As someone with more than 20 years of experience in the oil industry in both the producing and service manufacturing arenas, George Maxwell, chief executive of Eland Oil & Gas, was ideally placed to see the potential in Nigeria.
“Nigeria is one of the few places that has a very stable fiscal environment,” he tells Panmure Gordon’s chief economist Simon French and our senior market commentator, David Buik. “Unlike places like the UK or the US you don’t see windfall profit tax coming through from Nigeria when there are high oil prices. Equally, there are some investment incentives given at low oil prices.
“The other main reason is that it’s obviously one of the most prolific oil and gas regions in the world. It’s the largest producer in Africa, it is quite an open market. There are very few places where you can buy assets of such size and such quality with low geological risk but still have an environment where the monetization of the crude and the repatriation of those funds back to London or back to investors is always possible.”
Eland Oil & Gas is an independent company focused on production, development and exploration in West Africa, particularly the highly prolific Niger Delta region. It is listed on the London AIM market.
Prior to being appointed CEO three years ago, Maxwell had served on the board since September 2009. During his career, he has worked all over the world and held high profile roles including with Addax and ABB Oil & Gas.
At present, Eland is valued at £120 million, and its shares are up 35% from the start of 2017. Since it floated in August 2012 (it was formed in 2010), Eland has exhibited more resilience than the benchmark UK-listed oil and gas sector and has outperformed that index by 33%.
Maxwell attributes the company’s success at weathering a tough sector to a number of factors, not least having a good asset. He says: “At the end of the day if we’re an oil and gas company, all the value is under the ground.”
How are Eland Oil & Gas creating sustainable investments?
Among the successful strategies employed by the firm has been making use of key personnel’s experience in Nigeria, paying close attention to effective cost control, and investing in the local region.
French comments on the quality of the asset, saying that these are “quite spectacular numbers”. For example, the cost of extraction is $6 a barrel and the cost of transportation with the pipeline is $2.50 a barrel. Added to that is a 20% royalty tax. This is a low break-even cost particularly when the cost of Brent is touching $60 a barrel.
Maxwell agrees that Eland is in a low-cost environment, and points to a change in direction for the firm back in 2014. Before that, the company had a strategy to drill new wells. However, the majority of Eland’s peer group were re-entering old wells and increasing production. “So we decided to look at two wells to see if we could enhance that,” says Maxwell.
Much of Eland’s recent strong performance has been based on impressive uptime numbers (this refers to active time during which equipment or a system is either fully operational or ready to perform its intended use) – this is the key to getting decent export performance and decent cashflow. But how has the business managed to achieve that, and can it be sustained into the second half of the year?
“Certainly the last four months’ uptime performance has been exceptional,” says Maxwell. “If we can maintain around about the 85% level, that’s a very efficient operation for us.”
Is there a future for the Nigerian oil and gas market?
Meanwhile, Buik reflects that Nigeria is synonymous with oil. He asks Maxwell if he’s happy with it as an environment in which to continue the success of the company into the future.
“Absolutely. In running any company you have to take account of all stakeholders in the business whether it’s the investment community, a retail investor or an institutional investor all the way through to the community that you operate within. For me, we do run community programmes and I’m very, very pleased that finally we’ve got the drilling rig in the community. That’s been a major event for the company and I think it’s been a major event for the community as well…I’m very comfortable there.”
Maxwell adds: “With some of the announcements we’ve made recently, we’re beginning to demonstrate that whilst we had a tough time in 2016 and early 2017, Q3 has really seen the company start to generate a lot of cash, start to be able to work its way through the difficulties we had in 2016. And that’s going to continue through the second half of 2017.”