Seplat Petroleum Development Company Plc an indigenous Nigerian oil and gas firm spent $8.3 million in buying put options for its oil production at a Brent crude strike price of $45 per barrel (January to June) and $40 per barrel (June to December for an undisclosed sum), according to recently released First Quarter 2016 results.
This is as Brent crude prices edged to new 2016 highs on Friday, lifted by a weak dollar and falling production in the United States.
Brent crude futures were trading at $48.30 a barrel at 0.644 GMT up 16 cents from their last close.
The put options basically compel the counterparty to buy 3.3 MM bbls of Seplats crude oil at $45 per barrel between January and June and 2.7 MM bbls of crude produced by Seplat at $40 per barrel between June and December, irrespective of where oil prices are trading.
The total volume of crude lifted by Seplat in the first three months of 2016 was 1.1 MMbbls compared to 1.8 MMbbls in 2015, meaning the Put contract would cover over 100 percent of Seplats 2016 oil production if production rates remain at this level for the year.
The contracts make sense if oil prices are falling (to say near $20 per barrel) but would have Seplat leaving a considerable amount of money on the table if crude prices were to rise to $50 per barrel and above.
According to the Company:
“Having put in place at the end of 2015 dated Brent puts covering a volume of 3.3 MMbbls to June 2016 at a strike price of US$45.0/bbl, the net amount paid out to end March was US$8.3 million. In March 2016, the Company extended its hedging by entering into dated Brent puts covering a further volume of 2.7 MMbbls hedged at a strike price US$40.0/bbl over the second half of the year.”
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Seplat’s Gross revenue for the first three months was US$83 million (N16.6 billion), down 36% year-on-year (2015: US$131 million (N25.6 billion)) reflecting lower oil price realisations and shut-in of the Forcados terminal.
The Company reported a net loss for the first three months of US$19 million (N4.3 billion) compared to a net profit of US$23 million (N20.5 billion) in 2015.
Shareholders may want to keep a closer eye on Seplats hedging contracts which has the potential to lose the company money as the oil firm navigates a challenging operating environment and the prospects of its pioneer tax status not being extended.