Seplat Plc - In the clear


Friday, June 30, 2017 3:10 PM /ARM Research

Upward Revision to Forecast

Subsequent to the lifting of the force majeure on the Trans-Forcados Pipeline (TFP) alongside upgrade at the alternative route (Warri refinery), we revise our estimates for Seplat and increase our fair value estimate (FVE) to N518.74/share (previously N346/share).

We see substantial upside in earnings in 2018F where we expect weighty ramp-up in exports, benign cost, and earnings derisk (opening 2 additional evacuation routes) to drive a stellar performance. On basis of valuation, Seplat trades on 2018F P/E of 8.6x which is at 30% discount to its EMEA peers.


Earlier this month, Seplat’s management reported it has received notification from the operator of TPS (SPDC) on the lifting of the force majeure on the pipeline at the end of May 2017.

 The company further stated that it has successfully reinstated production levels at the OMLs 4, 38 and 41 to net working interest production levels of 56kboep/d. Also, Seplat informed that upgrade at the Warri refinery will be completed by Q2 17.

Our cautious view with regards to project completion and ramp up in export guides our 180 days downtime forecast for 2017E (previously 280 days).

Consequently, we revise working interest production for2017E to 39.27bopd (+52% YoY) to drive revenue 48% higher YoY to $376.6million – Oil revenue (+50% YoY to $222.7million) and Gas revenue (+46% YoY to $153.8million).  

We recall from our FY 16 earnings update ‘Striking FY 16 loss: is Seplat off the hook?’ where we noted that Seplat will need its working interest production to cross 32kbopd before the company can post a profit.  

Thus, given the earlier than expected re-opening of TFP to drive higher production, our estimate implies PAT of $27.3million for FY 17E (2016: loss after tax of $166million).

Upbeat outlook in 2018 but risk persist
Beyond 2017, we expect a more improved performance by the company. Starting off in 2018, we expect the company’s exports to rise largely reflecting the planned completion of the Escravos pipeline which offer a third export route for the company.  

Management has indicated it is working with the FG to complete the Escravos pipeline where it expects to export circa. 160kbpd.  

Though Seplat expects this to be operational in H2 17, 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 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 44.8bopd (+14% YoY) and over four-fold increase in PAT to $84.1million. 

Farther out (2019-2022F), Seplat’s intention to make the Escravos pipeline its primary route guides to lower reconciliation cost.  

Consequently, we forecast an average working interest production of 50kbopd and mean PAT of $95million over our forecast period.  

Another catalyst to earnings is Seplat’s operated$1.3bilion ANOH gas and condensate project which a final investment decision (FID) for the upstream and midstream elements is expected in H2 2017 and should guide a revision to forecast.  

Irrespective, downside risk to earnings persist. Ongoing national security concerns with recurrent threat by new militant groups in the Niger delta region poses risk to production and exportvolumes from pipeline attacks.  

To add, oil prices below our $40/bbl. Estimate would result in a downward revision to our estimate. 

The stock currently trades at an FY 17E and FY 18F P/E of 22x and 8.6x compared to 15.4x and 12x for its EMEA peers.  

We forecast a sturdy 5-year earnings CAGR of 55%. Cumulative impact of the adjustments results in anattractive valuation with NAV per share of its oil and gas assets at $2.19 and  $0.43 respectively having applied 35% discount to asset values to reflect our risk to future earnings.

The foregoing, combined with our exchange rate forecast of N360/$ for 2017, drives our FVE higher to N518.74 (previously N346). Our FVE is at a 13% premium to the last closing price of N460.  

We have an OVERWEIGHT rating on the stock. 

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