SEPLAT: disappointing earnings performance signpost bleak future for oil assets
In the first quarter of 2020, Seplat Petroleum Development Company Plc.’s sustained more than ₦36 billion loss due to shock in the oil industry.
Traded at ₦494.4, Seplat’s market capitalisation on the Nigerian Stock Exchange settled at ₦290.926 billion on 588,444,561 shares outstanding.
The stock 52-week high was priced at ₦657.80, though it had bottomed to ₦397.70 in the same period.
The company is currently in the process of consolidating acquisition of Eland Oil and Gas to lift the company’s output.
However, uncertainty that was not initially priced or envisage has find its way into the company’s operating outlook.
Coronavirus pandemic has halted upward movement in global prices of oil, and analysts have predicted it will take about 2 years for the industry to heal.
Meanwhile, in Q4 2019, Seplat had borrowed to pay for the acquisition of Eland, thus interest payment increased significantly.
Understanding that the industry is highly risk, before the oil shock, Seplat had hedge 1.5 million barrels (mmbbls) of crude oil for three quarters.
Analysts at Vetiva Capital estimated that the hedge contracts could lead to $39 billion gain for the company.
In the first quarter on 2020
The indigenous oil company reported turnover of ₦42.5 billion in the Q1 2020. This translate to 13.3% below ₦48.9 billion made in the comparable period in 2019.
Unfortunately, cost of sales moved in different direction, grew more than 32% year on year.
The company’s unaudited result for Q1 2020 shows that cost of sales expanded to ₦31.7 billion from ₦24 billion in Q1 2019.
As a result, the company’s gross profit dropped off by about 57% to ₦10.8 billion as against ₦25 billion in Q1 2019.
Despite weak operating performance, the company’s operating expenses ballooned significantly in the period.
The financial scorecard of the oil firm shows that operating expenses expanded more than 415%.
In Q1 2019, when Seplat’s turnover peaked at ₦48.9 billion, operating expenses was ₦10 billion.
On that, the oil company’s operating expenses per ₦100 sales was ₦20.44.
However in Q1 2020, the unaudited financials indicate that Seplat’s expenses surged to ₦51.4 billion.
This translates to more than ₦21 loss on every ₦100 sales the company made in Q1 2020.
Seplat’s net finance cost pitched at ₦6.6 billion in Q1 2020 as against ₦4 billion in the corresponding period.
Due to weak topline and rising cost effects, pre-tax profit slipped to ₦31.1 billion loss as against ₦6 billion profit made in Q1 2019.
The balance sheet position was weakened, as Seplat increased borrowing by more than 18%.
Increased leverage pushed debt to equity to 46.7%, about 300 basis points above 43.8% recorded in Q1 2019.
Inventories rose 10.1% year to date, from ₦25.9 billion to ₦28.6 billion.
Also, the company’s trade and receivables assets increased marginally by 1.2% to ₦151.2 billion.
Meanwhile, a 10% growth in total liabilities from ₦450.4 billion to ₦495.3 billion raised balance sheet size by the same rate.
Seplat’s balance sheet expanded 10.4% from ₦1.004 trillion to ₦1.109 trillion owing to increase in total liabilities.
Analysts’ expectations
Vetiva capital analysts expect the consolidation of Eland to lift Seplat’s total output by 16% to 53.7 thousand barrel of oil equivalent per day (kboepd) in 2020.
Analysts envisage that revenue would drop by 14% to $597 million, dragged by the coronavirus-induced plunge in oil prices.
Similarly, we expect bottom line to come in lower at $132 million – down 50% – the lowest in four years.
Seplat reported a 16% drop in oil revenue to $495 million in 2019, a reflection of lower output and weaker oil prices.
In 2019, average realised oil price was $64 per barrel (bbl) compare to $70 per bbl in 2018.
Due to rig mobilisation delays in the first half of 2019, oil output for the year fell by 9% to 7.7 mmbbls.
However, quarterly figures showed that the volume of oil lifted in the fourth quarter surged 55% quarter on quarter to 2.7 mmbbls.
Analysts at Vetiva capital stated that this was the highest output in a quarter since 2015.
According to analysts, the surge was driven by improved drilling activities in the second half of 2019, in line with the revised capital expenditure programme for 2019.
Analysts expected drilling activities to slow in 2020 amidst unattractive oil prices.
Meanwhile, analysts’ consensus is that the consolidation of Eland’s output that started in January 2020 is projected to lift Seplat’s oil output by 64% to 12.6 mmbbls.
Despite this sharp growth in oil output, analysts expect oil revenue to come in weaker, reflecting the plunge in oil prices.
Vetiva analysts note that Seplat hedged a quarterly output of 1.5 mmbbls at $45/bbl for the first three quarters of 2020.
As a result, we project a gain of $39 million from these hedging contracts.
In 2019, Seplat repaid the outstanding principal balance of $100 million on the revolving credit facility (RCF) that was raised in 2018.
Due to the loan repayment, finance charges dipped to $34 million compare to $56 million in 2018.
However, the firm’s leverage rose significantly in the fourth quarter of 2019.
This happened after management raised a new four-year RCF of $350 million for the financing of Eland acquisition.
This RCF bears a two-year moratorium on principal repayment and a variable interest cost of London Inter-Bank Offer Rate (LIBOR) +6%.
This is however expected to drop to LIBOR+5% when Amukpe-Escravos Pipeline comes on stream.
Seplat’s total debt jumped to $789 million in 2019 compare to $446 million in 2018, resulting in a debt ratio of 24% as against 18% 2018.
“Given the growth in the firm’s leverage, we foresee a spike in 2020 finance expenses to $86 million in 2020, against $34 million in 2019.
SEPLAT: disappointing earnings performance signposts bleak future for oil assets
