Wednesday, March 30, 2016 06:40PM / Vetiva Research
• FY’15 pre-tax profit 1% ahead of Vetiva estimate
• $21.5million tax recognition following elapsed initial pioneer status
• Strong FY’16 start disrupted by Forcados Terminal shut-in
• TP cut to N272.65 (Prev: N374.88) on hazy production, pioneer tax outlook
Earnings closely in line with revised estimates
Subsequent to the trading update provided in January (See our 26 January note), SEPLAT announced FY’15 earnings that was largely in line with our revised estimates, save for a surprising tax provision. FY’15 revenue at $571 million came within management’s $550 million to $600 million guidance, and 2% ahead of our revised estimate, whilst pre-tax profit came in at $87 million (Vetiva estimate: $86 million).
From the result, we calculate that SEPLAT’s cost of production averaged $24.10/bbl for the year, down from $30.35/bbl recorded in FY’14 as working interest (W.I) production rose 41% to 43,372 boed (liquids: 29,003 bopd, gas: 86 mmscfd), ahead of management guidance of 32,000 boed – 36,000 boed.
We calculate FY’15 netback at $23.74/bbl, down from our $48.15/bbl computation for FY’14 as oil prices plunged. Following a $21.5 million tax provision, EPS came in at 12 cents (Vetiva estimate: 15 cents). The Board of Directors has proposed a final dividend of 4 cents (Vetiva estimate: 3 cents) to bring 2015 total dividend to 8 cents, a 69% payout ratio.
Hazy outlook on pioneer tax status
We recall that SEPLAT was granted pioneer tax incentive by the NIPC for an initial 3 year period (2012 to 2015) renewable for another 2 years on approval. Thus, we had modelled 0% tax up until 2017 with the assumption that the 2 year extension will come to play. As at 31 December 2015, the initial 3 year period had elapsed and even though SEPLAT has filed for an extension, the NIPC was yet to approve; thus, management recognized a deferred tax charge for FY’15.
Management claims it has met all the requirements for an extension. However, we do not have good visibility on the extension of pioneer status since Nigeria’s new government came into power. Hence we have adjusted our model to recognize taxes going forward.
We calculate SEPLAT’s effective tax rate at 29%, 37% and 34% for FY’16, FY’17 and FY’18 respectively. Effective tax rate factors in PPT of 85%, CIT of 30% (Gas), marginal field tax rate of 55% and education tax of 2%.
Reality check! Prudent 2016 CAPEX as low oil prices linger
SEPLAT has guided to $130 million CAPEX spend for FY’16, down from $152 million and $321 million in FY’15 and FY’14 respectively. The 2016 work program indicates few activities with just $20 million committed to drilling (2015: $64 million).
The bulk of CAPEX spend will go to SEPLAT’s gas projects. The next phase of expansion of the Oben gas plant is to install a further 225 mmscfd capacity that will take overall processing capacity up to 525 mmscfd.
According to SEPLAT, the three modules (75 mmscfd each) have been ordered with delivery anticipated in Q3 2016 and installation in Q4 2016.
Strong start to 2016 disrupted by Forcados Terminal shut-in
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 FY’15 conference call, the Forcados Terminal was still Shut-in and traders imagine that exports could be halted until April (according to Reuters). SEPLAT has guided to 67% uptime in 2016 (2015: 79%) in coming up with production guidance of 41,000 to 48,000 boed (Vetiva estimate: 47,308 boed); production had averaged 52,000 boed prior to the Forcados terminal shut in.
Whilst our production volumes are raised higher, the production set back and tax assumption put FY’16 PAT at $82 million (Previous: $87 million). Our Target Price is revised lower to N272.65 (Previous: N374.88).