Friday, December 2, 2022

Review of the consolidated financials of the Stabroek Block co-venturers

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OilNOW
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By Joel Bhagwandin – OilNOW

Revenue

The consolidated financial statements for ExxonMobil Guyana, Hess and CNOOC for the period ended December 2021 revealed total revenue of GY$545b up from GY$176b recorded in the previous year or by GY$369b representing an increase of 210%.

Expenditure

Total operating expenditure increased from GY$166b in FY 2020 to GY$230b in FY 2021, representing a 38% increase.  Notably, total operating expenditure represented 94% of revenue in FY 2020 and decreased to 42% of revenue in FY 2021.

Financing cost increased from GY$521m in FY 2020 to GY$822m in FY 2021 or by 57%, representing 0.15% of gross revenue.

Profit Oil and Cost Recovery

The consolidated statement of comprehensive income / loss recorded for FY 2021 recorded a profit of GY$314b representing an increase of GY$305b when compared to FY 2020 position or an increase of 3158%.

It should be noted, however, that the oil companies did not collectively walk away with GY$314b or US$1.5b in profit as is being misconstrued by some commentators and local journalists/media houses.

In accordance with the fiscal provisions in the Production Sharing Agreement (PSA), cost recovery which includes recovery of the initial capital expenditure (CAPEX) (pre-exploration, exploration and development costs), and operating expenditure (OPEX) is capped at 75% of revenue. Hence, with the application of this formula profit oil for FY 2020 was GY$44b which increased to GY$136.3b in FY 2021 or by 210%. As such, Guyana’s share of profit oil amounted to GY$22b in FY 2020 and GY$68b in FY2021.

Guyana’s Net Take: Royalty and Profit Oil

Guyana’s total share of profit oil and royalty for FY 2020 amounted to GY$25.5b which increased to GY$79b in FY 2021 – while the oil companies net take in profit oil for FY2020 amounted to GY$22b which increased to GY$68.1b FY 2021. This means that Guyana’s share in profit and royalty is greater than the net profit of the oil companies.  Further to note, royalty is paid to Guyana in cash while profit oil is paid in raw crude which means Guyana is responsible for the marketing and sales of its share of crude. Consequently, Guyana’s share in profit oil is in actuality greater than the oil companies.

There is likely to be a marginal disparity in the exchange rate applied by the oil companies versus Guyana’s share of profit oil and royalty which would account for the higher difference accrued to Guyana albeit to a lesser extent (prevailing average market rate is GY$215 whereas the Bank of Guyana average rate is GY$209.2, approximately GY$6 lower than the market average).

To that end, the table below illustrates a comparison of Guyana’s actual profit oil paid into the Natural Resource Fund (NRF) versus the profit as reported in the financial statements.

As shown in the table (a) above, Guyana’s total share in royalty and profit oil according to the in the financial statements would have worked out to be GY$25.5b. The actual profit oil and royalty for the said period as reported in the NRF, however, stood at GY$41.3b in FY2020 representing a favourable variance of GY$15.8b or 88% while for FY 2021 Guyana’s total share stood at GY$85.3b as reported in the NRF, representing GY$17.1b or 25% more than what is reported in the financial statements of the oil companies.

Moreover, the oil companies share of profit oil for FY 2021 amounted to GY$68b while Guyana’s total [actual] share in royalty and profit oil stood at $85.3b – that is, GY$17b or 25% more than the oil companies.

Statement of Financial Position

The total assets for the oil companies grew from GY$1.2t in FY 2019 to GY$1.9t in FY 2020, representing an increase of $641.5b or 55%.

Total liabilities grew from a position of GY$651.4b in FY 2019 to GY$763b in FY 2020 representing an increase of GY$111.7b or 17% and 54% of total assets.

Total equity increased from GY$546.7b in FY 2020 to GY$1.129t in FY 2021 representing an increase of GY$581.7b or 106.4% and 46% of total assets.

Key Financial Ratios

The financial ratios above indicate that ExxonMobil and its consortium partners, Hess and CNOOC (Guyana operations) outperformed the global industry averages, where the performance indicators for profitability and asset management or efficiency ratios were all in the negative for FY 2020 and FY 2021.

Most importantly, oil companies typically employ a low level of debt in their capital structure. This is largely because of the complex nature and high-risk factor of the industry where the life cycle between exploration stage, development and production stages can be as long as 10 – 20 years. In the case of Guyana, for example, exploration commenced shortly after the 1999 agreement was signed with ExxonMobil, oil was discovered in commercial quantities in 2015, approximately 16 years later, and production commenced another 5 years later following the development stage. Altogether, the exploration to production lifecycle in Guyana spanned almost two decades. Then, another two years later, into production, the oil companies made a profit.

That said, the long term-debt-to-equity ratio for the oil companies operating in Guyana is 0.2 or 20%. This means 80% of the companies’ capital structure comprise of equity financing (typically, this ratio for other industries is as high as 50% – 70%).

More so, owing to this low level of long-term debt, the financing cost as shown in the statement of comprehensive income represents less than one percent of revenue. Thus, the companies financing expense has virtually zero impact on profit oil for Guyana and the oil companies share of profit.

About the Author

Joel Bhagwandin is a financial and economic analyst, an academic researcher and writer, a junior business executive, lecturer, and thought leader. Joel is actively engaged in providing insights and analyses on a range of public policy, economic and macrofinance issues in Guyana for the past 5+ years. In this regard, he has authored more than 300 articles covering a variety of thematic areas. Joel possesses more than fourteen years’ experience in the financial sector and private sector development combined. During this time, he has accumulated more than five years of professional experience in providing financial and business advice to both large corporations and Small and Medium sized Enterprises (SMEs) and eight years’ managerial experience. Academically, Mr. Bhagwandin is the holder of a master’s degree in business management with specialisation in banking and finance from Edinburgh Napier University. His specialties and skills include: Corporate Finance, Banking, Capital Markets & Securities, Business Intelligence & Data Analysis.

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