- Oil production declined y/y to 21.9 kb/d
- Average realised gas price jumped to $3.2/Mscf (Q1’18: $2.8/Mscf)
- Target price revised to ₦908.03 (Previous: ₦906.46)
Lower oil output weighs on top line
SEPLAT’s Q1’19 results show that oil revenue slid 16% y/y to $118 million, underperforming our estimate of $131 million. The fall in oil revenue was largely a reflection of the slump in oil production during the quarter; average oil production of 21.9 kb/d in Q1’19 vs 27.3 kb/d in Q1’18. We also note that the decline in average realised oil price (Q1’19: $62/bbl, Q1’18: $66/bbl) contributed to the tepid performance in SEPLAT’s oil business. Meanwhile, despite the fall in gas output during the quarter to 143 MMscfd (Q1’18: 158 MMscfd, Vetiva estimate: 145 MMscfd), SEPLAT’s gas operations registered modest performance in Q1’19, with gas revenue advancing 6% y/y to $42 million (Vetiva estimate: $39 million). The growth witnessed in gas revenue in Q1’19 was primarily driven by the increase in realised gas price (Q1’19: $3.2/Mscf, Q1’18: $2.8/Mscf).
Tax credit cushions earnings
While gross margin came in flat at 51%, operating margin declined to 20% (Q1’18: 46%), as the firm was less operationally efficient during the quarter. Operating margin was weakened by an overlift loss of $16 million (Q1’18: underlift gain of $9 million) coupled with higher administrative expenses (+27% y/y). We also highlight that SEPLAT recorded a charge of $12 million in relation to the firm’s oil price hedges. Despite the decline in operating margin, net margin came in stronger at 20%, as profit after tax was bolstered by a net tax credit of $13 million. In Q1’19, SEPLAT’s oil business made a loss before tax of $16 million and consequently got a net tax credit that brought the after-tax loss from the oil segment to $3 million. Meanwhile, SEPLAT’s gas operations recorded an after-tax profit of $36 million in Q1’19, accounting for the firm’s profitability during the quarter. All in, SEPLAT made an after-tax profit of $33 million in Q1’19, indicating a 59% y/y growth.
SEPLAT cuts its leverage in Q1’19
Following the improvement in operating cash flows during the quarter (Q1’19: $80 million, Q1’18: $46 million), SEPLAT repaid $100 million on the four-year revolving credit facility (RCF), bringing the balance drawn to zero. As such, finance charges declined by 40% y/y to $16 million in Q1’19. In light of the RCF repayment, SEPLAT’s total debt fell to $342 million (December 2018: $446 million), leaving the firm at a net cash position of $194 million.
Valuation and recommendation
We have revised our projections for SEPLAT in FY’19 to reflect the deviations in our previous estimates. We have revised our forecast for oil revenue lower to $586 million (previous estimate: $594 million), following our downward revision of oil production to 25.1 kb/d (previous estimate: 26.6 kb/d). However, we have raised our forecast for average realised oil price to $64/bbl (previous estimate: $61/bbl), largely supported by U.S. sanctions on Iran. Also, we have raised turnover from gas operations to $177 million (previous estimate: $169 million), consequent to our higher gas price projection of $3.2/Mscf (previous estimate: $2.9/Mscf). Also, we have raised our profit before tax to $287 million in FY’19 (previous estimate: $270 million), supported by our expectation of lower finance charges of $35 million (previous estimate: $56 million). Our revised valuation of SEPLAT yields a target price of ₦908.03. Thus, we retain our BUY rating.
VETIVA RESEARCH
