September 16, 2021/United Capital Research
Please click here to download the full report
Earlier, major indigenous upstream player, Seplat (‘SEPLAT’ or ‘The Company’) released its H1-2021 financials, which showed a 32.1% y/y and a 404.4% y/y increase in topline and bottomline to close at $303.8m and $36.1m, respectively. The strong performance was mainly bolstered by increased crude and gas sales which were spurred by the global economic recovery (following the relaxation of pandemic-related restrictions), the low base effect from 2020, and increased vaccination rollout which has enabled sustained demand recovery. Below we take a critical look at the company’s performance and present our outlook.
Topline boosted by a rebound in economy activities: On production activities, average working interest was down 0.8%, to 50,785 beopd the period under review, although it remained within production guidance. The company declared that the marginal decline in production was due to a drop in production in OML 40 in Q1-2021. Liquid production also dropped by 12.0% y/y to 30,028bpd, while gas production increased by 21.2% y/y to 120 MMscfd (H1 2020: 99 MMscfd).
In H1-2021, total Revenue grew by 32.1% y/y following increased sales volumes buoyed by the rebound in global economic recovery, which spurred improved demand for energy. On a segmented basis, Oil revenue was up 35.3% y/y to $308.1m, largely due to increased liquid production and a 79.4% increase in average realised price. The average realised price in the period under review was $64.5 p/b, compared to $35.8 p/b in the corresponding period in 2020.
For its Gas segments, Gas prices remained relatively flat in the period under review as average realised gas price printed at $2.86/Mscf (H1 2020: $2.88/Mscf). Nevertheless, Gas Revenue was up 19.7% y/y to $63.9m mainly due to an increase in gas production, reflective of the new gas wells brought onstream during the period and the full operation of the Oben gas plant. Total gas production increased to 120 MMscfd (up 21.2% y/y) in the period under review.
Higher production levels drive cost higher, but improved revenue boosts Gross and Operating margins: Cost of sales increased by 12.2% y/y to $212.2m in H1-2021, mainly driven by a surge in operational and maintenance expenses, up 57.2% y/y to $54.1bn. The jump in the Cost of Sales was due to increased production capacity from additional production from acquired assets. Also, as a result of improved production capacity, OPEX per barrel inched higher to $9.7/boe from H1-2020: $7.6/boe). Despite the uptick in Costs in Sales, SEPLAT’s Gross profit increased by 135.8% y/y to print at $44.8m in H1-2021, stemming from its improved topline, as a result of improved demand for crude from refineries and the rebound in oil prices. Furthermore, operating profit improved massively, up 203.1% y/y, further boosted by the recognition of $65.7m in underlifting income.
Net finance cost surged 29.9% y/y to $47.4m as scheduled coupon repayments on the company’s Eurobond program were sustained. Furthermore, PBT and PAT grew by 334.02% y/y and 404.4% y/y and to $62.0m and $36.1m in the period under review. Following improved profitability in Q2-2021, the company paid an interim dividend of $0.025 in Q2-2021.
Operating Cash flow hindered by an impairment charge booked in 2020: Cash flows from operating activities printed at $125.7m, 41.3% y/y lower than $176.6m in H1 -2020 despite the increased revenue and net income position. This was mainly due to the recognition of impairment on fixed assets in 2020. As such, the impairment charges on PPE, lead to a higher base for 2021. As such operating cash flows to revenue dipped to 0.4x in H1-2021, from 0.7x in the corresponding period in H1-2020.
Outlook for SEPLAT remains bright, but with pricey valuation
Looking forward, our outlook for SEPLAT remains bright, hinged on successful vaccination programs across the globe (which should sustain gradual return to normalcy) coupled with the recent OPEC+ plan to gradually increase production quota. OPEC has recently loosened Nigerian’s production quota to 1.8mbpd from 1.5mbpd, which is expected to kick in from 2022 (this is apart from OPEC+’s gradual monthly 400,000bpd increase in production). In the absence of any economic shocks, we remain bullish on the firm’s production capabilities in 2021. We expect ANOH, SEPLAT’s gas processing plant, scheduled to resume in H1-2022, to boost its revenue drive, bolster its gas expansion plans and SEPLAT’s gas supply to the Nigerian power grid.
Furthermore, in 2022, We expect gas revenue to improve due to the expected increase in electricity tariffs following the expected implementation of the Multi-Year Tariff Order. The power sector’s shift towards cost-reflective tariffs will increase SEPLAT’s gas supply revenue in the coming calendar year. Gas revenue will also be boosted by the onset of incoming production from new gas wells being brought onstream.
Considering the above and using a blend of our DCF and NAV methodologies whilst also adjusting our country risk premium lower and adopting a forward-looking risk-free rate. We consider SEPLAT a HOLD at the stock’s current market price of N710.0 per share, our revised year-end price of N770.0, represents a 8.5% upside.
Please click here to download the full report