Africa Oil Corp. is pleased to announce its operating and consolidated financial results for the three and nine months ended September 30, 2020. The Company is also providing a revision to its 2020 Management Guidance and an organizational update. All dollar amounts are in United States dollars unless otherwise indicated.
• The Company has received an additional $50 million in dividends from Prime1 subsequent to the previous reporting period. This brings the total dividends amount to $162.5 million since Africa Oil closed the Prime acquisition on January 14, 2020.
• Significant progress on deleveraging, including a 34% reduction in the corporate term loan from $250 million to $164.8 million, and a 29% reduction in the Prime RBL facility from $1,825 million to $1,303 million, for the year to date.
• Africa Oil third quarter net income of $21.2 million and nine-month net income of $118.1 million, excluding a $215.6 million non-cash impairment of Kenya exploration assets posted in the first quarter 2020.
• Selected Prime’s third quarter 2020 results net to Africa Oil’s 50% shareholding*:
o average daily working interest (“W.I.”) production3 of 26.9 thousand barrels of oil equivalent per day (“kboepd”) and economic entitlement production4 of 27.8 kboepd with 83% in oil production (nine-month period: W.I. production of 29.5 kboepd and economic entitlement production of 35.3 kboepd with 85% in oil production);
o sales revenues of $212.5 million (nine-month period: $551.2 million);
o adjusted EBITDA5 of $99.0 million (nine-month period: $490.3 million); and
o cash flow from operations of $107.5 million (nine-month period: $438.0 million).
• Exploration success continued with the Luiperd discovery on Block 11B/12B, offshore South Africa and the farmout of Transkei/Algoa blocks to Shell.
Africa Oil President and CEO Keith Hill commented: “I am pleased to report another strong quarter with a profit of $21.2 million. Despite these challenging times, our Nigerian assets continue to perform well, and we continue to deleverage despite the OPEC+ cuts imposed on the Egina field. During 2020 we have repaid 34% of our BTG term loan and Prime has reduced its RBL facility by 29%.
We have also achieved another significant exploration success on Block 11B/12B, offshore South Africa, with the giant Luiperd discovery. I am delighted that the operator believes that together with last year’s Brulpadda discovery, there is sufficient ground to move the project towards development. I am also confident there is substantial follow-on exploration potential on this world-class block, that complements the development opportunity of the two discoveries.
We are also very pleased that Impact Oil and Gas has expanded its portfolio and attracted a high-quality partner in Royal Dutch Shell to its Transkei and Algoa license, offshore South Africa. Through our shareholding in Africa Energy, Impact and Eco Atlantic, we have interests in an industry leading acreage position in an exciting region extending offshore Namibia and South Africa. We are now looking forward to the spud of Venus exploration well on Block 2913B, in Namibia’s Orange Basin in the first half of 2021, which will target one of the largest submarine fans ever tested by the industry.
Finally, I would like to announce that Tim Thomas, our Chief Operating Officer, has elected to retire at the end of first quarter 2021. I want to personally thank Tim for his dedicated service to the Company over the past few years. He has diligently performed in his operational leadership role, with significant contribution to our project in Kenya and he played a critical role as we executed the acquisition of our producing assets in Nigeria. I wish him the very best in his retirement.”
FINANCIAL POSITION AND EARNINGS
The Company recognized a total operating income of $31.8 million and net income of $21.2 million during the third quarter of 2020. The operating income primarily relates to the Company’s share of profit from its investment in Prime amounting to $32.5 million. For the nine-month period, the Company recognized a net loss of $97.5 million with a total operating income of $149.1 million being offset by $224.6 million in operating expenses, that primarily relates to the recognition of a $215.6 million noncash impairment of intangible exploration assets, relating to the valuation of the Kenyan development project and Kenyan Block 10BA.
The Company ended 2020 third quarter with cash of $30.4 million and working capital of $7.3 million in comparison to cash of $329.5 million and working capital of $290.7 million at the end of 2019. The reduction in the Company’s cash position of $299.1 million is primarily attributed to its acquisition of a 50% shareholding in Prime for $519.5 million. This acquisition was funded with a cash payment of $269.5 million and a term loan facility of $250.0 million.
During the 2020 third quarter, Prime paid one dividend for a total of $50.0 million with net payment to Africa Oil of $25.0 million related to its 50% shareholding interest. The Company applied $17.7 million of the amount received to reduce its BTG term loan, which at the period end stood at $176.9 million.
For the nine-month period ended September 2020, Africa Oil received four dividend payments from Prime for aggregate amount of $137.5 million net to its 50% shareholding.
Post third quarter 2020, Africa Oil received its fifth dividend from Prime, taking the total amount received to $162.5 million net to its 50% shareholding. The Company applied $12.1 million of the amount received to reduce the BTG loan facility to $164.8 million.
Africa Oil will apply any future dividends in priority towards the repayment of its BTG loan facility to accelerate the repayment of the loan principal amount, although the BTG term loan is not due for repayment until January 2022.
To finance its future acquisition, exploration, development and operating costs, including the Kenya development project, Africa Oil may require financing from external sources, including issuance of new shares, issuance of debt or executing working interest farmout or disposition arrangements. There can be no assurance that such financing arrangements will be available to the Company or, if available, that it will be offered on terms acceptable to Africa Oil.
PRIME’S THIRD QUARTER 2020 PERFORMANCE
During the third quarter 2020, Prime’s Egina production was impacted by the OPEC+ quotas, limiting gross field production from the planned capacity of 200.0 kbopd to an average of 134.3 kbopd for the period.
Prime’s third quarter 2020 average daily W.I. production was 26.9 kboepd and economic entitlement production was 27.8 kboepd (83% oil), net to Africa Oil’s 50% shareholding in Prime. Its nine-month average working Interest production was 29.5 kboepd and economic entitlement production was 35.3 kboepd (85% oil), net to Africa Oil’s 50% shareholding in Prime.
Third quarter 2020 average operating cost of $4.4 per boe is 10% below nine-month average of $4.9 per boe, demonstrating significant progress in reducing costs during second and third quarters 2020. No leasing costs are payable for Prime’s Floating Production, Storage and Offloading (“FPSO”) platforms because they are owned by the joint venture partners and are not leased.
All of Prime’s seven planned cargo sales for third quarter 2020 were completed as scheduled. These represent a total sales volume of 6.7 million barrels or 3.4mmbbl net to Africa Oil. In the nine-month period ended September 2020, Prime lifted and sold 17 cargos representing a sales volume of 16.2 million barrels or 8.1 million barrels net to Africa Oil’s shareholding in Prime, at an average price of $65 per barrel.
Prime has sold forward three cargos scheduled for the fourth quarter 2020 with two of these cargoes already lifted and sold in October 2020. Prime has also sold forward or hedged 7 cargoes out of a planned 9 cargoes in the first half of 2021. This results in 10 out of 12 cargoes planned for the fourth quarter 2020 and first half of 2021 being hedged at an average price of $60 per barrel.
Prime achieved third quarter 2020 sales revenues of $212.5 million (nine-month period: $551.3 million); Adjusted EBITDA of $99.0 million (nine-month period: $490.3 million) and cash flow from operations of $107.5 million (nine-month period: $438.0 million), in each case net to Africa Oil’s 50% shareholding.
Prime's total 2020 capital expenditure is expected to be $45 million or 50% lower than the initial budget of $91 million. The reduction includes deferral of infill drilling and activities related to the Preowei field development project due to COVID-19 and the oil price crash. These activities are expected to resume in 2021 as economic conditions improve, subject to partners’ consent.
REVISION TO THE 2020 MANAGEMENT GUIDANCE
The 2020 Management Guidance, as it relates to Prime’s production and free cash flow have been revised. It is important to note that even in these difficult times, the average guidance miss on all categories is 5% or less and is primarily due to OPEC+ curtailments at the Egina Field, a condition we hope to have reversed in the coming months. The revisions are as detailed bellow, in all cases net to Africa Oil’s 50% shareholding in Prime:
• working interest production range of 28.5-29.5 kboepd (previous range: 30.0-33.0 kboepd);
• economic entitlement production range of 33.5-34.5 kboepd (previous range: 35.0-38.0 kboepd);
• capital expenditure of $20-$25 million (previous range: $55-$60 million); and
• free cash flow (cash flow from operations less capital expenditure) range of $535-$565 million (previous range: $570-$625 million).
Africa Oil’s 2020 corporate budget guidance of $50 million, that includes the Company’s G&A costs, intangible exploration expenditures, Kenya development budget and equity investments in associates, is unchanged.
OTHER POST THIRD QUARTER UPDATES
On October 28, 2020, Africa Oil announced a second significant gas condensate discovery on the Luiperd prospect located on Block 11B/12B, offshore South Africa. The Company holds an indirect interest in the project through its equity interests in Africa Energy Corp. (19.9%) and Impact Oil and Gas Ltd (“Impact”, 31.1%).
On November 4, 2020, Africa Oil announced the entry of BG International Limited, a wholly owned subsidiary of Royal Dutch Shell plc (“Shell”) to the Transkei and Algoa exploration right, offshore South Africa. Through a farm-in agreement with Impact, Shell has acquired a 50% operated interest in the Transkei and Algoa Blocks. Africa Oil holds an indirect interest in these blocks through its shareholding in Impact (31.1%)
During July 2020, a number of COVID-19 cases were detected on Egina and Akpo FPSOs; however, with the prompt execution of the contingency plans by the operator, these were managed proactively with no operational impact on facilities or deferment in production. These facilities were declared COVID-19 free in August. Africa Oil employees mostly continue to work from home and there have been no cases of COVID-19.