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Seplat hedged its oil at $45 per barrel, should Nigeria be doing the same?

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Seplat Production Development Company is a Nigerian indigenous oil and gas firm that is listed on the London Stock Exchange (LSE) and Nigerian Stock Exchange (NSE).

One interesting thing gleaned from Seplats First Quarter (Q1), results is that it hedged its oil production though the third quarter of 2020, enabling it to virtually side-step the carnage currently ongoing in the global oil markets.
Seplat’s hedging policy aims to guarantee appropriate levels of cash flow assurance in times of oil price weakness and volatility.

The 2020 hedging programme consists of up-front premium put options at a strike price of US$45.0/bbl protecting a volume of 4.5 MMbbls (in aggregate) for the first three quarters of 2020.

Basically the put options guarantees that whoever is on the other side of the trade (the counterparty) will buy Seplat’s oil at $45 per barrel regardless of the price it’s at below that level ($45).

Following the oil price crash at the end of Q1 2020 and in line with IFRS, the hedges were fair valued by Seplat leading to a Market to Market gain (MTM) of $19.2 million.

Seplat says its Board and management team continue to closely monitor prevailing oil market dynamics and will consider further measures to provide appropriate levels of cash flow assurance in times of oil price weakness and volatility.

So should the Nigerian Government consider major hedges for its oil production?

One country that has seemingly mastered the art is Mexico, which spends an estimated $1 billion putting up downside protection hedges for its oil every year.

The hedges do come in handy when oil prices fall and Mexico will make a lot of money from them this year.

For Nigeria we would recommend a study by the Federal Government and NNPC to determine if the benefits of hedging some of our oil production outweighs the costs.

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