Stock & Analyst Updates | |
Stock & Analyst Updates | |
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Tuesday, November 07, 2017 12:56PM /ARM
Research
Our deductions from
Seplat Petroleum Development Company Plc. (Seplat’s) latest financial report as
well as recent discussions with management underpins our view on the stock’s
capacity to close the valuation gap vis-à-vis peers. Although in the near term,
aside from pricing in higher crude oil prices, we maintain our stable outlook
for the stock, our optimistic outlook for 2018 is reinforced.
In line with this
adjustment, comes the prospect for Seplat to relatively outperform its larger
peers. Seplat trades at a 2018 P/CF of 1.7x compared to African peers’ and FTSE
350 Oil & Gas index of 5.5x and 12.05x respectively.
Investment Case. Seplat is well-positioned to return to profitability by FY 17 with a
sturdy footing for substantial upside in earnings in 2018F. Balance sheet
deleveraging and an improving and more stable P&L premised on the company’s
return to past production levels and de-risked earnings via adding a new export
route to existing two routes) should give investors comfort on earnings
performance over 2018.
With capex also
decelerating from peak levels attained between 2014-16, free cash flow is set
to expand in 2018+, particularly as management guides to implementing capex
plans with the primary aim of maximizing current assets. Therefore, we expect
Seplat to resume returning cash to shareholders with dividend projected to grow
in line with productive capacity.
Key catalyst. Near term catalysts for Seplat includes its operated $1.3bilion ANOH
gas and condensate project for which a final investment decision (FID) remains
in place for YE 2017 as well as the planned completion of the Escravos pipeline
which offers a third export route for the company.
However, crude oil
prices below $40/bbl. and a reappearance of insecurity in the Niger delta may
trigger a downward review to earnings. That said, we have taken a conservative
approach based on the downside risk to our forecast.
Debate on pioneer
status. Although Seplat has taken a conservative approach by
providing for taxes despite its ongoing deliberation for pioneer tax status, we
hold the view that the company is likely to call its tax allowance on capex
made during the pioneer tax period, which we estimate at $98 million.
Valuation is more
compelling. We raise our FVE from N518.74 to
N588.11 after reviewing our model and considering recent updates on the
company’s operations, precisely its Escravos project and tax position. Our
revised target equates to 2018 P/E and P/CF of 7.0x and 1.7x compared with
African peers’ (12.76x and 5.46x) and the FTSE350 Oil & Gas index (22.41x
and 12.05x). Against this backdrop, we place an OVERWEIGHT rating on the stock.
Earnings rebound in Q3
17. Reflecting higher oil exports, Seplat delivered solid
Q3 results. The result showed a marked rebound in performance with the company
posting profit after tax (PAT) of $22.3 million, after six consecutive quarters
of losses.
Relative to the prior quarter
(Q2 17), oil export was higher almost double-fold to $115 million underpinned
by higher production of 26.4kbpd while gas sales remained resilient posting
$31.5 million (+7.5% QoQ) with gross production hitting a peak gross daily
output of 352Mscfd (working interest: 111Mscfd).
Irrespective, Seplat
posted loss after tax of $5.3 million over the nine-months of 2017(9M 16: $97.8
million loss after tax). That said, Seplat’s balance sheet remained sturdy on
the back of improved cash flow with operating cash flow at $167 million, free
cash flow at $120 million and net debt at $402 million (free cash flow to net
debt at 30%).
Revision to FY 17
volumes guides lower earnings. Third quarter
working interest production of 44.8kbopd is in line with management guidance of
H2 working interest production of 43–50kbopd (Oil: 25–29kbpd, Gas: 110
–130Mscfd), which implies expected FY 17 volumes of 35–38kbopd (Oil: 17–19kbpd,
Gas: 105–115Mscfd).
On this basis, we revise
our FY 17 volumes lower from 39.3kbopd to 37.5kbopd (Oil: 18kbpd, Gas:
118Mscfd), though we see scope for higher volumes in Q4 17. Consequently, FY 17
PAT should print at $19.4 million compared to loss after tax of $166 million in
FY 16
Upbeat outlook in 2018 but risk persist. Starting off in 2018, we expect the company’s exports to rise largely reflecting the planned completion of the Escravos pipeline which offers a third export route for the company. Management has indicated that it is working with the FG to complete the Escravos pipeline where it expects to export circa. 160kbpd.
Though Seplat expects the new pipeline to be operational in Q1 18, we are less sanguine about the target completion date owing to the government’s delayed completion on similar projects, and therefore see H2 2018 as a more realistic date for the project. The combination of an upgrade at the Warri refinery as well as fully operational Trans-Forcados and Escravos pipelines drive our forecast of a 90-day downtime in 2018 with working interest production forecast of 45.5bopd and over four-fold increase in PAT to $108.6 million.
Farther out (2019-2022F), Seplat’s intention to make the Escravos pipeline its primary route guides to lower reconciliation cost. However, we have lowered our crude oil price assumption to $30/bbl. over the forecast period. On balance, we forecast an average working interest production of 50kbopd and mean PAT of $95million over our forecast period.
We estimate cash flow of nearly $278
million in 2018, well above capital spending ($20 million capex plans in H2
2017). With the significant deleveraging in the balance sheet based on our
estimates there is clear capacity for enhanced shareholder return via
resumption of dividend payments in 2018.
Related
News
1. Seplat Q3 2017 Results: Net Finance
Costs Up 10% YoY To $20m
2. SEPLAT Declares N1.62 billion Loss in Q3
2017 Result,(SP:N480.00k)
3. Seplat Plc Announces Decision of Its
Board of Director Meeting
4. Seplat Plc Announces Closed Period on
Share Dealings
5. Seplat Petroleum Development Company -
Earnings Recovery Looking More Secure