Seplat Petroleum Development : PetDevCom Plc - Interim Management Statement & Q1 2018 Results

Seplat Petroleum Development Company Plc

Interim management statement and consolidated interim financial results for the three months ended 31 March 2018

Lagos and London, 30 April 2018: Seplat Petroleum Development Company Plc ('Seplat' or the 'Company'), a leading Nigerian independent oil and gas company listed on both the Nigerian Stock Exchange and London Stock Exchange, today announces its first quarter results. Information contained within this release is un-audited and is subject to further review.

Commenting on the results Austin Avuru, Seplat's Chief Executive Officer, said:

'We have made a good start to 2018. Our core production base remains strong and predictable, the gas business has once again set a new record for quarterly revenue contribution and the steps we took to refinance the balance sheet have significantly strengthened our liquidity position and will allow investments to be scaled up. Our debut bond issuance marks another key milestone for the Company, widening our long term capital base in support of our growth strategy while also reducing overall borrrowing costs. Looking ahead we will return to drilling in the second half of the year as we re-focus our efforts on the numerous high-margin and short-cycle cash return opportunities we have in our portfolio. I am also pleased to report that our strong operational and financial performance has resulted in the Board taking the decision to reinstate the dividend for our shareholders. With our capital structure reset and robust free cash flow generation underpinning the business we also have the headroom to capitalise on inorganic growth opportunities as and when they may arise, in line with our price disciplined approach'.

Q1 2018 Results Highlights

Record quarterly working interest production over the first three months of 2018⁽¹⁾

⁽¹⁾ Liquid production volumes as measured at the LACT unit for OMLs 4, 38 and 41 and OPL 283 flow station. Volumes stated are subject to reconciliation and will differ from sales volumes within the period.

- Production uptime in Q1 stood at 82% with average reconciliation losses of 7.3%; all current production assets have access to two export routes; in addition the Amukpe to Escravos pipeline is expected to be commissioned and operational in Q3 2018 and provide a third liquids export route for assets in OMLs 4, 38 & 41

Increased revenue contribution from the gas business

- Net working interest gas production 158 MMscfd translated into gas revenues of US$40 million, a new quarterly high

- Progressing towards FID for the large scale ANOH gas and condensate development at OML 53 in 2018

Continued strong quarterly financial performance

- Q1 2018 Revenue US$181 million and gross profit US$93 million (51% gross profit margin); EBITDA of US$116 million driven by higher total production and higher oil price realisation of US$65.78/bbl; average gas price US$2.79/Mscf

- Profit before tax for the period US$59 million; Net profit stood at US$21 million after a deferred tax charge of $24million. Cash generated from operations US$46 million versus capex incurred of US$3 million

Balance sheet refinanced and reset to support growth strategy

- Successfully refinanced existing US$300 million revolving credit facility ('RCF') with a new four year US$300 million RCF at LIBOR + 6%; debut US$350 million bond issue priced at 9.25% diverisifies long term capital base

- Proceeds from re-financing used to repay and cancel pre-existing indebtedness; also cash settled US$75 million crude oil prepayments undertaken during the extended period of force majeure in 2016 and 2017

- Cash at bank at 31 March US$361 million; gross debt US$550 million and net debt US$189 million; NPDC receivable reduced to US$16 million

Full-year 2018 guidance

- Full year average working interest production guidance set at 48,000 boepd to 55,000 boepd comprising 24,000 to 29,000 bopd liquids and 148 to 158 MMscfd gas

- 2018 capex guidance set at US$100 million and primarily includes:

- OMLs 4,38,41: One gas production well (will also test exploration/appraisal sequence in the deep section), one gas well workover, NAG booster compression, second condensate train at Oben; upgrades to Sapele gas plant

- OML53: Two oil production well recompletions at Ohaji South; one oil production well workover at Jisike and flow line installation

Q1 2018 interim dividend

- Following a review of Seplat's operational, liquidity and financial position post refinancing the Board has decided to reinstate the dividend for shareholders and a pay a Q1 2018 interim of US$0.05 per share

Important notice

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation. Upon the publication of this announcement via Regulatory Information Service, this inside information is now considered to be in the public domain.

Certain statements included in these results contain forward-looking information concerning Seplat's strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which Seplat operates. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within Seplat's control or can be predicted by Seplat. Although Seplat believes that the expectations and opinions reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations and opinions will prove to have been correct. Actual results and market conditions could differ materially from those set out in the forward-looking statements. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in Seplat or any other entity, and must not be relied upon in any way in connection with any investment decision. Seplat undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required.

Enquiries:

Notes to editors

Seplat Petroleum Development Company Plc is a leading indigenous Nigerian oil and gas exploration and production company with a strategic focus on Nigeria, listed on the Main Market of the London Stock Exchange ('LSE') (LSE:SEPL) and Nigerian Stock Exchange ('NSE') (NSE:SEPLAT).

Seplat is pursuing a Nigeria focused growth strategy and is well-positioned to participate in future divestment programmes by the international oil companies, farm-in opportunities and future licensing rounds. For further information please refer to the company website, http://seplatpetroleum.com/

Interim Condensed Consolidated Financial Statements (Unaudited) Expressed in Naira ('NGN') and US Dollars ('USD')

Interim condensed consolidated statement of profit or loss and other comprehensive income

for the first quarter ended 31 March 2018

The above interim condensed consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.

Interim condensed consolidated statement of financial position

Interim condensed consolidated statement of financial position continued

As at 31 March 2018

The above interim condensed consolidated statement of financial position should be read in conjunction with the accompanying notes.

The Group financial statements of Seplat Development Company Plc and its subsidiaries for the quarter ended 31 March 2018 were authorised for issue in accordance with a resolution of the Directors on 19 April 2018 and were signed on its behalf by

Interim condensed consolidated statement of changes in equity continued

For the first quarter ended 31 March 2018

The above interim condensed consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

Interim condensed consolidated statement of changes in equity continued

For the first quarter ended 31 March 2018

The above interim condensed consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

Interim condensed consolidated statement of cash flow

For the first quarter ended 31 March 2018

The above interim condensed consolidated statement of cashflows should be read in conjunction with the accompanying notes.

Notes to the interim condensed consolidated financial statements

1. Corporate structure and business

Seplat Petroleum Development Company Plc ('Seplat' or the 'Company'), the parent of the Group, was incorporated

on 17 June 2009 as a private limited liability company and re-registered as a public company on 3 October 2014, under

the Companies and Allied Matters Act, CAP C20, Laws of the Federation of Nigeria 2004. The Company commenced

operations on 1 August 2010. The Company is principally engaged in oil and gas exploration and production.

The Company's registered address is: 25a Lugard Avenue, Ikoyi, Lagos, Nigeria.

The Company acquired, pursuant to an agreement for assignment dated 31 January 2010 between the Company, SPDC,

TOTAL and AGIP, a 45% participating interest in the following producing assets:

OML 4, OML 38 and OML 41 located in Nigeria. The total purchase price for these assets was N104 billion (US$340 million) paid at the completion of the acquisition on 31 July 2010 and a contingent payment of N10 billion (US$33 million) payable 30 days after the second anniversary, 31 July 2012, if the average price per barrel of Brent Crude oil over the period from acquisition up to 31 July 2012 exceeds N24,476 (US$80) per barrel. N110 billion (US$358.6 million) was allocated to the producing assets including N5.7 billion (US$18.6 million) as the fair value of the contingent consideration as calculated on acquisition date. The contingent consideration of N10 billion (US$33 million) was paid on 22 October 2012.

In 2013, Newton Energy Limited (''Newton Energy''), an entity previously beneficially owned by the same shareholders

as Seplat, became a subsidiary of the Company. On 1 June 2013, Newton Energy acquired from Pillar Oil Limited (''Pillar

Oil'') a 40 percent Participant interest in producing assets: the Umuseti/Igbuku marginal field area located within OPL

283 (the ''Umuseti/Igbuku Fields'').

On 12 December 2014, Seplat Gas Company Limited ('Seplat Gas') was incorporated as a private limited liability company to engage in oil and gas exploration and production.

In 2015, the Group purchased a 40% participating interest in OML 53, onshore north eastern Niger Delta, from Chevron Nigeria Ltd for N79 billion (US$ 259.4 million). Contingent consideration of US$18.5 million for OML 53 was initially recognised at the fair value of N79 billion(US$12 million) . This is contingent on oil price rising above US$90 (N27,522)/bbl. over the next three years.

In 2017, the Group incorporated a new subsidiary, ANOH Gas Processing Company Limited. The principal activities of the Company is the processing of gas from OML 53.

The Company together with its six wholly owned subsidiaries namely, Newton Energy, which was incorporated on 1

June 2013, Seplat Petroleum Development Company UK Limited ('Seplat UK'), which was incorporated on 21 August

2014, Seplat East Onshore Limited ('Seplat East'), which was incorporated on 12 December 2014, Seplat East Swamp

Company Limited ('Seplat Swamp'), which was incorporated on 12 December 2014, Seplat Gas Company Limited ('Seplat

GAS'), which was incorporated on 12 December 2014 and ANOH Gas Processing Company Limited which was incorporated

on 18 January 2017 are collectively referred to as the Group.

Notes to the interim condensed consolidated financial statements continued

2. Significant changes in the current reporting period

The following significant changes occurred during the reporting period ended 31 March 2018:

· The offering of US$350 million in aggregate principal amount of 9.25% senior notes due April 2023 in March 2018. The notes have been issued by the Group and guaranteed by some of it's subsidiaries. The proceeds of the notes are being used to refinance existing indebtedness and for general corporate purposes.

· The refinancing of an existing US$300 million revolving credit facility due in December 2018 with a new four year US$300 million revolving facility due June 2022 in March 2018. The facility has an initial interest rate of the 6% +Libor (7.7%) with interest payable semi-annually and principal repayable annually. US$200 million was drawn down in March 2018. The proceeds from the notes are being used to repay existing indebtedness.

· The issue of 25,000,000 additional shares in furtherance of the Group's Long Term Incentive Plan in February 2018. The additional issued shares are held by Stanbic IBTC Trustees Limited as Custodian. The Group's share capital as at the reporting date consists of 588,444,561 ordinary shares of N0.50k each, all with voting rights.

3. Summary of significant accounting policies

3.1 Introduction to summary of significant accounting policies

The accounting policies adopted are consistent with those of the previous financial year end corresponding interim reporting period, except for the adoption of new and amended standards which are set out below.

3.2 Basis of preparation

i) Compliance with IFRS

The interim condensed consolidated financial statements of the Group for the first quarter ended 31 March 2018 have been prepared in accordance with the accounting standard IAS 34 Interim financial reporting.

ii) Historical cost convention

The financial information has been prepared under the going concern assumption and historical cost convention, except for contingent consideration and financial instruments on initial recognition measured at fair value. The financial statements are presented in Nigerian Naira and United States Dollars, and all values are rounded to the nearest million (₦'million) and thousand (US$'000) respectively, except when otherwise indicated.

iii) Going concern

Nothing has come to the attention of the directors to indicate that the Group will not remain a going concern for at least twelve months from the date of these financial statements.

iv) New and amended standards adopted by the Group

A number of new or amended standards became applicable for the current reporting period and the Group had to change its accounting policies and make retrospective adjustments as a result of adopting the following standards:

· IFRS 9 Financial Instruments, and

· IFRS 15 Revenue from Contracts with Customers.

The impact of the adoption of these standards and the new accounting policies are disclosed in note 3.3 below. The other standards did not have any impact on the Group's accounting policies and did not require retrospective adjustments

Notes to the interim condensed consolidated financial statements continued

v) New standards and interpretations not yet adopted

The Group has the following standards issued but not yet effective that may have a significant impact on the Group's consolidated financial statements.

a. IFRS 16 Leases

b. Amendments to IAS 19 Employee benefits

These amendments were issued in February 2018. The amendments issued require an entity to use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment or settlement. They also require an entity to recognise in profit or loss as part of past service cost or a gain or loss on settlement, any reduction in a surplus, even if that surplus was not previously recognised because of the impact of the asset ceiling.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Group does not intend to adopt the amendment before its effective date.

c. IFRIC 23- Uncertainty over income tax treatment

These amendments were issued in January 2019. IAS 12 Income taxes specifies requirements for current and deferred tax assets and liabilities. An entity applies the requirements in IAS 12 based on applicable tax laws. It may be unclear how tax law applies to a particular transaction or circumstance. The acceptability of a particular tax treatment under tax law may not be known until the relevant taxation authority or a court takes a decision in the future. Consequently, a dispute or examination of a particular tax treatment by the taxation authority may affect an entity's accounting for a current or deferred tax asset or liability.

These amendments are mandatory for annual periods beginning on or after 1 January 2019. The Group does not intend to adopt the amendment before its effective date.

3.3 Changes in accounting policies

This note explains the impact of the adoption of IFRS 9: Financial Instruments and IFRS 15: Revenue from Contracts with Customers on the Group's financial statements and also discloses the related accounting policies that have been applied from 1 January 2018.

Notes to the interim condensed consolidated financial statements continued

3.3.1 Impact on the financial statements

Except as described below, the accounting policies applied in these interim financial statements are the same as those applied in the Group's consolidated financial statements for the year ended 31 December 2017.

As explained in note 3.3.2 below, IFRS 9: Financial instruments was adopted without restating comparative information. The adjustments arising from the new impairment rules are therefore not reflected in the statement of financial position as at 31 December 2017, but are recognised in the opening statement of financial position on 1 January 2018.

The Group has adopted IFRS 15: Revenue from Contracts with Customers using the simplified method, with the effect of applying this standard recognised at the date of initial application (1 January 2018). Accordingly, the information presented for 2017 financial year has not been restated but is presented, as previously reported, under IAS 18 and related interpretations.

The following tables summarise the impact, net of tax, of transition to IFRS 9 and IFRS 15 for each individual line item for the reporting period ended 31 March 2018. Line items that were not affected by the changes have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated from the numbers provided.

Notes to the interim condensed consolidated financial statements continued

Notes to the interim condensed consolidated financial statements continued

3.3.2 IFRS 9 Financial Instruments - Impact of adoption

IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.

The adoption of IFRS 9: Financial Instruments from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The new accounting policies are set out in note below. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated.

3.3.2.1. Classification and measurement

a) Financial assets

On 1 January 2018 (the date of initial application of IFRS 9), the Group's management assessed the classification of its financial assets which is driven by the cash flow characteristics of the instrument and the business model in which the asset is held.

The Group's financial assets includes cash and cash equivalents, trade and other receivables and contract assets. The Group's business model is to hold these financial assets to collect contractual cash flows and to earn contractual interest. For cash and cash equivalents, interest is based on prevailing market rates of the respective bank accounts in which the cash and cash equivalents are domiciled. Interest on trade and other receivables is earned on defaulted payments in accordance with the Joint operating agreement (JOA). The contractual cash flows arising from these assets represent solely payments of principal and interest (SPPI).

Cash and cash equivalents, trade and other receivables and contract assets that have previously been classified as loans and receivables (L and R) are now classified at amortised cost.

Since there was no change in the measurement basis except for nomenclature change, opening retained earnings was not impacted (no differences between the previous carrying amount and the revised carrying amount of these assets at 1 January 2018).

b) Financial liabilities

Following the adoption of IFRS 9, the Group no longer has a choice to either recognise gain or loss from the refinancing of a borrowing on day 1 or defer any gain or loss over the remaining life of the borrowing by adjusting the effective interest rate, on the basis that the terms and conditions of the facility remained largely unchanged. Day one gain or loss must now be recognised at once. No retrospective adjustments have been made in relation to this change as at 1 January 2018.

The Group has contingent consideration for the purchase of OML 53 which is carried at fair value in accordance with IAS 39. Under IFRS 9, the contingent consideration continues to be measured at fair value with total fair value movements recognised in profit or loss.

Notes to the interim condensed consolidated financial statements continued

On the date of initial application, 1 January 2018, the financial instruments of the Group were classified as follows:

*Other receivables exclude NGMC VAT receivables, cash advance and advance payments.

** Trade and other payables excludes accruals, provisions, bonus, VAT, Withholding tax, deferred revenue and royalties.

3.3.2.2. Impairment of financial assets

The total impact on the Group's retained earnings as at 1 January 2018 and 31 March 2018 is as follows:

The Group has six types of financial assets that are subject to IFRS 9's new expected credit loss model. The Group was required to revise its impairment methododgy under IFRS 9 for each of these classes of assets. The impact of the change in impairment methodology on the Group's retained earnings is disclosed in the table in note 3.3.2 above.

Notes to the interim condensed consolidated financial statements continued

§Nigerian Petroleum Development Company (NPDC) receivables

§National Petroleum Investment Management Services (NAPIMS)

§Trade receivables

§Contract assets

§ Other receivables and;

§Cash and cash equivalents

a) Nigerian Petroleum Development Company (NPDC) receivables

The Group applies the IFRS 9 general model to measuring expected credit losses (ECL) which uses a three-stage approach in recognising the expected loss allowance for NPDC receivables. The Group measures loss allowance at an amount equal to lifetime ECL as these assets do not contain a significant financing component.

The ECL recognised for the period is a probability-weighted estimate of credit losses discounted at the effective interest rate of the financial asset. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the Group in accordance with the contract and the cash flows that the Group expects to receive).

The ECL was calculated based on actual credit loss experience from 2014, which is the date the Group initially became a party to the contract. The following analysis provides further detail about the calculation of ECLs related to these assets. The Group considers the model and the assumptions used in calculating these ECLs as key sources of estimation uncertainty.

1 January 2018

*Exposure at default

31 March 2018

31 March 2018

The reconciliation of loss allowances for Nigerian Petroleum Development Company (NPDC) receivables as at 1 January 2018 and 31 March 2018 is as follows:

Notes to the interim condensed consolidated financial statements continued

*Stage 1 includes receivables that are less than 30 days past due (Performing).

*Stage 2 includes receivables that are more than 30 days past due but less than 90 days past due. These receivables have experienced a significant increase in credit risk.

*Stage 3 receivables that are more than 90 days past due i.e. these receivables are in default.

Probability of default (PD)

The credit rating of Federal Government bonds was used to reflect the assessment of the probability of default on these receivables. This was supplemented with external data from credit bureau scoring information from Standard & Poor's (S&P) to arrive at a 12-month PD of 3.9%. Lifetime PD (stage 2) was assumed to be the 12-month PD as the maximum contractual period over which the Group is exposed to credit risk is less than 12 months. The PD for Stage 3 receivables was 100% as these amounts were deemed to be in default using the days past due criteria. (See note 3.3.3 for definition of default).

Loss given default (LGD)

The 12-month LGD was calculated as the present value of the percentage loss on the outstanding NPDC receivables adjusted with forward looking macroeconomic indicators. The 12-month LGD assumptions are a reasonable proxy of lifetime LGD.

Exposure at default (EAD)

This is the amount that best represents the maximum exposure to credit risk at the end of the reporting period without taking account of any collateral.

Macroeconomic indicators

The real historical gross domestic product (GDP) growth rate in Nigeria and crude oil price were identified as the key economic variables impacting the credit risk on these receivables. Forecasts of these economic variables ( the 'base economic scenario') provide the best estimate view of the economy in the last ten (10) years. In addition to the base economic scenario, two additional scenarios (optimistic and downturn) were used along with scenario weightings.

The probability weight attached to each of the scenarios was determined using the GDP growth rates. The historical GDP growth rates were evaluated at 75% confidence interval. Based on this confidence interval, 89% of historical GDP growth rate observation falls within the acceptable bounds, 2% of the observation relates to period of boom while 9% of the observation relate to periods ofrecession/downturn.

b) National Petroleum Investment Management Services (NAPIMS) receivables

The Group applies the IFRS 9 general model to measuring expected credit losses (ECL) which uses a three-stage approach in recognising the expected loss allowance for NAPIMS receivables. The Group measures loss allowance at an amount equal to lifetime ECL as these assets do not contain a significant financing component.

The ECL was calculated based on actual credit loss experience from 2016, which is the date the Group initially became a party to the contract. The following analysis provides further detail about the calculation of ECLs related to these assets. The Group considers the model and the assumptions used in calculating these ECLs as key sources of estimation uncertainty. The explanation of inputs, assumptions and estimation techniques used are consistent with those for NPDC receivables.

1 January 2018

Notes to the interim condensed consolidated financial statements continued

31 March 2018

The reconciliation of loss allowances for National Petroleum Investment Management Services receivables as at 1 January 2018 and 31 March 2018 is as follows:

c) Trade receivables and contract assets

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.

To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due criterion. Contract assets relate to unbilled receivables for the delivery of gas supplies in which NGMC has taken delivery of but has not been invoiced as at the end of the reporting period. These assets have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets.

Trade receivables and contract assets include amounts receivable from Mercuria Energy Group, Shell Western Supply, Pillar Limited and Nigerian Gas Marketing Company (NGMC).

For Mecuria Energy Group and Shell Western Supply, impairment was assessed to be immaterial as there has been no history of default (i.e. the Group receives the outstanding amount within the standard payment period of 30 days) and there has been no dispute arising on the invoiced amount from both parties.

The Group also assessed for impairment on receivable balances from Pillar Limited and Nigerian Gas Marketing Company (NGMC) using outstanding payments from 2014 to model the expected loss rates. Based on this assessment, the identified impairment loss as at 1 January 2018 and 31 March 2018 was immaterial there has been no history of default or dispute on the receivables. The impairment allowance on these assets was nil under the incurred loss model of IAS 39.

d) Other receivables

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all financial assets that are classified within other receivables.

Other receivables relate only to staff receivables. Impairment allowance was assessed to be immaterial. This was on the basis that there has been no history of default on these assets as repayments are deducted directly from the staff's monthly salary. In addition, the outstanding balance as at the 31 March 2018 and 31 December 2017 was deemed to be immaterial N7.1 million, 2017: N4.5 million (US$ 23,288, 2017: $14,598). The impairment was nil under the incurred loss model of IAS 39.

Notes to the interim condensed consolidated financial statements continued

e) Cash and cash equivalents

While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

3.3.2.3. Hedge accounting

As at the reporting periods ended 31 December 2017 and 31 March 2018, the Group had no derivative assets or liabilities. However, the Group entered agreements to sell put options for crude oil in Brent at a strike price of $40 per barrel to NedBank Limited for 600,000 barrels within a period of 6 months from 1 January 2018 to 30 June 2018.

It also entered into agreements to sell put options for crude oil in Brent at a strike price of $50 per barrel to Natixis for 500,000 barrels within a period of 6 months from 1 July 2018 to 31 December 2018.

The purpose of these is to hedge its cash flows against oil price risk. The contracts provide for a no loss position for Seplat, in that Seplat makes a gain if the price of oil falls below the strike price; and if the price of oil is above the strike price, there is no loss i.e. no payment is made by Seplat except for the mutually agreed monthly premium which is paid in arrears and is settled net of any gain on settlement date.

These contracts however, are not designated as hedging instruments, and as such hedge accounting is not being applied. In the event where the Group takes the option of designating its derivative as hedging instruments, the Group would need to make a formal designation and documentation of the hedging relationship and the Group's risk management objective and strategy for undertaking the hedge.

3.3.3 IFRS 9: Financial Instruments - Accounting policies applied from 1 January 2018

The Group's accounting policies were changed to complywith IFRS 9. IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities; derecognition of financial instruments; impairment of financial assets and hedge accounting. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 Financial Instruments: Disclosures.

a) Classification and measurement

§Financial assets

It is the Group's policy to initially recognise financial assets at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss which are expensed in profit or loss. Classification and subsequent measurement is dependent on the Group's business model for managing the asset and the cashflow characteristics of the asset. On this basis, the Group may classify it's financial instruments as amortised cost, fair value through profit or loss and as fair value through other comprehensive income. All the Group's financial assets as at 31 March 2018 satisfy the conditions for classification at amortised cost under IFRS 9.

The Group's financial assets include trade receivables, NPDC receivables, NAPIMS receivables, contract assets, other receivables and cash and cash equivalents.

§Financial liabilities

Financial liabilities of the Group are classified and subsequently recognised at amortised cost net of directly attributable transaction costs, except for derivatives and contingent considerations which are classified and subsequently recognised at fair value through profit or loss.

Fair value gains or losses for financial liabilities designated at fair value through profit or loss are accounted for in profit or loss except for the amount of change that is attributable to changes in the Group's own credit risk which is presented in other comprehensive income. The remaining amount of change in the fair value of the liability is presented in profit or loss.

The Group's financial liabilities include trade and other payables, interest bearing loans and borrowings and contingent consideration.

Notes to the interim condensed consolidated financial statements continued

b) Impairment of financial assets

Recognition of impairment provisions under IFRS 9 is based on the expected credit loss (ECL) model. The ECL model is applicable to financial assets classified at amortised cost and contract assets under IFRS 15: Revenue from Contracts with Customers. The measurement of ECL reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, time value of money and reasonable and supportable information, that is available without undue cost or effort at the reporting date, about past events, current conditions and forecasts of future economic conditions.

The Group applies the simplified approach or the three-stage general approach to determine impairment of receivables depending on their respective nature. The simplified approach is applied for trade receivables and contract assets while the three-stage approach is applied to NPDC receivables, NAPIMS receivables and other receivables.

The simplified approach requires expected lifetime losses to be recognised from initial recognition of the receivables. This involves determining the expected loss rates which is then applied to the gross carrying amount of the receivable to arrive at the loss allowance for the period.

The three-stage approach assesses impairment based on changes in credit risk since initial recognition using the past due criterion. Financial assets classified as stage 1 have their ECL measured as a proportion of their lifetime ECL that results from possible default events that can occur within one year, while assets in stage 2 or 3 have their ECL measured on a lifetime basis.

Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the related financial assets and the amount of the loss is recognised in profit or loss.

c) Derecognition

§Financial assets

The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or when it transfers the financial asset and the transfer qualifies for derecognition.

The Group's financial assets include trade receivables, NPDC receivables, NAPIMS receivables, contract assets, other receivables and cash and cash equivalents.

§Financial liabilities

The Group derecognises a financial liability when it is extinguished i.e. when the obligation specified in the contract is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised immediately in the statement of profit or loss.

d) Significant increase in credit risk and default definition

The Group assesses the credit risk of its financial assets based on the information obtained during periodic review of customer files such as management accounts, budgets, projections and payment records. Based on the analysis of the information provided, the Group identifies the assets that require close monitoring.

Financial assets that have been identified to be more than 30 days past due on contractual payments are assessed to have experienced significant increase in credit risk. These assets are grouped as part of Stage 2 financial assets where the three-stage approach is applied.

In line with the Group's credit risk management practices, a financial asset is defined to be in default when contractual payments have not been received at least 90 days after the contractual payment period. Subsequent to default, the Group carries out active recovery strategies to recover all outstanding payments due on receivables. Where the Group determines that there are no realistic prospects of recovery, the financial asset and any related loss allowance is written off either partially or in full.

Notes to the interim condensed consolidated financial statements continued

3.3.4 IFRS 15 Revenue from Contracts with Customers - Impact of adoption

The Group has adopted IFRS 15 Revenue from Contracts with Customers from 1 January 2018 which resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. In accordance with the transition provisions in IFRS 15, the Group has adopted the new rules prospectively and has not restated comparatives for the 2017 financial year. There was no impact on the Group's retained earnings at the date of initial application (i.e. 1 January 2018).

The analysis below shows the impact on the statement of financial position and statement of other comprehensive income for the period ended 31 March 2018.

3.3.4.1. Presentation of contract assets

a) Trade and other receivables

The Group has changed the presentation of contract assets in the balance sheet to reflect the terminology of IFRS 15. Contract assets recognised in relation to unbilled revenue from Nigerian Gas Marketing Company (NGMC) were previously presented as part of trade and other receivables.

3.3.4.2. Reclassifications

The following reclassification adjustments were made in the current reporting period to recognize the impact of the initial application of IFRS 15.

a) Reclassification of underlifts to other income

In some instances, Joint ventures (JV) partners lift the share of production of other partners. Under IAS 18, over lifts and underlifts were recognised net in revenue using entitlement accounting. They are settled at a later period through future liftings and not in cash (non-monetary settlements). This is referred to as the entitlement method. IFRS 15 excludes transactions arising from arrangements where the parties are participating in an activity together and share the risks and benefits of that activity as the counterparty is not a customer. To reflect the change in policy, the Group has reclassified underlifts to other income.

Notes to the interim condensed consolidated financial statements continued

b) Reclassification of demurrage from costs of sales

Seplat pays demurrage to Mercuria for delays caused by incomplete cargoes delivered at the port. These are referred to as price adjustments and Seplat is billed subsequently by Mercuria. Under IFRS 15, these are considerations payable to customers and should be recognised net of revenue. Demurrage costs have therefore been recognised net of revenue In the current period, there was a refund of demurrage which has been added to revenue.

3.3.4.3. Financing components

The Group does not have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Group does not adjust any of the transaction prices for the time value of money.

3.3.5 IFRS 15 Revenue from Contracts with Customers - Accounting policies

The Group has adopted IFRS 15 as issued in May 2014 which has resulted in changes in accounting policy of the Group. IFRS 15 replaces IAS 18 which covers revenue arising from the sale of goods and the rendering of services, IAS 11 which covers construction contracts, and related interpretations. In accordance with the transitional provisions in IFRS 15, comparative figures have not been restated as the Group has applied the modified retrospective approach in adopting this standard.

IFRS 15 introduces a five-step model for recognising revenue to depict transfer of goods or services. The model distinguishes between promises to a customer that are satisfied at a point in time and those that are satisfied over time.

a) Revenue recognition

It is the Group's policy to recognise revenue from a contract when it has been approved by both parties, rights have been clearly identified, payment terms have been defined, the contract has commercial substance, and collectability has been ascertained as probable. Collectability of customer's payments is ascertained based on the customer's credit rating at the inception of the contract which is in turn based on the customer's historical records, guarantees provided, the customer's industry and advance payments made if any.

Revenue is recognised when control of goods sold has been transferred. Control of an asset refers to the ability to direct the use of and obtain substantially all of the remaining benefits (potential cash inflows or savings in cash outflows) associated with the asset. For crude oil, this occurs when the crude products are lifted by the customer (buyer) Free on Board at the Group's loading facility. For gas, revenue is recognised when the product passes through the custody transfer point to the customer. Revenue from the sale of oil and gas are recognised at a point in time when performance obligation is satisfied.

The surplus or deficit of the product sold during the period over the Group's ownership share of production is termed as an overlift or underlift. With regard to underlifts, if the over-lifter does not meet the definition of a customer or the settlement of the transaction is non-monetary, a receivable and other income is recognised. Conversely, when an overlift occurs, cost of sale is debited and a corresponding liability is accrued. Overlifts and underlifts are initially measured at the market price of oil at the date of lifting, consistent with the measurement of the sale and purchase. Subsequently, they are remeasured at the current market value. The change arising from this remeasurement is included in the profit or loss as other income or cost of sales.

b) Transaction price

Transaction price is the amount that an entity allocates to the performance obligations identified in the contract. It represents the amount of revenue recognised as those performance obligations are satisfied. Complexities may arise where a contract includes variable consideration, significant financing component or consideration payable to a customer.

Variable consideration not within the Group's control is estimated at the point of revenue recognition and reassessed periodically. The estimated amount is included in the transaction price to the extent that it is highly probable that a significant reversal of the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Significant financing component (SFC) assessment is carried out (using a discount rate that reflects the credit worthiness of the customer based on the internally generated credit rating assigned to the customer on inception of the contract) on contracts that have a repayment period of more than 12 months.

Notes to the interim condensed consolidated financial statements continued

The Group does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between when it transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Instances when SFC assessment may be carried out include where the Group receives advance payment for agreed volumes of crude oil or receivables take or pay deficiency payment on gas sales. Take or pay gas sales contract ideally provides that the customer must sometimes pay for gas even when not delivered to the customer. The customer, in future contract years, takes delivery of the product without further payment. The portion of advance payments that represents significant financing component will be recognised as interest revenue.

Consideration payable to a customer is accounted for as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the Group. Examples include barging costs incurred, demurrage and freight costs. These do not represent a distinct service transferred and is therefore recognised as a direct deduction from revenue.

c) Breakage

The Group enters into take or pay contracts for sale of gas where the buyer may not ultimately exercise all of their rights to the gas. The take or pay quantity not taken is paid for by buyer called take or pay deficiency payment. The Group assesses if there is a reasonable assurance that it will be entitled to a breakage amount. Where it establishes that a reasonable assurance exists, it recognises the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. However, where the Group is not reasonably assured of a breakage amount, it would only recognise the expected breakage amount as revenue when the likelihood of the customer exercising its remaining rights becomes remote.

d) Contract modification and contract combination

Contract modifications relates to a change in the price and/or scope of an approved contract. Where there is a contract modification, the Group assess if the modification will create a new contract or change the existing enforceable rights and obligations of the parties to the original contract.

Contract modifications are treated as new contracts when the performance obligations are separately identifiable and transaction price reflects the standalone selling price of the crude oil or the gas to be sold. Revenue is adjusted prospectively when the crude oil or gas transferred is separately identifiable and the price does not reflect the standalone selling price. Conversely, if there are remaining performance obligations which are not separately identifiable, revenue will be recognised on a cumulative catch-up basis when crude oil or gas is transferred.

The Group combines contracts entered into at near the same time (less than 12 months) as one contract if they are entered into with the same or related party customer, the performance obligations are the same for the contracts and the price of one contract depends on the other contract.

e) Contract assets and contract liabilities

The Group recognises contract assets for unbilled revenue from crude oil and gas sales. A contract liability is consideration received for which performance obligation has not been met.

f) Disaggregation of revenue from contract with customers

The Group derives revenue from two types of products, oil and gas. The Group has determined that the disaggregation of revenue based on the criteria of type of products meets the revenue disaggregation disclosure requirement of IFRS 15 as it depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See further details in note 6.

3.4 Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 March 2018.

This basis of consolidation is the same adopted for the last audited financial statements as at 31 December 2017.

Notes to the interim condensed consolidated financial statements continued

3.5 Functional and presentation currency

Items included in the financial statements of the Company and the subsidiaries are measured using the currency of the primary economic environment in which the subsidiaries operate ('the functional currency'), which is the US dollar except for the UK subsidiary which is the Great Britain Pound. The interim condensed consolidated financial statements are presented in the Nigerian Naira and the US Dollars.

The Group has chosen to show both presentation currencies side by side and this is allowable by the regulator.

a) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end are generally recognised in profit or loss.

Foreign exchange gains and losses that relate to borrowings are presented in the statement of profit or loss, within finance costs. All other foreign exchange gains and losses are presented in the statement of profit or loss on a net basis within other income or other expenses.

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss or other comprehensive income depending on where fair value gain or loss is reported.

b) Group companies

The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

· assets and liabilities for each statement of financial position presented are translated at the closing rate at the reporting date.

· income and expenses for each statement of profit or loss and statement of comprehensive income are translated at average exchange rates (unless this is not - a reasonable approximation of the cumulative effect of the rates

prevailing on the transaction dates, in which case income and expenses are translated at the respective exchange rates that existed on the dates of the transactions), and

· all resulting exchange differences are recognised in other comprehensive income.

On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss.

4. Significant accounting judgements, estimates and assumptions

4.1 Judgements

Management judgements at the end of the first quarter are consistent with those disclosed in the recent 2017 Annual financial statements. The following are some of the judgements which have the most significant effect on the amounts recognised in this consolidated financial statements.

i) OMLs 4, 38 and 41

OMLs 4, 38, 41 are grouped together as a cash generating unit for the purpose of impairment testing. These three

OMLs are grouped together because they each cannot independently generate cash flows. They currently operate

as a single block sharing resources for the purpose of generating cash flows. Crude oil and gas sold to third parties

from these OMLs are invoiced together.

ii) Advances on investment (note 16)

The Group considers that the advances on investment of ₦20.1 billion, 2017: ₦20.1 billion(US$65.7 million, 2017: US$65.7 million) in relation to the acquisition of additional assets is fully recoverable in accordance with the terms of the deposit.

Notes to the interim condensed consolidated financial statements continued

iii) New tax regime

As at the end of the quarter, the Nigerian Investment Promotion Commission is yet to approve the tax incentives for the additional 1 year and 9 months of the tax holidays for the Company. The financial statements have been prepared on the assumption that the tax incentives may not be renewed and hence this forms the basis of the Group's current and deferred taxation in the financial statements. Deferred tax assets have been recognised during the quarter.Deferred tax liabilities are not recognised in the current quarter as the Group was not liable to make future income taxes payment in respect of taxable temporary differences.

iv) Unrecognised deferred tax asset

Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. See further details in note 13.

v) Impairment of financial assets

The loss allowances for financial assets are based on assumptions about risk of default, expected loss rates and maximum contractual period. The Group uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Group's past history, existing market conditions as well as forward looking estimates at the end of each reporting period. Details of the key assumptions and inputs used are disclosed note 3.3.3 above.

4.2 Estimates and assumptions

The key assumptions concerning the future and the other key source of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are disclosed in the most recent 2017 annual financial statements.

The following are some of the estimates and assumptions made.

i) Defined benefit plans

The cost of the defined benefit retirement plan and the present value of the retirement obligation are determined using

actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and changes in inflation rates.

Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. The parameter most subject to change is the discount rate. In determining the appropriate discount rate, management considers market yield on federal government bonds in currencies consistent with the currencies of the post-employment benefit obligation and extrapolated as needed along the yield curve to correspond with the expected term of the defined benefit obligation. The rates of mortality assumed for employees are the rates published in 67/70 ultimate tables, published jointly by the Institute and Faculty of Actuaries in the UK.

ii) Contingent consideration

During the quarter the Group continued to recognise the contingent consideration of ₦5.7 billion (US$18.5 million) for OML 53 at the fair value of ₦5.6 billion, 2017: ₦4.2 billion, (US$18.3 million, 2017: US$13.9 million). It is contingent on oil price rising above US$90 (N 27,535)/bbl. over the next two years and 9 months.

iii) Income taxes

The Group is subject to income taxes by the Nigerian tax authority, which does not require significant judgement in terms of provision for income taxes, but a certain level of judgement is required for recognition of deferred tax assets. Management is required to assess the ability of the Group to generate future taxable economic earnings that will be used to recover all deferred tax assets. Assumptions about the generation of future taxable profits depend on management's estimates of future cash flows. The estimates are based on the future cash flow from operations taking into consideration the oil and gas prices, volumes produced, operational and capital expenditure.

Notes to the interim condensed consolidated financial statements continued

5. Financial risk management

5.1 Financial risk factors

The Group's activities expose it to a variety of financial risks such as market risk (including foreign exchange risk, interest rate risk and commodity price risk), credit risk and liquidity risk. The Group's risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

Risk management is carried out by the treasury department under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity.

5.1.1 Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.

The Group manages liquidity risk by ensuring that sufficient funds are available to meet its commitments as they fall due.

The Group uses both long-term and short-term cash flow projections to monitor funding requirements for activities and to ensure there are sufficient cash resources to meet operational needs. Cash flow projections take into consideration the Group's debt financing plans and covenant compliance.

Surplus cash held is transferred to the treasury department which invests in interest bearing current accounts, time deposits and money market deposits.

The following table details the Group's remaining contractual maturity for its non-derivative financial liabilities with agreed maturity periods. The table has been drawn based on the undiscounted cash flows of the financial liabilities based on the earliest date on which the Group can be required to pay.

Notes to the interim condensed consolidated financial statements continued