SEPLAT Estimates Upgraded as Analysts Foresee Value Unlocking Opportunities
Seplat Petroleum Development Company Plc.: It has been a tough year for Seplat, an independent indigenous Nigerian upstream exploration and production company with dual listing on the floor of the Nigeria, and New York Stock Exchange.
Its financial statement shows that revenue has been peppered strongly since the beginning of the year due due to outbreak of COVID-19.
The pandemic has impacted global demand for oil, thus price and demand have been under pressure for most part of the year, thus impacting earnings.
Also, the Organisation of the Petroleum of Exporting Countries and Allied (OPEC+) request to member to cut oil supply has translated to reduced quota for Nigeria, and greater compliance means low output for Seplat.
In its equity research, Chapel Hill Denham projected Seplat’s 12-month target price of N487.50, while the market price closed the week at N400 per share.
As a result, the company’s earnings failed to excite the market but gradual recovery in the global economy provides an upside but for the oil prices that have been trading range bound.
In its equity note, Chapel Hill Denham said the key take-away in this somewhat erratic 2020, is that oil price remains the king, especially for the upstream players, irrespective of their varying internal risk specifics.
It said amid the unprecedented oil market pandemonium, oil and gas companies in West Africa witnessed a massive wave of sell-offs, with share prices declining by between 36% and 65% YTD across the board.
The worst-hit was Tullow that recorded 62.91% drop year to date and currently undergoing corporate re-organisation and system clean-up.
Chapel Hill Denham said investors’ apprehension towards upstream focused companies, at the time of this low oil price regime, is not surprising since the share prices of companies engaged in exploration and production strongly correlate with oil price movements.
“Since we do not see a significant oil price recovery through the end of 2021, we investigate the impact of a sustained lower oil price environment on SEPLAT.
“While we expect oil prices to average US$43/bbl and US$48/bbl in 2020 and 2021, respectively, we believe the recent development in the oil market suggests the balance of risk remain to the downside.
“We have stress-tested our numbers assuming higher and/or lower oil prices, to examine the potential upside/downside for our coverage name”, Chapel Hill Denham explained.
Analysts at the firm like that Seplat’s balance sheet is strong, with sizeable cash flows.
“In our view, 2021 volume growth should be bolstered by 2020 capital expenditure (CAPEX) spend”, Chapel Hill Denham forecasted.
Over 9M-2020, the company expended US$109 million in CAPEX, from its 2020 guidance of US$120 million.
Analysts think since Seplat will not face any major debt repayment until 2021, at US$43/bbl average realised oil price, they believe the firm can comfortably fund the rest of its CAPEX for 2020 without the need for external funding.
At such, analyst forecasted 2021 production at 52kboepd, split across liquid (30kbopd) and gas (22kboepd).
Chapel Hill Denham assumed that if the forecast oil price holds, this translates to 2021 revenue of US$661.8 million.
Meanwhile, despite its successful attempt to de-risk its revenue base via massive investment in gas, analysts said they found that the market is still over-penalising Seplat by unreasonably placing a significant discount to its share price.
“From our estimate, assuming our expected 62-day downtime holds, we note that the market is valuing Seplat based on an oil price of US$27/bbl., which is too aggressive, in our view.
“We believe the company’s consistent effort to de-risk its cash flows will drive performance higher to warrant a re-rating in the coming quarters”, analysts added.
Thus, Chapel Hill Denham maintain BUY recommendation on the stock, with a revised 12-month target price of N487.50.
At current level, analysts hinted that Seplat is trading at a substantial discount of 26% to core net asset value.
Our 12-month TP implies a total return of 20.6%, including a dividend yield of 4.5%.
Read Also: Oil Price Balanced amidst Demand Recovery Pressure
SEPLAT Estimates Upgraded as Analysts Foresee Value Unlocking Opportunities
