Upstream Oil & Gas Sector in H2-2020

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The global Oil & Gas sector was certainly one of the hardest-hit sectors by the COVID-19 pandemic, as global economic lockdowns crippled the demand for crude oil and Saudi – Russia oil price war triggered a decline in global crude oil price.

In Nigeria, the upstream oil sector was the worst hit, given the unfavourable pricing of the country’s Official Selling Prices (OSP) for its crude grades, relative to higher production costs incurred by operators.

Upstream Oil & Gas Sector in H2-2020
Sources: Bloomberg, United Capital Research

These dynamics forced upstream operators to cut back on production activities, evident by the decline in rig count to the lowest in 2 years and confirmed by the recently published H1-2020 financial statement of SEPLAT, which showed a 26.5% y/y decline in Revenue and a Loss after tax of N37.8bn.

Looking ahead, given Nigeria’s partial-compliance to the OPEC+ quota in Q2-2020, the country is required to compensate by deeper supply cuts in Q3-2020 for the excess production.

Also, given the unprecedented level of shock to oil prices caused by the pandemic, we expect upstream oil activities in H2-2020 to be focused on cost, production and cash optimization.

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Notably, the NNPC is targeting an operating cost of $10.0/ b among all oil producers, with costs for JV and PSC operators in Nigeria estimated around $25.0/ b and $17.7/ b respectively. For SEPLAT, the only upstream oil player under our coverage, our outlook for the year is muted, amid lower oil prices.

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United Capital Research

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