Tuesday, April 04, 2016 05.36PM / ARM Research
Last week, Seplat Petroleum Development Company Plc. (Seplat) published its FY 16 audited result, which revealed striking before and after tax losses of $172.7million and $166.1million respectively (2015: PBT - $87.1million, PAT - $65.6million), following sustained force majeure on its key export route (Trans Forcados System) as well as foreign exchange and derivative losses.
Parsing through finer details of the result, FY 16 revenue of $254million (2016E: $272million) was down 55.4% YoY on account of lower working interest production (-40% YoY to 25.8kbopd) which drove net crude oil sales to $148.7million (-69.9% YoY). Thus, despite lower input cost (-43.3% YoY), gross profit sank 71.1% YoY with corresponding margin contracting 15pps YoY to 28%.
Further-down, foreign exchange loss of $101.4million (2015: foreign exchange gain of $7.7million) as well as a $12.5million loss on derivatives (2015: derivative gain of $13.2million) worsened the impact of a stifled underlying performance to drive the aforementioned after tax loss of $166million in the period. On the positive side of things, gas production increased 10% YoY to 95Mmscfd with gas sales up 37% (relative to prior year) to $105.5million (2016E: $113.5million). In our view, higher gas production reflects an over two-fold YoY increase in gross capacity to 525 MMscfd following the Oben Phase II expansion.
Seplat post loss at gross level…
Notably, fourth quarter performance indicated a deterioration from the production run rate of 9M 16 (-34% YoY to 26.2kbpd) as volumes slowed even further (Q4 16 sales: -13.4% QoQ). According to breakdowns, the drop in sales cut across oil (-20.2% QoQ) and gas (-7.25% QoQ) despite management’s guidance of a ramp-up in oil export at the Warri refinery jetty as well as gas production increase on the back of Oben gas expansion. The weak turnover alongside a surprising rise in input cost (+19.4% QoQ) triggered the company’s first gross loss (of $2.2million) on record.
…with FX pressures driving earnings further south
Unsurprisingly, amidst sizable naira depreciation over 2016, Seplat’s translation of outstanding trade receivables from NPDC resulted in a $71.4 million FX loss (Q3 16: $1.7million). This together higher OPEX (+5.9% QoQ) more than offset positive effect of a $16.1 million net finance income (Q3 16 net finance cost: $15.4 million) as well as tax credit of $16.8million, leaving earnings for the quarter depressed.
Figure 1: Trend in working interest production vs. quarterly PAT
In spite of the loss, the company’s profile was strong on other fronts with cash flow from operations at $172million (2015: $38million) and net debt at $516million (2015: $573million). In addition, net NPDC receivables balance stood at $229million (2015: $435million) after backing out NPDC’s share of gas revenues, crude handling charges, as well as foreign exchange differences and impairments.
Forcados reopening: hard way, the only way?
Over 2017, management guides to higher exports via the Warri refinery jetty to a gross average level of 30kbpd with projected completion of the Escravos pipeline expected to facilitate a full delink from Forcados. Precisely, Seplat is undertaking upgrade at the Warri refinery jetty with its management earmarking Q2’17 for completion. Similarly, the company is actively working with the government on completion of a new 160kbpd Escravos terminal for Seplat’s western assets which is expected to be fully operational in H2 2017.
That said, not to wag the dog, while we are positive on volumes ramp up via the Warri refinery route as well as kick-start of export via the launch of Escravos pipeline, a rebound to earnings remains hinged on re-opening of Forcados terminal.
We have adopted this conservative view on production via alternative route guided by lower volumes in Q4 16 despite earlier management optimism. On this evidence, and excluding impact of Forcados re-opening, we forecast a 17.8% YoY increase in working interest production to 30.5kbopd (2016: 25.8kbpd) – liquids (+29% YoY to 13kbpd) and gas (+10.9% YoY to 105Mmscfd). Thus, we forecast 2017 revenues at $298.6 million (+17.5% YoY) – liquids (+26.4%) and gas (+4.9%).
The foregoing combined with our expectation for a two-fold YoY expansion in net finance cost to $46.2million (2016: $14.9million) (finance income in 2016 was buoyed by interest of $48million calculated on outstanding NPDC receivables in accordance with provisions of the Joint operating agreement, which in our minds, was not sustainable), guides our forecast for a loss before and after tax of $16.8million and $9.6million respectively. Based on our analysis, total working interest production will need to cross 32kbopd (liquids: 12kbpd) for Seplat to report positive earnings in 2017, which the company can only achieve on the reopening of of Forcados. To estimate potential impact of earnings based on production volumes, we play out different scenarios in the table below.
Figure 2: Scenario outcomes for changing production level (Changes in PAT $’mn)
Elsewhere, we are less sanguine about the target completion time of the Escravos pipeline owing to government’s delayed completion on similar projects, and therefore see Q4 17 as a more realistic date for the project. In view of this, we expect the pipeline to start impacting working interest production from 2018— underpinning our 45% YoY growth expectation for working interest production to 32.49kbpd in 2018F.
On Forcados, while we expect a re-opening this year, we also retain a conservative targeted export resumption to H2 17. On balance, we adopt a base case oil production of 13kbpd (+29% YoY) for 2017, bringing combined working interest production to 30.5kbopd.
We value Seplat’s Oil business at $1.72 per share and Gas business at $0.38 per share, having applied risked valuation methodology for contingent resources. The foregoing, combined with our exchange rate forecast of N360/$ for 2017, drives our FVE 21% higher to N346 (previously N285). Our FVE is at a 13% discount to last closing price of N396.
We have a SELL rating on the stock.