May 9, 2022/United Capital Research

During the recent Q1-2022 earnings season, Seplat Energy (“Seplat” or “the company”) released its unaudited Q1-2022 results showing sustained growth in Revenue, climbing 58.6% y/y to $241.8mn, from N152.4mn in Q1-2022. Despite the 58.6% and 196.4% growth in Revenue and Profit Before Tax, Profit After Tax(PAT) fell by 21.3% due to deferred tax debit in Q1-2022. In this report, we provide an update on expectations for the company in 2022 and an updated position on valuation.

Gross Revenue for FY-2021 was at $241.82mn, representing a 58.2% y/y compared to $152.4mn reported in the corresponding period in 2021. Working interest production was down by 1.3% to 47.6kbpdoe in the period under review.

Despite the reduced production, the firm’s Crude segment rose by 76.6% to $216.2mn (Q1-2021: $124.0mn), 74.2% higher than the Q1-2021 increase in average realised price from $60.7 per barrel to $97.5 per barrel. On its Gas sales, Revenue was reportedly sturdy, although gas output dropped by 5.8%, to 107mscf, from 144mscf in Q1-2021. Gas Revenue fell by 9.5% from $25.6mn. The average realised gas price remained flat at $2.76 in Q1-2022.

On the cost side, Cost of sales (COS) increased by 24.9% y/y to $124.4mn (Q1-2021: $99.6mn), mainly driven by a 24.9% y/y. The increase in Cost of Sales, was primarily due to a 76.1% increase in royalties paid to $50.1mn from $28.4mn. Consequently, SEPLAT’s Gross profit rose by 122.2% to print at $117.3mn. Operating profit was also up to $102.0mn, as the increased Revenue boosted operating margins.

Profit before Tax (PBT) rose to $83.0mn from $28.0mn in Q1-2021, representing a 196.4% increase in PBT from Q1-2021. However, despite recording strong growth, PAT fell by 21.3% to $19.5mn, mainly due to Seplat mainly due to a deferred income tax expense of $63.5 mn, including a current tax charge of $17.9mn and a deferred tax charge of $45.6mn The company disclosed that the tax charge is mainly driven by the unwinding of previously unutilised capital allowances and higher under-lift in the current year. The effective tax rate for the period was 76% (2021: 11%). The company also approved an interim dividend payment of $0.025 per share for Q1-2022.

Outlook for 2021 – Sustained higher prices will support Revenue in 2022

Our Outlook for the rest of 2022 is predicated on expected sustained oil prices, as major high output producers within OPEC, such as Saudi and UAE, have opted not to cover supply shortages. Other market players, such as shale producers, which would have been a threat at higher prices, seem focused on shareholder growth instead of a grab for market share, a strategy adopted since the pandemic. As a result, we expect 2022 results to be relatively robust as currently higher oil prices bode well for SEPLAT. Although in recent weeks, OPEC has looked to revise its forecasts following a slowdown in demand stemming from a slowdown in the Chinese market coupled with rising inflationary pressures globally. Seplat’s output will also be constrained slightly, as OPEC adhered to its stance of gradual output adjustments keeping the crude market tight amid global demand recovery in its most recent May meeting. However, despite some downside risks, we expect the global oil market to remain tight supporting sustained higher prices.

Planned acquisition of ExxonMobil assets still on course

In a recently held Q1-2022 review of its unaudited results, management disclosed that its acquisition of  MPNU’s entire offshore shallow water from Exxon Mobil for $1.28bn plus up to $300mn contingent consideration is expected completion in H2 2022, pending the necessary approvals from government and regulators. The proposed acquisition will add a 182.6% increase in output to Seplat’s current production to 146bkepd, from 51bkepd.

Valuation

Considering the above and using a blend of our DCF and NAV methodologies while adjusting our country risk premium from our last earnings update. Our valuation does not factor in the expected takeover of Exonnmobil assets. As we await the necessary approvals before the conclusion of the deal.  We consider SEPLAT a HOLD as the stock’s current market price of N1200.0 per share presents a 10.3% upside to our year-end price of N1324.7.