Seplat shares remains flat after Q4 2014 results, not a bad sign for now


Thursday, March 26, 2015 2:02 PM / FBN Capital Research


Event: Seplat Petroleum Development Company (Seplat, Not rated) reports Q4 2014 results

Implications: Downward adjustments to consensus estimates expected

Positives: 2014 production above 30,000 barrels of oil equivalent per day (boepd) in line with guidance; 2P working interest reserves up 24% y/y to 281 million barrels of oil equivalent (mboe)

Negatives: Q4 sales down 23% y/y to US$183m and PBT down 77% y/y to US$24m


This morning, Seplat Petroleum Development Company (Seplat) reported Q4 2014 results, which showed that sales were down 23% y/y, while PBT and unadjusted PAT were both down 77% y/y. Unbudgeted downtime during the quarter due to shutdown on the Trans Forcados System (TFS) - the primary third party oil evacuation route, and softer oil prices were the key drivers behind the lower sales. Oil sales of US$172m still accounts for over 94% of the firm’s earnings. Seplat recorded more days of unplanned downtime as a result, bringing the total to 40 days (33 days as at 9M 2014) in 2014. Seplat’s working interest production in 2014 was 30,823boepd, implying that the firm successfully hit its production target for the year. Excluding unplanned downtime, average working interest production was approximately 34,600 boepd. Downtime guidance for 2015 is around 50/60 days vs. 35 days planned for 2014. This comes on the back of fears of increased disruption to the export pipeline post-election.


Reconciliation losses from Trans Forcados were given at 10.6%, worse than the firm’s 5% target. At the moment, the Warri Refinery evacuation route cannot provide sufficient cover. In Q4, oil sales of US$172m declined 26% y/y, driven by lower oil prices, while gas sales of US$11m were up 127% y/y. Although oil sales continue to be the primary driver for topline growth, the gas business is primed to be more influential in the short to medium term. Seplat has priotised the commercialisation and development of its gas reserves as it seeks to tap into growing domestic demand. The newly installed 150 million standard cubic ft per day (mmscf/d) gas processing facility at Oben is expected to support the firm’s ambition to create a gas hub at Oben.


A gross margin contraction of 115bps y/y to 59% and a 42% rise in opex led to the y/y decline in PBT. We suspect that rig-related costs weighed on gross margins. The opex rise was primarily due to US$16m (our estimate for the quarter) one-off costs in relation to financing, regulatory and procurement, and staff costs. PAT y/y comparisons are skewed by deferred tax liabilities as a result of the pioneer tax status granted by the government. Excluding the impact of the one-off costs, on a normalised cost basis, Q4 PAT increased 54% y/y to US$40m.


A final dividend of US$0.09 is proposed (interim was US$0.06) which implies a yield of around 5% (fx rate of N200 assumed).


Consensus sales and PBT forecasts for 2014 are US$807.5bn and US$311.2m respectively. As such, on the back of these numbers and relatively softer crude oil prices, we expect downward adjustments to consensus estimates. Management continues to focus on organic and inorganic growth strategies, as well as building capacity in the gas segment. Management stated on its conference call this morning that it is actively searching for (asset acquisition) target(s) which fit into the firm’s growth strategy.


Although, the recently acquired working interests in OML 53 and OML 55 are still being disputed in the court, management stated that these blocks currently contribute to the firm’s gross output (2,000bpd from OML 53 and 8,000bpd from OML 55), whilst contributing slightly to the firm’s cost profile. Management also guided to a 2015 production target of between 33,000 and 36,000 boepd, which is expected to occur within very strict capital limits. In addition to this, no tax exemptions are to accrue to these newly acquired blocks, at least for now.


Seplat is now considering hedging oil prices in divergence from its previous strategy, even though this is not crucial at this point as project break-even is around US$42/49 per barrel. As an immediate step, Seplat’s capex plan for 2015 is down 43% y/y to US$168m, with drilling accounting for just 46% compared with 71% in 2014. The company’s balance sheet remains healthy, with cash at US$285m and a refundable deposit of US$453m. Ytd, Seplat’s shares have remained flattish compared with the NSE ASI (-13.2%).


Seplat (Not rated) Q4 2014 results (US$ millions)

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