CardinalStone Sets N1,988.64 Target Price for Seplat Energy

CardinalStone Sets N1,988.64 Target Price for Seplat Energy

Nigeria’s top investment firm, CardinalStone Securities Limited, has set N1,988.64 12-month target price for Seplat Energy, saying this price expectation does not consider the impact of the Mobil Producing Nigeria Unlimited (MPNU) acquisition.

The investment firm estimate was anchored on the energy company reference price of N1,670.80. Seplat Energy’s target price is at a 17.2% premium compared to the current market price, analysts said in the report.

Despite a tough outing in the first half of 2023, the investment firm said Seplat appear set to achieve production levels above the midpoint of management’s 45,000 to 55,000 barrels of oil equivalents per day (boepd) guidance for the current financial year.

Analysts said in the equity report that this view is supported by the de-risking of evacuation at OMLs 4, 38, & 41 and ongoing efforts to leverage Edo Refinery to arrest third-party evacuation concerns.

“We recall that H1-2023 production was primarily supported by operating mining lease (OML) 40, wherein volumes rose by 24.3% year on year to 10,803 barrels of oil per day (bopd) due to improvement in uptime and delivery of new wells.

“The gains from this asset masked the weaknesses in OMLs 4, 38, & 41 and the smaller Eastern operation (OML 53)”, CardinalStone Research said.

According to CardinalStone, management said first half of the year set-backs across OMLs 4, 38, & 41 and OML 53 reflected delays in the on-streaming of new wells -meant to offset the impact of assets’ deterioration- in the former and evacuation challenges due to the unavailability of key deliverable lines in the latter. 

“While OML 40 remains on a good run, resolving the issues around the other assets could provide a needed buffer and boost confidence in the 2023 volume outlook”.

The equity report reads that a relatively weaker oil price outlook further underscores the need to resolve production issues.

This weaker oil price outlook -driven by tamer global demand prospects and delays in the drilling programme will likely keep revenue growth contained in 2023 despite the slight production recovery expected in the near to medium term, analysts added. 

“These expectations do not consider the impact of the Mobil Producing Nigeria Unlimited (MPNU) acquisition and the ANOH gas processing plant”.  In the year, the report noted that weaker oil prices would mask volume growth.

“We expect liquid production to rise by about 8.0% year on year to 26,590 bopd in the financial year 2023, aided by plans to expedite the ongoing drilling program alongside Joint Venture partners.

“Specifically, we expect the completion of the Orogho-8 and Ovhor-21 wells by Q3-2023 and regulatory approval to commence operation at the Sibiri-2 well in the same quarter”, CardinalStone explained.

In addition, analysts said they expect the company to maintain a consistent production flow through resolutions of third-party evacuation issues. In the first half of the year, analysts report revealed that Seplat Energy recorded a deferred tax credit of $28.7 million due to a change in the applicable tax rate on its Elcrest assets.

It noted that the government has also ratified the application to transit to the PIA regime, which should lead to more benign tax charges. The company announced that the long-stop date for full compliance with the various aspects of the PIA has been extended to September 30, 2023, according to CardinalStone Research report.

“We anticipate a lower tax expense for 2023, supporting profit after tax growth projection”, analysts said in the report, adding that the energy company’s operating cash flows would be sufficient for dividend plans.

With the knock-on effect of weaker oil prices likely to drag operating cash flow in 2023, analysts believe Seplat Energy Plc’s position should still be enough to more than cover the cumulative dividend for the ongoing financial year.

The company has given dividend payment guidance of $0.03/share per quarter and also maintained its capital expenditure (CAPEX) guidance of $160 – $190 million, analysts said. Already, Seplat Energy Plc expended $62.1 million in drilling activities and $25.1 million in engineering projects, CardinalStone analysts said.

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