Seplat FY 2020 Report: A Resilient Performance in the Face of Pandemic and Low Oil Prices

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Thursiday, March 04, 2021, 06:00 PM / by Proshare Research/ Header Image Credit: Seplat Petroleum Development Company Plc'



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Seplat Petroleum Development Company Plc's (SPDC's) FY2020 audited accounts reflected COVID-19-induced problems mirrored in the company's revenue dip which slid off the back of rising cost of sales. Overall, the company's 2020 fiscal performance was a shadow of the result posted in 2019. The company witnessed a US$329.4m operating cash flow in 2020 representing a year-on-year (Y-o-Y) drop of -3.57% from the US$341.6m it reported in 2019.

 

Backstopped from growth by COVID-19 the company's average production was 33,714 bpd, this was a +40.9% production rise Y-o-Y from production volume in 2019. However, the group recorded a 410,000bbl restriction in its export due to the OPEC and OPEC+ production cuts implemented in Q3 2020. Crude oil prices declined in 2020, as Brent sold at an average price of $39.95 per barrel which was US$20 lower than the average price of Brent in 2019.

 

Key Highlights/Takeaways

  • The total revenue for the period 2020 declined by -10.87% Y-o-Y from N214.16bn in 2019 to N190.92bn in 2020.
  • The cost of sales (COGS) recorded a significant rise of +57.59% Y-on-Y from N92.69bn in 2019 to N146.09bn in 2020.
  • The finance cost of the company increased Y-o-Y by +81.23% in 2020.
  •  Total assets grew by +30.53% Y-o-Y from its N1.00trn in 2019 to N1.31trn in 2020.
  • The Group's EBITDA, having adjusted for non-cash items, declined by -54.02% Y-o-Y from N147.4bn in 2019 to N95.7bn in 2020.
  • Gross profit for 2020 dipped from N121.46bn in 2019 to N44.83bn, a -63.13% Y-on-Y decline.
  • Earnings per share slumped by -68.92% Y-o-Y in 2020.

 

Share Price & Volume Movement-Figuring Market Sentiment

Seplat's share price saw sustained upward movement in Q4 2020. Seplat's share price movement did a V-pattern in 2020 as market sentiment wavered concerning oil and gas (O&O) sector outlook. On the back of COVID-19 fears the stocks share price tumbled in Q1 and Q2 2020 before pivoting by mid-year as investor confidence started to return to the market and energy stocks started to see market reversals. Given trends in Q4 2020 investors may take a long position concerning the stock as rising global price of crude indicates a rise in Seplat's 2021 earnings compared to the dips of the previous year.

 

On the other hand, the volume of the shares traded experienced significant volatility in 2020. The volume was flat early in the year as investors were trying to make up their minds whether to go short (sell) or long (buy) the company's shares. As anxiety around COVID-19 dissipated by July 2020 traded volumes rose, fell and then rose again in September before collapsing in October 2020. Traded volume oscillated between 6,181 in October 2020 and 20,115 in February 2021 (see chart 1 below).

 

Chart 1: Seplat Share Price Movement Vs Volume of Shares

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*share price and volume as of 26 February 2021

Source: NSE, Proshare Research

 

Proshare's regression model of Seplat's price and volume movement for 2020 showed a mildly negative correlation between the volume of Seplat's traded volume and its price, this reflected market fears and sentiment reversal between July and September 2020. The higher the price of Seplat the lower the volume traded in 2020 and the reverse situation was also observed, that is, the lower the price of Seplat shares the higher the traded volumes as investors opted to go long (or buy) the company's shares (see chart 2 below).

 

Chart 2: Correlation between Seplat's  Share Price Movement and Volume of Shares (2020)

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Source: NSE, Proshare Research



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Profitability: Stunted

Seplat's total revenue of fell by -10.87% Y-on-Y in 2020. A breakdown of the revenue showed that the company recorded an increase in its oil revenue as a proportion of total corporate sales. In 2020 crude oil contributed 78.79% to the company's total revenue which was higher than 70.95% it contributed to revenue in 2019 while gas sales accounted for 21.21% of the total revenue in 2020.

 

Crude oil sales declined by -1.01% Y-on-Y to N150.42bn in 2020 from N151.95bn in 2019. This was largely driven by lower average oil prices of US$39.95/bbl in 2020 compared to the average oil price of $64.4/bbl in 2019. Similarly, gas sales decreased by -2.80% Y-on-Y to N40.50bon in 2020 from N41.67bn in 2019. The decline in gas sales could be attributed to a fall in demand caused by the pandemic and a delay in the completion of the Oben-50 gas well.

 

While the group recorded a revenue of N20.54bn from gas processing in 2019, it has since ceased to process gas for Nigeria Petroleum Development Company (NPDC) when it acquired 55% stakes in the company's gas plant (see chart 3 below).

 

In US dollar terms, the revenue of the oil player declined significantly by -28.18% Y-o-Y from US$697.69m in 2019 to US$501.11m in 2020. CBN's official rate at the end of the year for the different periods was used for the translation. The decline in revenue in US dollar terms was majorly driven by the devaluation of the domestic currency, the naira.

 

Chart 3: SPDC Total Revenue 2015-2020 (N'bn)

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Source: SPDC Financial Statement, Proshare Research

 

The group's profit before taxation (PBT) declined by -132.11% Y-on-Y from N89.91bn in 2019 to a loss of N28.87bn in 2020. This was despite the +84.92% increase recorded in profit from its joint venture. Disaggregating PBT showed that the slide was caused by the -262.25% Y-o-Y decline in profit from crude oil sales and the -46.96% decline in profit from gas sales (see chart 4 below).

 

Operating profit also dropped by -111.92%, from N95.75bn in 2019 to a loss of N11.42bn in 2020.

 

Translating into US dollar terms, PBT declined by -125.87% from $292.93m in 2019 to a loss of $75.78m in 2020.

 

Chart 4: Seplat's Profit Before Taxation 2015 - 2020 (N'bn)

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Source: SPDC Financial Statement, Proshare Research



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Asset Quality-Chilly Operations Amid A Virus Spread

The group's current ratio fell by -15.33% Y-on-Y from 1.50 in 2019 to 1.27 in 2020. The current ratio of 1.27 in 2020 showed that the group was able to meet its short-term liabilities with its current assets, although a current ratio of at least 2 would have been preferred. The group had reasonable working capital that supported short-term solvency (see chart 5 below). 

 

Chart 5: Seplat Current Ratio 2015 - 2020

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Source: SPDC Financial Statement, Proshare Research

 

The stricter corporate liquidity test, the acid-test ratio, for Seplat in 2020 slipped to 0.29 from 1.36 in the previous year. This reflected the company's relatively high inventory position between 2019 and 2020. The Y-on-Y growth of inventory suggested that the company needed to clamp down on the growth of the stock of its finished goods but this was difficult to achieve at a time of excess supply of oil in international markets which so future oil prices turn negative (see chart 6 below). 

 

Chart 6: Seplat Acid-Test Ratio 2015 - 2020

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Source: SPDC Financial Statement, Proshare Research

 

Seplat's recent result shows that the upstream major had problems managing liquidity in 2020 as its liquidity ratio sputtered from 10.38% in 2019 to 7.61% in 2020 (see chart 7 below). 

 

Chart 7: Seplat Liquidity Ratio 2015 - 2020 (%)

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Source: SPDC Financial Statement, Proshare Research

 

The O&G company's leverage ratio for 2020 stood at 41.97% as against the 43.76% in the preceding year. The slight decline in the ratio was buoyed by an increase in the shareholder's equity relative to the increase in the group's debt. Analysts have noted that to build investors' confidence and maintain its operational efficiency, the group needs to raise its capital or cut back on its debt size (see chart 8 below).

 

Chart 8: Seplat Leverage Ratio 2015 - 2020 (%)

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Source: SPDC Financial Statement, Proshare Research


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Outlook for 2021-A Ray of Sunlight and the Smell of Roses

The main highlight of the company in 2020 was an increase in capital investment, particularly its investment in its ANOH project and the US$100million debt repayment. The group's outlook for 2021 appears sunny. The upstream oil producer recently noted that "following its successful funding, the completion of the ANOH project remains a major priority. Although we expect some COVID-19 related delays to push completion into early 2022, following a cost optimization program we now expect the project to cost no more than $650 million, substantially below the $700 million budget previously stated at Final Investment Decision (FID)." This according to industry analysts, was a notable development that could help the group reposition its future operating cash flow and bottom lines. 

 

Considering the likely OPEC+ quota, Seplat hopes to produce an average of between 48,000 and 55,000 barrels of oil equivalent per day (boepd) of crude oil in 2021. The bulk of the group's outputs would come from gas since there remains uncertainty in the demand for oil considering the indeterminable outcome of the global vaccination programmes against COVID-19. The oil group foresees that a larger proportion of its future revenues will come from its long-term gas contracts with stable prices rather than the highly volatile oil market, with more gas sales in 2021 perhaps Seplat would be able to smell the corporate roses.

 

 

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