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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
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 31st, 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 3rd 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
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