Thursday, April 21, 2016 13:26 PM / CardinalStone Research
The Forcados Oil Pipeline System is the second largest network in the Niger Delta, and transports oil, water and associated gas from fields in the western delta to the Forcados oil terminal. The terminal has an oil export capacity of 400,000 barrels per day (bpd). A 31 kilometre pipeline delivers crude to offshore loading berths for export. The Trans Forcados Pipeline (TFP) is the major trunk line within the system, into which feed multiple branches from onshore fields.
On February 14th, the TFP was attacked by Niger Delta militants who destroyed a section of the pipeline prompting Shell Petroleum Development Company of Nigeria Limited to declare a force majeure on Forcados liftings on February 21 2016, following the disruption in production caused by the spill on the Forcados Terminal subsea crude export pipeline.
The continued shut-in of Nigeria's popular crude oil grade Forcados following sabotage on the subsea Forcados pipeline and export terminal has continued to assail Nigeria's economy, as Angola overtakes Nigeria as the highest oil producing nation in Africa. The Organisation of Petroleum Exporting Countries (OPEC) latest monthly report revealed that Nigeria's oil production fell by 67,000bpd in March to 1.677mbpd from 1.744mbpd, while Angola saw its oil output rise to 1.782mbpd within the same period.
Forcados has the capacity to export about 400,000bpd, but the constraints to repair works on the vandalized pipeline have dashed hopes of further export through the lines in the next few months. News flow as reported by Reuters on Wednesday (click here) indicated that repair works on a Nigerian pipeline feeding the key Forcados export terminal will last until June. Previous guidance had suggested that repair works would be completed by April.
The February force majeure announced by Shell following the disruption in production caused by the spill on the Forcados Terminal subsea crude export pipeline has impacted production from OMLs 4, 38 and 41 (SEPLAT's core assets - over 90% of production). Given the nature of the disruption, we think it will take a while before production resumes. As at 25 March when SEPLAT hosted its FY'15 conference call, the company guided towards 67% uptime in 2016 (2015: 79%) in coming up with its production guidance of 41,000bpd to 48,000bpd.
Whilst we acknowledge the existence of an alternative evacuation channel (Warri refinery pipeline), we think management is likely to revise their production targets and downtime expectations for 2016 with adverse connotations for FY'16 revenue and net profit. Production had averaged 52,000bpd prior to the Forcados terminal shut in.
Assuming a constant run rate and based on management's previous guidance, we estimate that production uptime for 2016 may be down to c.59%. Thus, we have revised lower our revenue estimate by 12% to US$527 million and PAT by 16% to US$68 million.
Our TP is revised lower to N337.39 (Previous: N376.38), hence we place a HOLD rating on the stock. Click here for our previous update on the company.
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