Seplat Petroleum Development Company Plc – Brace Up For a Difficult Year

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Operating performance may be set for a tumble in FY’20
We expect SEPLAT to report a 42.0% YoY plunge in revenue to $404.6 million in FY’20 on an expected decline in sales across its crude oil and gas business segments. Notably, the outbreak of COVID-19 has forced OPEC into a downward review of global oil demand projection to c.99.73mb/d (vs. 100.73mb/d previously) just as its failed oil production cut engagement degenerated into an all-out price war on the supply side. Although SEPLAT may be slightly insulated (relative to deep offshore producers) by its cheaper cost of production (c.$6.20/boe), realizable prices are still likely to be significantly lower relative to 2019 levels. Already, Nigerian crude exporters have reportedly been forced to sell at discount to the Brent as competition for narrowing global demand intensifies. We forecast crude production to rise by only 10.0% YoY to 26.3kb/d in FY’20 as negative developments in the oil market water down potential gains from the acquisition of Eland and SEPLAT’s well drilling program on legacy fields in H2’19. Elsewhere, vandalism of pipelines and liquidity constraints of gas turbine power generation plants are likely to cascade to a 23.7% YoY contraction in gas production to 100 Mmscfd, in our view.
Seplat Petroleum Development Company Plc - Brace Up For a Difficult Year
Positioned for some near-to-medium term cash gains despite current headwinds
In addition to providing legroom for greater liquid production, the acquisition of Eland has increased SEPLAT’s export route options and reduced the risk of over-reliance on the frequently vandalized Trans Forcados. In addition, the acquisition has put SEPLAT on course to receive over $414 million (over 1.2x of FY’19 cash balance) in a Westport loan repayment that was formerly due to Eland. For clarity, aided by a $90 million facility sourced from RBL, Westport (previously 100.0% owned by Eland; now fully owned by SEPLAT) had provided $505 million funding to Elcrest Nigeria Limited (45.0% owned by Eland) for the development of OML 40 in 2012. Westport repaid its $90 million debt to
RBL via repayments from Elcrest in 2019, and the revised balance of the loan now belongs to its new owner (SEPLAT). This loan repayment is expected to span between 2021 and 2024 and should be a major boost to SEPLAT’s cash position in the period. Going by the agreement, SEPLAT reserves the right to consolidate 100.0% of OML 40 until the loan is repaid. Upon completion of the repayment, however, SEPLAT’s working interest in OML 40 is expected to reduce to 20.25%.
Seplat Petroleum Development Company Plc - Brace Up For a Difficult Year
ANOH also offers some hope. The ANOH JV gas processing and condensate development
project is expected to hit its first milestone in Q1’21 with the completion of its Phase I 150
MMscfd plant. We, therefore, expect gas sales to grow by 25.0% YoY in 2021 and an average of 10.0% YoY in 2022 and 2023. The plant is set to be linked with the largest power plant in Nigeria (1320 MW Egbin power plant) and other terminals across West Africa via Escravos–Lagos Pipeline System (ELPS) and West African Gas Pipeline (WAGP), respectively.
Seplat Petroleum Development Company Plc - Brace Up For a Difficult Year
Valuation
We have updated our forecasts and revised our target price downwards to N610.23 (vs. N797.69 previously). We placed a 40% weighting on NAV, 35% on DCF, and 25% on relative valuation methodology. We have a HOLD (vs BUY previously) recommendation on the stock.
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