eplat Petroleum Development Company (Ticker: SEPLAT) Plc.’s earnings bounced back strongly on higher oil prices as the global economy heals gradually following the pandemic, analysts maintain buy rating due to strong upside potential.
Profit margin had hit the bottom following the outbreak of coronavirus pandemic in the financial year 2020 when oil prices slide strongly due to lack of demand.
In its first quarter (Q1) of 2021, the indigenous oil exploration and production company saw its profit after tax payment expanded from loss position to profitability.
“We like that the company grew PAT by over two-fold in the period under review, a development triggered by higher oil price-induced expansion in revenue , rising 6.8% quarter on quarter”, Chapel Hill Denham said in a report.
However, the firm added that relative to its expectation, the underlying earnings outturn was unimpressive, with the EPS now tracking behind its 2021 forecast by over 56%.
Analysts then said they imagined that most of the benefits of the recent oil price rally did not fully reflect in Q1-2021, and now expect the Q2-2021 result to make up for the tad slack witnessed.
Consequent to improved outturn, Seplat board of directors declared a final dividend of 25cents- compare with 10cents for 2020 – which translates to a yield of 1.7% based on reference day closing price and assuming a dividend currency exchange rate of N380/US$.
In a separate announcement, the board stated its intention to change the company’s name to Seplat Energy Plc, which, according to management, more adequately reflects the company’s ambitions of providing broader energy.
According to the management, the name change is expected to be presented to shareholders for approval at the annual general meeting on 20 May 2021.
That said, Chapel Hill Denham explained that the positive Q1-2021 earnings per share (EPS) is an evidence of how higher oil price is driving robust oil economics for Seplat.
Against that backdrop, the firm expects investors’ reactions to be positive.
“Our view is shaped by the belief that financial year 2021 will be a new growth phase for the company, owing to numerous value unlocking opportunities.
“We believe the company’s steady effort to diversify its revenue stream, de-risk its cash flows, and more importantly, its consistent dividend payment will drive performance higher to warrant a re-rating in the coming quarters”.
Equity analysts at Chapel Hill Denham said they currently have a BUY recommendation on the stock, with a 12-month price target of N541.78.
What Excites Analysts in the Report
Explaining what the investment firm like about the result, it said Seplat’s Q1-2021 production and sales were higher, mostly driven by the favourable exogenous factors, especially for upstream players.
The company benefited from the Organisation of Petroleum Exporting Countries and allies (OPEC+) led rebound in global oil prices, with average realised oil price expanding by over 21% year on year in Q1-2021 to US$60.76/bbl.
“This was more than enough to offset the 4.5% year on year decline in the average realised gas price to US$2.76/Mscf. Beyond that, production volume rose marginally by 0.5% to 48.2kboepd, albeit slightly below our estimate of 48.1kboepd”, analysts remarked.
Seplat Plc. also disclosed that the Gbetiokun field at Oil Mining Lease (OML) 40 is now back in production.
Thus far in April, management mentioned that average daily volumes are now in excess of 53kboepd, a level that is expected to be maintained over Q2-2020, barring any negative surprises.
Chapel Hill Denham noted that the impact of the foregoing drove robust revenue growth of 16.8% year on year in Q1-2021.
Seplat saw its gross profit expand by 2.0x, with related margin now at the highest level since Q4-19, the quarter that preceded the outbreak of the pandemic.
Most of the gains stemmed from the benign growth in cost of goods sold (COGS) coming at 2.3% year on year, which analysts considered to be strikingly below revenue growth.
Although production cost was higher, this was neutered by lower crude handling charges, due to the launch of the Liquid Heater Treater.
In the period, Seplat’s production operating expenses closed at US$8.7/boe from US$7.7/boe in the comparable period in 2020.
In addition, the non-production operating expenses was 84 basis points (bps) lower, when compared to the prior year.
Chapel Hill Denham analysts said these, together with a 43.1% year on year decline in operating expenses, ensured that the company, for the third consecutive quarter, reports another positive earnings before interest tax depreciation and amortisation (EBITDA) of US$77.8mn.
Overall, the investment firm noted in the report that the combination of sturdy revenue growth and a de-risked balance sheet, which midwife lower finance charges, helped Seplat report a profit after tax of US$24 million in Q1-2021 from loss of US$106 million in Q1-2020.
Analysts maintained that the company’s balance sheet remains healthy especially noting the positive outlook in the global oil market.
Although, Chapel Hill Denham stated that Seplat’s cash balance has reduced by 8.7% year to date, the firm found the reported cash balance of US$236mn sizeable.
It noted the oil exploration company has completed the refinancing of the Reserve-Based Loan (RBL). As part of the new agreement, the debt utilised and interest rate remain unchanged at US$100 million and 8% + interbank borrowing rate (LIBOR), respectively.
However, it said the maturity date was extended by either five years after the effective date of the loan (March 2026) or by the reserves tail date (expected to be March 2025).
That said, it was noted that the company has expended US$32 million in capital expenditure (CAPEX) out of its guidance of US$150 for financial year 2021.
ANOH project is fully funded.
“We understand that a consortium of seven banks agreed to provide US$260 million of debt financing for the ANOH gas processing plant in February 2021”, analysts stated.
Chapel Hill Denham noted the cash was raised via an incorporated joint venture, ANOH Gas Processing Co (AGPC), equally owned between Seplat and the Nigerian Gas Company, a wholly-owned subsidiary of Nigerian National Petroleum Corporation.
“Seplat and NGC have previously provided a combined US$420 million in equity funding and the project is now fully funded. Recall that the 300MMscfd capacity ANOH plant is located on OML53”.
On the downside, Chapel Hill Denham said beyond the fact that earnings underperformed its expectation, the company’s weaker working capital management drove net operating cash flow lower by as much as 93.2% year on year.
Further, the firm noted a lump sum of US$20.8 million of the cash deposited in Access bank Plc bank accounts are said to be unilaterally restricted by Access bank Plc in connection with the court case between Seplat Petroleum Development Company Plc and Access Bank Plc.
Chapel Hill Denham analysts retain buy rating on Seplat with target price of N541.78 per share.
In 2020, Seplat Recorded Weaker revenue across business segments
Seplat’s gross revenue for 2020 settled at $530.6 million, representing a decrease of 24.8% compared to $697.7 million reported in the corresponding period in 2019.
The drop in revenue was directly linked to the drop in realized price from $64 to $39.5 as analysts noted the rise in working production – which measures total liquid and gas production converted to oil equivalent- increased by 10.1% to 51.kbpdoe.
This occurred following maiden contribution from newly acquired assets from Eland considered not enough to compensate for the stack drop in price.
A breakdown of the revenue by segment indicated that the Crude Oil segment -which accounts for 78.9% of revenue- tumbled 15.4%year on year to $417.9 million from $495.1 million in the prior year.
This outturn was dragged by weaker oil prices as average realized price fell 46.4% to $39.5 per barrel, triggered by the pandemic in 2020.
Nevertheless, production volume, measured by Liquid production – which measures extracts of liquids like crude- grew by 40.9% to 33.7kbopd, spurred by SEPLAT’s acquisition of its Eland assets.
With the acquisition, Seplat gained working interest control and maiden contributions of OML 40 and its Ubima Wells and higher production from its OML 53 well.
In its report, United Capital analysts detailed that Eland’s Wells accounted for 26.7% of SEPLAT’s production in 2020.
For the Gas segment, the revenue line decreased by 17.1% to $112.5 million from $135.8 million in 2019 due to lower volumes of 37.1 Bscf compared to 47.8 Bscf in 2019.
Interestingly, the average realised price of gas was slightly higher in 2020, settling at $2.87/Mscf compare with $2.84/Mscf in 2019.
United Capital said the weaker gas volumes reflect lower than-expected gas production owing to weak demand due to the impact of the pandemic and delays in completing the Oben-50 gas well, as demand began to rebound later in the year.
Also, it was noted that Seplat did not record any gas-processing revenues in the period, compared with the one-off gas processing revenue of $66.9 million in 2019, a gas plant tolling payment by NPDC. Total gas sales made up 21.1% of Seplat’s revenue in 2020 from 19.5% in 2019.
Higher production level drives cost higher:
In 2020, amidst covid-19 pressure, the company’s cost of sales (COS) increased by 34.4% to $405.80 million in 2020, mainly driven by a surge in operational and maintenance expenses, up 128.9% to $95.6 billion and a 40.0% increase in depletion, depreciation, and amortisation charges to $127.4 billion.
United Capital said the jump in the cost of sales was due to increased production capacity as well as additional actual production from acquired assets, pressuring.
Gross Profit lower.
SEPLAT’s Gross profit slumped by 63.1% to print at $44.8 million in 2020. Similarly, operating profit was down 110.2%, largely driven by weaker revenue and a $144.1 million impairment charge booked in the period under review.
“However, on an adjusted basis, after adding back non-cash impairments and fair value losses, operating profit was $121.4 million”, analysts at United Capital stated.
The firm also noted that low yield environment in 2020 resulted in a 89.1% year on year decline in SEPLAT finance income. Meanwhile, its net finance cost surged 54.5% to $51.8 billion as scheduled coupon repayments on the company’s Eurobond program were sustained.
Analysts said this further exacerbated pressure on profitability as pre-tax loss and loss after tax settled at $80.2 billion and $85.3 respectively.
Notwithstanding the above, the company paid a final dividend of $0.05 in 2020, bringing up the total dividend paid to $0.10 in 2020.
Capital Expenditure Came Stronger
Despite the pandemic, the company’s capital expenditure expansion went largely unaffected as SEPLAT spent $150 million on drilling and completing new gas and oil wells.
The company’s capital expenditure spends printed at $150 million, far higher commitment that proposed $120 million for the year.
The majority of the company’s capital spending was on its Oben 48, 49, and 50 plants and six development oil wells including Sapele-35, Ovhor-6ST, Ovhor-20, Ohaji South-5, Ohaji South-6 and Gbetiokun-5.
Total assets in the period under review expanded by 5.0% as debt to equity ratio declined marginally to 42.2% in 2020 from 44.6% in 2019, following its repayment of $100 million on its revolving credit facility in the period under review.
SEPLAT Cash flow remains strong despite loss.
Though the company declared loss, its net operating cash flows in the period under review remained strong, declined by 8.6% to $308.7 million.
Cash position was boosted by non-cash adjustments and impairment charges of $144.1 million deducted, which United Capital analysts think us relatively impressive considering the pandemic and shocks in 2020.
As such, cash flow cover improved to 43.8x from 42.3x just as cash flow margin recorded significant improvement to 58.1% in 2020, from 48.2% in 2019.
United Capital Predicts Seplat will Blossom
Analysts at United Capital explained that given 2020 performance which was affected by weak oil prices, lower realised prices and OPEC production quotas, they expect 2021’s results to be relatively robust.
To kick-off, the most recent oil market rally bodes well for SEPLAT. Post Covid-19 recovery, due to reduction in infection rates as well as and increased vaccinations, will continue to support recovery in demand for fossil fuels and gas in 2021.
“SEPLAT disclosed its engagements with the NNPC on loosening OPEC production quotas on its wells which we expect to continue to drive improved production in 2021.
“Against this backdrop, we remain bullish on the firm’s production capabilities in 2021. We expect gas revenue to improve in 2021 due to the expected increase in electricity tariffs in 2021”, analysts stated.
The power sector’s shift towards cost effective will increase Seplat’s gas supply revenue in the coming calendar year as analysts optimism is further boosted by the management’s drive to adopt cost-cutting measures to reduce operating expenses around its Eland assets, which were the major drivers of costs in 2020.
The company financials showed operating cost per barrel jerked up 43% in 2020 to $8.9 from $6.0 in 2020, saying this is expected to improve near-term outlook.
“We expect ANOH, SEPLAT’s gas processing plant, scheduled to resume in H1-2022, to boost its revenue drive and boost its gas expansion business and SEPLAT’s gas supply to the Nigerian power grid”.
On debt financing, the company recently raised $650.0 million at 7.7% in the Eurobond market maturing in 2026 to refinance its $350.0 million Eurobond issued at 9.9% due to mature in 2023.
Analysts said the firm has taken advantage of the low-yield environment for dollar instruments having announced it had successfully refinanced its existing US$100.0 million reserve-based lending facility due November 2023.
This facility has been replaced with a new five-year US$100 million reserve-based lending facility due March 2026.
In a report, Moodys said Seplat Petroleum Development Company Plc.’s B2 ratings reflect its leading exploration and production (E&P) position in Nigeria with long-term oil and gas field licensing agreements and ability to withstand low oil prices in the near term.
The rating according to Moodys is supported by short term oil hedges and contracted gas revenue representing 21% of 2020 revenue.
It noted that Seplat’s moderately positioned credit metrics and sizable unrestricted cash balances, provide a buffer against a decline in its operating cash flow from potential low oil prices over the next 18 months.
“The ratings are constrained by the company’s exposure to volatile oil prices; small scale of production; and concentration to a single asset block, Oil Mining Licences (OML) 4, 38 and 41 which account for 76% of the company’s working interest production”, Moodys said.
The rating is further constrained given the operational concentration to a single country, Nigeria with reliance on Nigerian government-owned entities for the timely payment of capital cash calls.
Seplat Plc.’s Earnings Bounced Back Strongly on Higher Oil Prices