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Seplat H1 2020 Report: Revenue Dips 26.49%, But Reversal Flickers In The Horizon

Stock & Analyst Updates	2010 VIEWS
Stock & Analyst Updates
2010 VIEWS

Tuesday, August 11, 2020, / 05:30 PM / By Bukunmi Adejobi, Proshare Research / Header Image Credit: Seplat Petroleum Development Company Plc (SPDC)

Fickle oil market behaviour took billions off the stock prices of major oil and gas companies globally and on The Nigerian Stock Exchange (NSE) as investors voted for safety with their feet in the first half of 2020. Seplat Petroleum Development Company Plc (SPDC) saw operating performance slide southwards as revenue in H1 2020 fell by a quarter of its H1 2019 figure.

Despite Lockdowns in key parts of the Nigerian economy as a result of the coronavirus pandemic oil operations were allowed to continue because of the sector's strategic significance. According to Seplat, the very little direct impact of COVID-19 was experienced in its operations at oilfields and offices but the company said it would continue to monitor the developing situation.

The company's revenue slipped by -26.49% to N80bn in H1 2020 from N109bn in the previous half-year of 2019, this was despite contributions from Eland Oil and Gas that was acquired at the end of Q4 2019. The company experienced a decline in revenue from crude oil mainly as COVID-19 and conflict between Russia and Saudi Arabia over oil sales quota put downward pressure on global oil prices.

Key Takeaways

SPDC recorded a decline in top-line earnings by -26.49% Y-on-Y which was due to lower oil revenue and higher non-production costs majorly consisting of royalties and Depletion, depreciation and amortization. Q-on-Q performance of gross revenue recorded a decline of -11.11% to N37.69bn recorded in Q2 2020 from N42.40bn recorded in the previous Q2 2019.
The cost of sales increased by +65.44% Y-on-Y to N67.18bn in H1 2020 from N45.36bn in H1 2019, operating expenses also included the impact of Eland consolidation.
Finance cost increased by +64.73% Y-o-Y in H1 2020. The rise was the result of a +71.58% increase in interest on bank loans Y-o-Y.
The group recognized an impairment loss of N50.1bn on its non-financial assets. The impairment was primarily the result of re-assessment of future cash flows from the Group's oil and gas properties due to a significant fall in oil prices.
Total assets grew by +9.37% from N1trn recorded by FYE 2019 to N1.09trn recorded for H1 2020.
EBITDA declined by -48% from US$223m in H1 2019 to US$115m in H1 2020 Y-on-Y. This was after adjusting for impairment.
Earnings per share dipped by -199% Y-on-Y in H1 2020.

Profitability; The Broken Money Machine

A further breakdown of the company's revenue showed that it earned N61.76bn in crude oil in H1 2020 which was significantly lower than H1 2019 which posted a revenue of N66.29bn while revenue from gas sales also dropped by -17.21% to N18.38bn due to lower gas sales volume. The lower volumes reflected higher downtime at third-party infrastructure and a 15-day shutdown of the Oben Gas Plant for turnaround maintenance in March.

There was no revenue from gas processing in H1 2020 because the company ceased processing of gas for the Nigerian Petroleum Development Company (NPDC). Although there was no direct impact of OPEC+ cuts on the revenue of the company in H1 2020 as stated in the company's financial half-year presentation. (see chart 1).

Chart 1: Seplat Gross Revenue 2019 - 2020 (N'm)

Source: SPDC Financial Statement, Proshare Research

Profit before tax slumped by -234.86% Y-on-Y. Q-on-Q performance of PBT declined by -39.81%, (see chart 2), this may have been driven by a -66.79% decline in finance income and +64.73% increase in finance cost Y-o-Y.

Chart 2: Seplat Profit before Tax 2019 - 2020 (N'm)

Source: SPDC Financial Statement, Proshare Research

Asset Quality and Sweat Work

The company posted a current ratio of 1.52 in H1 2020; this was a decline from 1.87 chalked up in the corresponding period of the previous year. SPDC's current asset in H1 2020 was higher than its current liability showing that it held onto a fairly reasonable working capital position but could have done better with a ratio of between 2 and 2.5 (see chart 3).

Chart 3: Seplat Current Ratio 2019 - 2020

Source: SDPC Financial Statement, Proshare Research

The acid-test ratio for Seplat in H1 2020 stood at 1.36 against 1.65 recorded in H1 2019. The tougher working capital ratio suggests rising inventory levels which the company may need to reverse as the economy picks up in Q3 and Q4 2020. Y-on-Y growth of the company's inventory would be knocked down a few notches to ensure that SPDC has sufficient liquidity buffers to absorb future business shocks(see chart 4).

Chart 4: Seplat Acid Test Ratio 2019 - 2020

Source: SPDC, Proshare Research

The company's liquidity ratio for H1 2020 was 14.46% as against 16.80% recorded in H1 2019. The company managed its liquidity risk by ensuring that sufficient funds were available to meet its commitments as they fell due. However, the company's liquidity position has shrunken between Q1 2019 and Q2 2020 (see chart 5).

Chart 5: Seplat Liquidity Ratio 2019 - 2020 (%)

Source: SPDC Financial Statement, Proshare Research

SPDC's leverage ratio stood at +47.88% in H1 2020 as against +20.60% recorded in the corresponding period of the previous year, 2019. H1 2020 shows a significant increase in Seplat's debt size, the doubling of the company's debt between Q3 2019 and H1 2020 indicates a potential squeeze on profit before tax by the full year ended December 31^st, 2020 and even throughout 2021. For investors, this may be a matter of concern as the company's finance costs are likely to escalate between 2020 and 2021 (see chart 6). SPDC may need to do a capital raise between 2020 and 2021 or sort out options for reducing its debt exposure.

Chart 6: Seplat Leverage Ratio 2019 - 2020 (%)

Source: Seplat Petroleum Development Company, Proshare Research

Share Price Movement

Seplat Petroleum Development Company's share price has tumbled by -52.84% year-to-date (YTD) (as at 3^rd Aug). Seplat's share price started the year within a neutral channel indicating that investors were neither optimistic nor pessimistic about the company's future earnings outcome reflected in low volatility in the oil producer's stock price between January 2020 and March 2020. By volume, number shares traded in January experienced an uptick but quickly crumbled as share prices became flat throughout February 2020.

There was a price breakout point at the top of the trading channel in April 2020 accompanied by a sharp increase in volume, the increase in volume was not sustained at breakout as a reversal occurred on lower traded volume.

Indeed, between June 2020 and August 2020, a 'bearish flag' or declining prices within a downward trending trading channel was observed. Analysts noted that at every point the volume of shares traded went up, there was a dip in the share price. The pattern worked contrary to the laws of demand and supply, it showed no correlation between Seplat's share price movement and volume of shares traded over time(see chart 7).

Chart 7: Seplat Share Price Movement Vs Volume of shares 2019 - 2020 (%)

Source: SPDC, Proshare Research

Outlook for 2020

Following the sharp drop in crude oil prices on the back of the spread of coronavirus in the oil industry, the oil and gas sector has experienced a downturn. The sector is responsible for about 80 % of Government revenue and remains the principal source of foreign exchange earnings. However, the oil and gas sector has shown a potential for large uncertainty and unpredictable cash flows meaning that investors in companies such as SPDC would have to tolerate high earnings risk and dividend misgivings.

Seplat may experience a V-shaped earnings recovery in 2020, but a lot depends on how the global economy works out in the last two quarters of the year and restoration of manufacturing activities as countries try to restore production output and re-establish global supply chains. Austin Avuru, outgoing Chief Executive Officer of the company noted that "We remain confident of market recovery in the coming months. The business is hedged against low oil prices using put options and a significant proportion of our revenues now come from gas, which offers additional protection from oil price volatility. The Company has low production costs and continues to focus on cost savings in line with Government partner directives to reduce costs, to maintain profitability even at the lower prices we have seen this year".

"We have significant cash resources available and will continue to manage our finances prudently in 2020, expecting now to invest US$120 million of capital expenditure across the full year (of which US$86 million has already been invested), including two new gas wells to be drilled in H2."

With SPDC's risk management strategies (puts and calls) and reviving global economic happenings leading to increased oil and gas demand and a drop in global oil inventories, a positive reversal of fortunes awaits in the wings, if the health pandemic does not worsen and blow all calculations in the face of global optimists (see illustration 1 below).

Illustration 1 Seplat: A Periscope on The Future