Seplat Petroleum Development Company - Earnings Recovery Looking More Secure


Wednesday, August 16, 2017 9:59AM / Vetiva Research

·         Q2 delivers $8.6 million operating profit as Forcados resumes

·         Production back to pre-Force Majeure 56,000 boed (working interest)

·         Warri crude evacuation capacity expansion, doubles to 30,000bpd

·          FY’17 hydrocarbon recovery on track, forecast at 38.1k boed (FY’16:25.9k)

·          Target Price per share (considering 2P assets only) revised to N582.70/share (Previous: N365.54)

Q2 operations report profit on Forcados resumption return

For the first time since Q1’16, SEPLAT reported profit from quarterly operations – posting an EBIT of $8.6 million.

Q2’17 performance was partly supported by the resumption of crude export at the Forcados Terminal following lifting of the force majeure on June 6.

Notwithstanding, the 3- month bottom-line remained negative as in previous quarters - pressured by finance expenses.

In line with expectation, Liquids production post resumption rose to the pre-force majeure working interest levels of 34,000 boed, propping Q2 average production to 9,507 bpd (Q1’17: 5,112 bpd).

Gas production also returned to normal levels of around 130 mcfd, improving the quarter’s average reading to 101 mcfd (Q1’17: 95 mcfd).

As a whole, hydrocarbon production for the Q2’17 period rose c.53% q/q to 32k boed, bringing H1’17 production to 26.3k boed (up 3% y/y).

However, revenue over the 6-month period was down 14% y/y to $131 million (after adjustment for crude over-lifting) amidst mild decline in average realized selling prices – Crude oil price: down 2% y/y to $45/bbl (20% of H1’17 volume hedged at $47/bbl), Gas price: down 3% y/y to $2.97/mcf. For H2’17, SEPLAT has hedged 1.70 million bbls (about 35% of management forecast production) at a price of $50/bbl.

Barring further volume or price shocks, we believe SEPLAT is well on course to return to profit by FY’17 end.

Exports de-risked

We understand that SEPLAT has completed the upgrade and repair of its two jetties at the Warri refinery.

The upgraded jetties can sustain exports of 30,000 bpd (gross), up from 15,000 bpd pre-upgrade.

Work is also ongoing on the 160,000 bpd Amukpe to Escravos pipeline with completion date now revised to Q1’18 (Previous: Q4’17).

SEPLAT signed an MOU on 12 July with the pipeline operator Pan Ocean to work in partnership on i) completion of the pipeline, ii) negotiation with the Escravos Terminal Operator (Chevron) on crude handling and iii) operation & maintenance of the pipeline going forward.

Although attacks on pipeline installations have significantly subsided following negotiations between the government and Niger Delta militants, a permanent ceasefire still has not been guaranteed.

Also, risks such as pipeline explosion and damages from theft remain headwinds. That said, we find this progress on SEPLAT export route diversification (particularly on the jetties) quite significant and key to sustainability of earnings recovery.

Although crude liftings via the Warri refinery jetty attract higher costs of around US$11/bbl, this higher expense is partly offset by the fact that liftings are not subject to reconciliation losses and crude handling & transport charges that are payable when exporting via Forcados.

Buoyed by the cautiously optimistic outlook on H2’17 production, we forecast SEPLAT’s working interest production at 38.1k boed (Oil: 19.1k bpd, Gas: 114 mcfd), higher than FY’16 25.9k boed (Oil: 10.1k bpd, Gas: 95 mcfd).

Management has guided to production range of 17,000 to 19,000 bpd and 105 to 115 mcfd, or 35k to 38k boed.

Topline recovery still on track

At our average $50/bbl oil price assumption, we see FY’17 oil revenue at $329 million (Previous: $269 million, FY’16: $149 million) - largely driven by H2’17 production.

We are equally positive on the gas segment as the return of the Forcados terminal will further de-constrain production.

Also, the 100% increase in Warri jetty capacity effectively improves SEPLAT’s ability to raise gas volumes by de-constraining condensate production at this alternative evacuation route in event of a shut-in at Forcados.

We note SEPLAT’s increased gross gas processing capacity to 575 mcfd (Previous: 300 mcfd) following the commissioning of Phase II expansion of the Oben gas processing plant earlier in the year.

We forecast FY’17E gas sales at $123 million on an average gas price assumption of $3.00/mcf (H1’17: $2.98/mcf).

Combined with the oil segment, we forecast SEPLAT’s FY’17 revenue at $452 million (Previous: $424 million, FY’16: $254 million).

We see FY’18 revenue at $692 million, assuming an 80% uptime for oil and 90% for gas production.

Valuation revised higher amidst stable production outlook

Supported by management’s continued cost containment (General & Admin Expenses down 27% y/y as at H1’17), we forecast FY’17 operating profit at $112 million (Previous: $95 million).

Meanwhile, we have revised our interest expenses higher amidst the one-year extension of the Revolving Credit Facility (announced July 3) from Dec 2017 to Dec 2018; the outstanding principal balance of the facility stands at $150 million. On the back of our cautiously optimistic view on H2’17 production, we forecast FY’17 tax of $30 million (H1’17: $1.1 million).

Overall, we expect SEPLAT to return to profit in FY’17 and forecast a PAT of $33 million (Previous: $10 million), supported by a more optimistic view on H2’17 production.

Buoyed by our improved outlook, we raise our Target Price (considering 2P assets only) to N582.70 (Previous: N365.54).

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