Oil firms’ cash flows worsen, banks jittery

Nigerian indigenous oil and gas firms are recording negative cash flows as the plunge in global oil prices lingers, a development that has sent shivers down the spines of many banks.

Nigerian banks have in recent years increased their exposure to the nation’s oil and gas sector, providing financing for asset acquisitions and development by indigenous firms.

Industry players, who spoke at the 13th Aret Adams Annual Lecture Series in Lagos on Thursday, lamented that the low oil price had severely affected their operations, leading to huge cuts in capital expenditure and affecting their ability to repay loans.

The Managing Director and Chief Executive Officer, Seplat Petroleum Development Company Plc, a major Nigerian independent oil and gas firm, Mr. Austin Avuru, said, “Exploration and production companies are now constrained. I think the banks are more nervous than the operating companies in Nigeria.

“We saw a profit warning yesterday (Wednesday) from First Bank describing impairments that are likely to erode their P&L bottom line when they publish their 2015 results. That is a warning to shareholders and investors and that is because of their exposure to the upstream segment of the oil and gas industry.”

He said exploration investments had almost dried up, adding that the implications would become evident later as addition to reserves would flatten out.

Avuru said, “When people ask me how we are doing, I say we are under water. If you can survive at the end of 2017 under this regime, you will be in business for all time. I suspect that there will be a lot of dead bodies by the end of 2017.

“The biggest problem with the independents is that we are all heavily leveraged. You borrowed to buy our assets. You borrowed to work the assets, and deployed critical capital expenditure so that you can ramp up production; so that you can repay your debts. Then came the drop in price. You cannot grow production because you don’t have the free cash flow to do that. You need production, even more production in this price regime.

“So our biggest problem is our discussion with our bankers. Most of us are now cash negative. As I said, you need more cash to do investment to grow oil production to be able to meet your obligations and that is exactly what you don’t have. For the majors, usually what they need to do is cut capex, fire some employees to balance their books and explain to their shareholders why they are reducing marginally the dividend payout.”

Avuru said the service companies had been hardest hit, adding, “57 per cent of the land rigs in Nigeria today are idle. Each of these will ordinarily be employing some 210 people. In 2013, we were operating seven rigs in Seplat, we dropped our last rig in November 2015. We don’t have a rig working for us now. Service companies are in serious trouble.”

The Managing Director and Chief Executive Officer, Chevron Nigeria Limited, Mr. Clay Neff, who described the drop in oil prices as dramatic by any scale or stretch, said, “We are going through challenging times. Development work has dropped significantly. New projects are being slowed down because the economics don’t justify going forward.”

He stressed the need to address the funding challenge facing joint venture oil and gas assets in Nigeria, putting the cash call arrears owed by the Nigerian National Petroleum Corporation at over $5bn.


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