Seplat Plc H1’Q2 2020; Company’s Performance Impacted by Pandemic

August 4, 2020/InvestmentOne Report 

·         Top line Performance: down 11.11% q/q, 37.20% y/y.

·         Gross profit margin: down to 5.73%, from 25.37% in Q1 2020 and 64.22% in Q2 2019.

·         OPEX/sales ratio: down to 47.25%, from 12.79% in Q1 2020 but up from 22.53% in Q2 2019.

·         PBT margin performance: up to -49.68%, from -73.36% in Q1 2020 but down from 51.74% in Q2 2019.

Seplat released its Q2 2020 results and we observed the impact of the decline in crude oil price following the outbreak of COVID-19. Higher cost of sales dealt a further blow on its performance with gross profit declining to N2.16billion. The increase (y/y) in operating expenses and net finance cost reflected in bottom-line performance as the company recorded a loss before tax of N18.73billion.

Lower Oil Price Drives Top line Lower

The result showed that Q2 2020 revenue was down 37.20% y/y, reaching N37.69billion. While gas revenue rose by 15.94% y/y to N10.83billion, the company’s oil revenue printed at N26.86billion (down 10.92% y/y). The decline in oil revenue was on the back of the decline in crude oil price following the outbreak of COVID-19 and price war between Saudi Arabia and Russia, which led to a supply glut. Accordingly, Brent crude price averaged US$30.29/barrel in Q2 2020 vs U$/65.63barrel in Q2 2019. 

The company recorded a jump in its cost, which led to a deterioration in Gross profit margin (GPM). GPM was down to 5.73% (from 64.22% in Q2 2019), with gross profit declining by 94.40% y/y to N2.10billion. The surge in the firms cost of sales resulted from a 97.01% and 132.36% y/y jump in DDA 1 and O&M 2 expenses to N14.53billion and N7.31billion respectively. According to management, this was due to additional production from OML 40, which it recently acquired from Eland Oil & Gas. Other cost related to OML 40 included Barging and Trucking which amounted to N3.66billlion. 

Finance Cost Affects Bottom-line Performance

Operating expense for the quarter was up 31.72% y/y owing to the recognition of an unrealized fair value loss on its hedge contracts. Consequently, OPEX/sales ratio jumped to 47.25%, from 22.53% in Q2 2019.  Moving down the P&L, the jump in net finance cost (up 213.87% y/y) to N5.34billion, combined with depressed operating profit, was enough to hamper bottom-line performance. Hence, the oil & gas producer recorded a loss before tax of N18.73billion. The jump in net finance cost was on the back of a 105.23% increase in finance cost to N5.59billion, which could have been as a result of the US$350 million revolving credit facility taken in December 2019 and the consolidation of Eland finance cost. 

Half-year Performance

On a half-year basis, much of the story remains the same as turnover declined by 26.49% y/y on the back of lower average realised oil price (US$34.94/bbl) compared to H1 2019 (US$65.16/bbl) and lower gas volumes. This, combined with a 47.88% rise in cost of sales, pressured gross profit margin down to 16.12%. Furthermore, the rise in OPEX/sales and net finance cost pushed the companies bottom-line to a LBT of N49.84billion, from a PBT of N36.95billion in H1 2019.   

Seplat’s oil production averaged 34,117bopd (up 48.50% y/y) on a working-interest basis in H1 2020 (H1 2019: 22,974bopd); this was bolstered by contribution from Eland OML 40 assets: 10,861bopd (31.38% of group oil volumes). On the other hand, Seplat’s gas production for H1 2020 was 99MMscfd at an average selling price of US$2.88/Mscf (H1 2019: 145MMscfd, US$2.75/Mscf). 

On a sequential basis, topline performance in Q2 2020 compared to Q1 2020 came in lower majorly on the back of weaker oil price in Q2 2020 (US$30.29/bbl in Q2 vs US$49.06/bbl). However, gas volume sales improved during the quarter as the company successfully completed a 15-day turnaround maintenance for the Oben Gas Plant in March. We point out that gas production was affected during that maintenance period and this impact gas revenue in Q1 2020. 

Oil Price to Remain a Major Concern

So far this year the oil market has been volatile with price dwindling rapidly on the back of multiple unfavorable interconnected events. Although the implementation of the OPEC cuts seem to be returning balance in the global oil market, we maintain a negative outlook on oil price as we expect the reeling effects of the virus to linger making it unlikely for oil price to return to pre-COVID levels in the near future. 

Furthermore, IMF’s negative 2020 output growth projections for developed economies (-8.0%) and weakened outlook for other large fuel consumers such as China (1.0%) and India (-4.5%) may mute a resurgence in the commodity’s price.  

We believe this could play out negatively for Seplat in terms of topline performance. Nonetheless, the company should continue to thrive in these difficult times given its cost efficiency and cost saving initiatives. In addition, the diversification of its topline to include gas exploration and sales (accounting for 22.89% of revenue in H1 2020) should provide some buffers for overall performance. We highlight that, the company’s hedging strategy of 1.5MMbbls/quarter at US$45/bbl for Q3 2020 could continue to protect the company from low oil prices. However, they may book a loss on Q4 2020 oil hedge at US$/30/bbl as oil price is more likely to trade above that level. 

Management affirmed that, due to the imposition of production cuts by OPEC of which Nigeria is poised to implement, Seplat has been advised by the NNPC to revised its production quota in July and August 2020. However, little impact is expected on full-year result. 

Lastly, the Amukpe to Escravos pipeline construction has faced some delays due to COVID-19 however, management affirmed that it is set to provide a third export option for liquids production from OMLs 4, 38 and 41 in H2 2020. We believe the operation of this export route would bode well for the firm in the face of shutdowns at Forcados terminal. 

YE(DEC) N’ Million

 Q2 2020

 Q/Q

 Y/Y

 H1 2020

 Y/Y

 Revenue

        37,698

-11.11%

-37.20%

     80,106

-26.49%

Cost of Sales

      (35,538)

12.28%

65.44%

    (67,189)

47.88%

Gross Profit

          2,160

-79.92%

-94.40%

     12,917

-79.67%

Gross margin

5.73%

-1964bps

-5849bps

16.12%

-4218bps

OPEX

      (17,811)

-65.38%

31.72%

    (69,251)

194.70%

Opex/sales

47.25%

-7405bps

2472bps

86.45%

6488bps

Net Finance Cost

        (5,339)

-19.06%

213.87%

    (11,935)

105.78%

PBT

      (18,727)

-39.81%

-160.29%

    (49,838)

-234.86%

PBT margin

-49.68%

2368bps

-10142bps

-62.22%

-9613bps

Tax Credit/ (Expense)

        15,572

542.89%

445.89%

     12,056

2858.81%

PAT

        (3,155)

-90.89%

-111.88%

    (37,782)

-203.46%

PAT margin

-8.37%

7328bps

-5261bps

-47.17%

-8068bps

Source: Company Financials, Investment one Research

1 Depletion, depreciation and amortisation

2 Operational & maintenance expenses

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