Unpriced Risks Rocked Seplat Plc.’s Earnings in 2020

Unpriced Risks Rocked Seplat Plc.’s Earnings in 2020

Externally driven unpriced risks are negatively impacting Seplat Petroleum Development Company’s earnings strongly in 2020 but a slew of analysts remain positive about the outlook.

Sharp collapse in global price of oil induced by the outbreak of coronavirus tamed the company’s revenues expectation.

Unfortunately, this was coming at the time when Seplat started building volume capacity, then Nigeria was hit by oil supply cut.

Looking beyond the present, analysts at Chapel Hill Denham consider looking beyond the disappointing earnings reported by Seplat thus far in 2020.

The company still enjoy strong valuation as slew of equity research analysts formed a buy rating consensus on Seplat’s share.

Equity research analysts at ARM Securities Limited rated Seplat a strong buy as they projected fair value estimate of ₦964.45, which suggests an upward potential of 129.63% from current price level.

Unpriced Risks Rocked Seplat Plc.’s Earnings in 2020
Seplat Petroleum Development Company

Also, Chapel Hill Denham maintained buy rating on the company stock as its equity research analysts forecast a 12-month target price of ₦500.89 per share.

In its revised valuation of Seplat, Vetiva Capital’s analysts also handed buy recommendation on the stock as its projected 12-month target price of ₦632.65.

On the local bourse, Seplat’s current market price printed at ₦420 per share on Tuesday, putting its market capitalisation at ₦247.146 billion.

In the third quarter of 2020 (Q3-20), Seplat profit after tax (PAT) came in at US$13.86 million, though this represent a 77.9% year on year drop, but then this is the first profit in 2020, mostly supported by a volume-led revenue growth of 10.3%.

Against that backdrop, 9M-2020 loss after tax (LAT) improved marginally to US$96.32 million, from US$110.18 million in H1-2020.

Beyond the stronger performance in Q3-20 standalone, analysts at Chapel Hill Denham said the improvement in 9M-2020 LAT was also helped by a one-off tax credit reported.

Still, analysts said this was a stack disappointment when compared to the corresponding period of last year when profit after tax of US$181.42 million was reported.

Nonetheless, the company declared an interim dividend of 5 cents, which translates to a yield of 4.5% based on last Friday in October, 2020 closing price.

“We are not surprised that investors’ reactions have been muted thus far, and we believe 2021 will be a new growth phase for the company.

“As with the market, we believe the company’s consistent effort to diversify its revenue stream and de-risk its cash flows will drive performance higher to warrant a re-rating in the coming quarters”, Chapel Hill Denham stated..

Thus, analysts at Chapel Hill Denham remain positive on the company’s outlook as they maintain BUY recommendation on the stock, with a 12-month target price of ₦500.89.

Explaining this decision, Chapel Hill Denham said in Q3-2020 Seplat reported a profit after tax of US$13.86 million, which is 77.9% drop, BUT the first quarterly profit in 2020.

To the firm, this is a year consider erratic due to a significant plunge in oil prices, especially at the twilight of Q1-2020.

The reported profit was helped by strong revenue growth of 10.3% year on year and 61.7% deceleration in operating expenses year on year.

Analysts said the company’s revenue growth was aided by crude oil sales that swelled up by 17.5% year on year, which was more than enough to offset the tad decline of 12.9% in gas sales year on year.

Seplat’s 9M-2020 loss after-tax reduction was aided by a deferred tax credit of US$44.5 million, which masked a tax charge of US$10.4 million over 9M-2020.

Thus, analysts at Chapel Hill Denham tax credit came in at US$33.8 million on a net basis in the period.

“We like that Seplat’s balance sheet remains strong”, Chapel Hill Denham said.

Analysts said although cash balance reduced by 36.0% year on year,  but Chapel Hill Denham found the reported cash balance of US$213 million robust.

Unaudited financials showed that the company paid down US$100 million from the US$350 million revolving credit facility and expended US$108.6 million in capital expenditure.

The impact of these was partly neutralised by about US$198 million achieved in operating cash flows in 9M-2020.

However, analysts stated that management disclosed that a chunk of the capital expenditure is geared towards gas projects, which should underpin a stronger future revenue stream.

Notably, it was said that the ANOH project remains on schedule for 2021, with the first gas production now looking set for Q4-2021, a move found quite instructive.

“We understand that the equity portion of the funding is completed, while the debt part is expected to be closed by the end of Q4-2020 according to the management”, Chapel Hill Denham said.

The investment expressed concern over Seplat’s 9M-2020 revenue of US$387.8 million which moderated by 21.6% year on year, mostly mirroring external factors.

“While we do not believe Seplat is alone in this, especially among Exploration & Production players, we believe the sharp collapse in oil prices was the major cog in the wheel of the company”, analysts said.

Precisely, analysts stated that realised oil prices were lower when compared to the prior period.

For oil, 9M-2020 realised price declined to US$38.60 per barrel litre as against US$64.2/bbl. In the comparable period in 2019.

Analysts however noted that realised gas prices were largely flat at US$ 2.88/Mscf.

On the positive, despite the BRVS accident, downtime, and OPEC-induced quotas, production volumes grew by 7.1% year on year to 50.65kboepd compare with 47.2kboepd in comparable period.

However, Chapel Hill Denham said this was not enough to neuter the lower prices. The reported production volume splits across oil (+40.9% year on year to 33.33kboepd) and gas (-26.3% year on year to 17.3 kboepd).

Since the company’s cost of royalties, DDA, and crude handling fees now includes consolidated amounts from Eland, cost of goods sold rose markedly by 29.1%.

That, together with the US$179 million impairment recorded on assets, weighed on earnings before interest tax depreciation and amortisation (EBITDA) that plunged 15.6% year on year over 9M-20.

For the sake of clarity, analysts explained that the reported impairment charge was necessitated by lower oil prices and splits across non-financial (US$158mn) and financial (US$21.4mn) assets impairment.

Clearly,  Chapel Hill Denham analysts said Seplat isn’t alone in this regard, as Tullow comparatively reported a US$1.33 billion loss after tax over H1-2020, driven by exploration cost written off of US$941 million, mostly on Kenya Blocks 10BB and 13T, and the sizeable write-down on the Uganda asset.

Beyond that, the company also reported an impairment charge of US$418.3 million, primarily on Ghana’s TEN, driven by lower oil prices.

Still, Chapel Hill Denham explained that Seplat’s EBITDA margin improved by 3.8 percentage points as operating expenses growth outperformed revenue growth.

Vetiva capital said in its equity research note that despite the jump in crude output, Seplat’s turnover fell 22% to $388 million, thus underperformance Vetiva estimate of $373 million in 9M’20,

This happened as average realised oil price declined 40% year on year to $39/bbl.

Additionally, an asset impairment expense of $158 million dragged the indigenous oil producer to a loss of $96 million for the nine-month period.

Meanwhile, Vetiva’s review of Seplat’s Q3 figures revealed that oil revenue climbed 18% to $126 million, mainly lifted by additional output from Eland.

“We note that in Q3, Seplat’s crude production surged 70% year on year to a record high of 2.9 mbbls”, Vetiva explained.

However, the gains from higher crude output were tempered by adverse volatilities in the oil market, which saw realised oil price from crude sales drop 31% to $43/bbl in Q3. 

Coronavirus second wave may bite Q4 turnover:

Unlike its peers, Vetiva Capital believes that the second wave of COVID-19 may bite revenue again in the fourth quarter of 2020.

“While we witnessed significant recoveries in oil prices in Q3 relative to Q2, the emergence of a second wave of the coronavirus, especially in Europe and North America, has dealt a big blow to global oil demand, with Brent prices falling to $37/bbl”, Vetiva Capital stated.

As such, analysts at the firm said they see Q4 oil revenue dropping 12% quarter on quarter to $110 million, as they expect Q4 average realised oil price to come in weaker at $38/bbl compare with $43/bbl in Q3.

This translates to an oil revenue of $416 million, down 16% year on year in 2020.

Meanwhile, analysts said they have adjusted 2020 estimate for gas revenue to account for the miss in Q3, taking its 2020 projection for total revenue to $528 million compare with $698 million in 2019.

Vetiva said having seen Seplat reduce its debt balance to $693 million (H1’20: $799 million), we have lowered our forecast for finance expenses to $65 million in 2020.

“We expect Seplat to turn in an after-tax loss of $51 million for the full year, dragged by Q1 non-cash impairment charge of $145 million.

In its revised valuation of Seplat, Vetiva handed buy rating recommendation on the stock as its projected 12-month target price of ₦632.65.

Analysts at Asset and Resources Management limited remain largely bullish on Seplat as they recommend the stock to investors as a buy.

ARM Securities stated that Seplat valuation remain attractive despite subdued performance.

Over the 9M’20 period, Seplat has posted an operating loss and loss before tax of $79.3 million and $130.1 million respectively compare against an operating profit and PBT of $211.2 million and $184.8 million respectively in the comparable period in 2019.

Although average realized crude oil prices was lower, the improvement in crude oil revenue in Q3’20 reflects the higher crude oil production in the period, particularly from the recently acquired OML 40 and Ubima assets which contributed 18.5% of total crude oil production in Q3’20.

“While we are of the view that management cost cutting initiative may have started to feed into performance following the 69.4% quarter on quarter and 61.7% year on year reduction in general and administrative expenses in Q3’20, we continued to see further impairment charges on Seplat’s oil and gas infrastructures in Q3’20 as management re-evaluate potential future cash flow from these assets in light of recent developments in the global economy and most especially, in the global oil space”, ARM Securities explained.

Thus, the firm said to account for the impairment charges on Seplat’s assets, it has lowered long-term crude oil price forecast to $40/bbl from $45/bbl.

“We have also reduced our forecasted production uptime for the year to 79% from 83% given that it came in lower than expected in Q3’20 and currently prints at 77% for the nine-month period”, analyst at ARM Securities stated.

Furthermore, analysts at ARM Securities increased 2020 oil production forecast to 33.30kbbl from 30.80kkbl.

“In the near term, we expect to see improvement in Seplat gas production.

“Management mentioned the two new gas wells it recently completed (Oben 48 and Oben 49), which is expected to produce a combined output of 75MMScfd.

“Also, we expect to see continued improvement in crude oil production from OML 40 and Ubima fields.

“This should support output and moderate the negative impact of lower crude oil prices on revenues.

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“We also expect to see reduced losses on the OMLs 4, 38 and 41 oil fields as the Amukpe-Escravos pipeline comes on stream”, ARM Securities stated.

Unpriced Risks Rocked Seplat Plc.’s Earnings in 2020