Wednesday, August 14, 2019 /2:40PM / Meristem Research / Header Image Credit: @seplatpetroleum
Gas Tolling Fees Prop Up Revenue
SEPLAT’s H1:2019 results affirmed a key fact we previously asserted – this is a company with genuine growth potential. Overall revenue came in at NGN108.97bn, 3.98% higher than the prior corresponding financial period (NGN104.79bn). However, contributions from the oil and gas segments declined considerably owing to production figures which ran off at a slight tangent to guidance. At the start of the year, SEPLAT had put out guidance of 24kbpd – 27kbpd for oil and 146MMscfd – 164MMscfd for gas but only achieved 22,974bpd for liquids (vs. 25,286bpd in H1:2018) and 145MMscfd (vs. 155MMscfd last year) for gas in H1. Oil and gas prices were also at sizeable discounts to 2018; average oil price was USD65.20pb (H1:2018: USD69.10pb) while gas was priced at USD2.75/Mscf (H1:2018: USD3.04/Mscf). The fall in production and prices combined to send revenue from crude oil sales down 15.76% to NGN66.29bn, while gas sales tumbled by a similar quantum; -15.13% to NGN22.15bn.
Whereas gross revenue should have come in lower at NGN88.44bn, the company was handed a lifeline in the form of gas tolling revenue. SEPLAT was able to negotiate and finally recognize USD66.89mn (NGN20.53bn) in tolling fees arising from NPDC’s share of processed gas from the Oben Gas Expansion project (from June 2015 – December 2018), which was financed on a sole risk basis by Seplat. Provided that its work programme for H2 is delivered, SEPLAT should exit 2019 at production levels of 34,000bpd for oil and 158MMscfd for gas, bringing overall output to 62,000boepd. We have upped the ante on our 2019FY revenue projection by 4.60% to NGN221.08bn.
Impairment Losses Nonetheless Knock Operating Margins
Cost to Sales (CtS) came in substantially lower at 41.70%, settling gross margin at 58.30% (H12018: 50.87%). The lower CtS is a result of the higher revenue base in the period, as costs on the gas tolling revenue had been recognized in earlier periods. Adjusting for this unusual item places CtS at 51.38%. As administrative expenses soared by 9.78% to NGN12.92bn, OPEX surged to NGN22.64bn (+81.08%), moderating operating profit by 11.89% to NGN42.68bn.
Operating Costs should have come in lower, but for a NGN12.32bn write off on receivables owed by NPDC to SEPLAT, which the company had recognized in previous periods. As the company sustained deleveraging of its balance sheet, finance costs were softer (-39.93%; NGN7.61bn) during the period, triggering pre-tax profit of NGN36.96bn. Effective tax rate during the period was 1.18%, due to deferred tax assets. The company also booked a profit of NGN0.98bn from its 50% sale of ANOH to NGC which eventually bolstered after-tax earnings to NGN37.50bn (EPS: NGN65.96).
Significant Headroom to Capitalize on Opportunity
In H1:2019, SEPLAT spent NGN8.62bn of its NGN61.59bn capex budget and plans an additional NGNG37.57bn for the rest of the year with, the balance of NGN15.40bn deferred to Q1:2020 due to delays in rig work. With a cash balance of NGN133.34bn, there is significant headroom to capitalize on strong oil & gas plays in the Niger Delta while funding development work on existing assets.
Outlook and Recommendation
Our assessment of SEPLAT remains upbeat for the year. Based on the most-recent release, we expect net income to pitch in slightly higher at NGN50.14bn (vs. previous estimate of NGN49.69bn). 2019FY expected EPS is now NGN88.21 and with target PE of 6.64x, we maintain our target price at NGN585.65, a 19.52% upside to the current share price of NGN490.00. The counter now has a BUY recommendation.