now been appointed for both matters and SacOil awaits confirmation of the commencement of arbitration proceedings.
With respect to advancing our exploration assets, we look forward to initiating the technical and commercial pre-feasibility studies of a transnational terrestrial gas pipeline and distribution facility that will carry natural gas from Mozambique’s Rovuma fields into South Africa. Furthermore as announced to shareholders on 9 November 2015, we are excited to be part of the Bioko Oil Terminal Project in Equatorial Guinea. Through this project, the Government of Equatorial Guinea aims to establish a premium oil and petroleum storage facility in West and Central Africa, a major transit point for global oil and gas deliveries.
The Group will continue to pursue other oil and gas opportunities on the continent and in doing so will focus on its funding situation to ensure that an adequate capital structure is in place to deliver on the new strategy. Again, we reiterate our strategy of acquiring cash generative assets to underpin the long-term growth of the Company.
Operations for the past six months have primarily focused on the execution of the development plan for the Lagia Oil Field. Shareholders are referred to the announcement issued on SENS and RNS on 17 September 2015 regarding the installation of steam facilities for a thermal recovery process on the existing production wells and plan to drill a minimum of five additional thermal wells with the intent of further enhancing existing production and the recovery of oil from the field. Shareholders are further referred to the announcement dated 16 November 2015 regarding the commencement of drilling operations at the field. Shareholders will be kept informed as the development activities progress.
On 26 March 2015, the Group concluded a settlement agreement with EERNL which terms incorporated an interest freeze on the outstanding loans from 30 November 2014. This reduced investment income from R77.0 million in the prior comparative period to R23.1 million for the period under review, as a significant portion of the Group’s interest income was attributable to the loans advanced to EERNL. Furthermore, the continued operational delays affecting Block III due to the civil unrest in the DRC have resulted in the deferral of the expected receipt of the contingent consideration by a year. The consequence of this deferral is the impairment of the contingent consideration receivable by an amount of R26.1 million (2014: nil) which is reflective of the time value of money. This impairment is included in “other operating costs”. The financial impact of these two events, partially offset by an increase in foreign exchange gains included in “other income”, significantly affected the profit after tax for the period which decreased by 87% from R20.6 million at 31 August 2014 to R2.8 million at 31 August 2015. Foreign exchange gains for the period on the Group’s US Dollar denominated financial assets totalled R57.5 million (2014: foreign exchange losses of R7.2 million).
Production rates at the Lagia Oil Field have remained low due to the development activities currently underway. As previously reported, the next phase of the activities includes the installation of steam facilities for a thermal recovery process on the existing production wells and the drilling of a minimum of five additional thermal wells with the intent to further enhance production and the recovery of oil. Consequently, oil revenue for the period is minimal at R3.0 million (2014: nil).
Excluding the impairment of the contingent consideration of R26.1 million (2014: nil), the Group’s other operating costs decreased by 27%. There were no exchange losses incurred during the period (2014: R7.2 million) and no provision was raised for the impairment of the EERNL loans (2014: R19.7 million). The decrease was however offset by increases in operational costs to support the execution of the Group’s revised strategy. The Group’s other operating expenses are disclosed in note 3.
Oil and gas properties increased by R23.9 million due to additions of steaming and other equipment totalling R6.5 million (28 February 2015: R7.3 million), foreign exchange gains of R18.5 million (28 February 2015: R5.8 million) on translation of foreign operations net of depletion of R1.1 million (28 February 2015: R0.3 million). Movements in the Group’s oil and gas properties are also provided in note 7.
Other financial assets (current and non-current), as disclosed in note 8, increased by R15.5 million to R692.9 million (28 February 2015: R677.4 million). The net movement comprises:
• interest of R17.9 million on the contingent consideration (R12.4 million), advance payment against future services
(R3.4 million) and other financial assets (R2.1 million);
• foreign exchange gains totalling R84.8 million on the US Dollar denominated contingent consideration and loan due from EERNL;
• an impairment charge of R26.1 million on the contingent consideration; and
• a part repayment of the EERNL loan of R61.1 million from EERNL’s 50% share of the cash collateral received on
5 June 2015 (see note 9).
Movements in the Group’s cash and cash equivalents are provided in the cash flow statement. The restriction on the cash collateral (see note 9) was lifted on 2 May 2015 upon the expiry of the OPL 233 performance bond.
The decrease in other financial liabilities corresponds with the offset of EERNL’s indebtedness to SacOil as disclosed in note 11. The liability was initially recognised to account for EERNL’s 50% share of the cash collateral held in the bank account of SacOil’s wholly owned subsidiary, SacOil 233 Nigeria Limited, on behalf of EERNL.
Movements in the Group’s exploration and evaluations assets, other intangible assets, property, plant and equipment, inventories, trade and other receivables and trade and other payables were not significant for the period under review.
EXIT FROM OPL 233 AND OPL 281
Pursuant to the Board’s decision to investigate the termination of the Group’s participation in OPL 233 in Nigeria, SacOil officially notified Nigdel of its decision to terminate on 19 May 2015. Pursuant to the exit SacOil will not have future commitments and obligations associated with the appraisal of OPL 233 (2014: R386.2 million). Furthermore, the farm-in fee which would have been payable to Nigdel and the transaction fee which would have been payable to EERNL of US$10.6 million and US$2.5 million, respectively, are no longer due and payable. The termination of the Group’s participation in OPL 233 does not represent an exit from Nigeria, as the country has significant oil and gas opportunities which the Group will continue to investigate. Instead, this is reflective of portfolio rationalisation undertaken by the Group to focus on cash generative assets.
At 31 August 2015, OPL 233 remains classified as held for sale pending the conclusion of the recovery process initiated by SacOil under the terms of the Farm-in Agreement with Nigdel. As previously communicated to shareholders in the annual report for the financial year ended 28 February 2015, Nigdel has also initiated arbitration and court proceedings to dispute the terms of SacOil’s exit from the asset. The directors of SacOil remain confident that their claim against Nigdel is valid. Disclosures relating to the non-current asset held for sale are provided in note 10.
As disclosed in the annual report for the year ended 28 February 2015, Transcorp, the operator of OPL 281, instituted action in the High Court of Lagos State on 18 June 2015 against SacOil 281 Nigeria Limited (“SacOil 281”) and EER 281 Nigeria Limited (“EER 281”) for the wrongful termination of the Farm-out and Participation Agreement and is seeking special damages for the wrongful termination. In support of its action Transcorp claims that SacOil 281 and EER 281 are not entitled to any refund or repayment, in particular the $8.75 million (signature bonus) and $3.75 million (initial fee). The Group is defending the action instituted by Transcorp. The directors of SacOil remain confident that their claim against Transcorp is valid.
As previously communicated to shareholders, the Board engaged Ernst & Young Inc. (“EY”) to carry out an investigation of specific historical transactions of the Group between 1 August 2011 and 30 November 2011 relating to the Group’s unsuccessful attempt to acquire interests in Blocks I and II in the DRC, amongst other matters. The forensic investigation was finalised during September 2015. The Board met on 29 September 2015 to consider the findings in the final report (“the Report”) issued by EY which confirmed the occurrence of certain irregularities committed by previous management. The Board has now engaged lawyers to evaluate and respond to the recommendations provided in the Report. The evaluation of the recommendations is currently ongoing. The Board is also in the process of informing the relevant regulatory authorities of irregularities identified in the Report.
Good progress has been made in advancing the Lagia operations. Management will continue to focus on the completion of the development activities at the Lagia Oil Field which will see the Group achieve the targeted production of 1 000 bbl/d. Management also remains focused on defending the legal actions instituted by its previous partners Nigdel and Transcorp and will keep shareholders informed of progress in this regard.
The Group will continue to pursue other oil and gas opportunities on the continent and in doing so will focus on its funding situation to ensure that an adequate capital structure is in place to deliver on the new strategy.
The Board has performed an assessment of the Group’s operations relative to available cash resources and is confident that the Group is able to continue operating for the next 12 months. The Group interim financial statements presented have been prepared on a going concern basis.
Change in directorate
Gontse Moseneke resigned from the Board of SacOil on 1 October 2015.
The interim results are available for download: