Crude Oil Sales Decline Amid Depressed Spell in Global Oil Markets
SEPLAT’s Q1:2020 financial performance showed that revenue declined by 13.34% YoY to NGN42.41bn (vs. NGN48.94bn in Q1:2019). The decline was off the back of a slowdown in crude oil sales, which declined by 3.41% to NGN34.90bn (vs. NGN36.21bn in Q1:2020), and a 41.38% reduction in Gas sales at NGN7.51bn. SEPLAT’s working interest production in Q1:2020 came in at 48,491bpd; within its guidance of 47,000bpd – 57,000bpd for the period. The production figures consist of 33,368bpd of liquid volumes (a YoY increase of 52.47%) and 88MMscfd of gas (a YoY decrease of 38.46%). Liquid volumes were fueled by the increase (+242.35% YoY) in production at OML 53 and an additional contribution (+10,056bpd) from OML 40 which was acquired from Eland Oil & Gas. However, despite the increased volumes, the weaker oil sales reflected the reduced global oil demand due to the COVID-19 pandemic, alongside the oil price war between Saudi Arabia and Russia, which saw oil prices (Brent) average USD50.82pb in Q1:2020 (falling to an unprecedented low of USD22.74 in the period), compared to an average of USD63.83pb in Q1:2019. Similarly, gas revenue was impaired by both lower gas prices averaging USD2.89/Mscf (vs. USD3.24/Mscf in Q1:2019) and lower volumes sold, which was further exacerbated by the 15-day turnaround maintenance at the Oben Gas Plant in March.
No Quick Fix to Demand Problem
The prospects for Seplat’s gas business look bright over the medium term as the completion of the 300MMscfd capacity ANOH gas plant by Q4:2021 is expected to support topline and contribute to the company’s segment diversification goals. With Nigeria expected to slash oil output to the range of 1.41MMbpd – 1.58MMbpd as part of the OPEC+ April agreement to cut supply, we expect the company’s crude volumes to drop in subsequent periods. The outlook for prices does not look bullish either; the lingering COVID-19 pandemic will keep crude oil demand and prices very low. Although the company has 60% of its 2020 production hedged at price of USD45pb from Q1 to Q3 of 2020, we still expect a 26.01% drop in revenue by 2020FY at NGN158.48bn (vs. NGN214.16 in 2019FY).
Bearish Outlook on Oil Prices Induces Impairment Loss
Cost-to-Sales worsened in Q1:2020 to 74.63% (vs. 48.95% in Q1:2019) with total cost of sales at NGN31.65bn (vs. NGN23.96bn in Q1:2019). Gross margin thereby declined sharply to 25.37% (vs. 51.05% in Q1:2019). This is in contrast with the trend in the last 4 years during which gross margin has expanded at a CAGR of 12.84%. This reflects the impact of COVID-19 on crude oil demand and an early indication that maintaining its margins will be a major challenge for the company during this period. An impairment loss of NGN47.46bn (due to anticipated lower crude prices) dragged EBIT by 351.02% YoY to a loss of NGN25.04bn. Net finance costs also rose higher, resulting in the NGN34.63bn loss after tax. However, despite the turmoil in the crude oil market, the company’s liquidity position improved slightly YoY, with current and quick ratios ticking up to 1.75x and 1.59x respectively (vs. 1.51x and 1.36x in 2019FY), while Operating Cash flow to sales marginally improved to 0.55x (vs. 0.50x in Q1:2019).
Outlook and Recommendation
We project an EBITDA of NGN73.09bn for 2020, with earnings expected to drop to NGN25.48bn (- 68.54% YoY) under our base case scenario of average crude prices between USD28pb – USD35pb for the rest of the year. However, with the pandemic expected to persist for longer, risks are tilted further to the downside and earnings could drop much deeper, to a loss of NGN8.29bn in our worst case. We adopted a target EV/EBITDA of 5.83x and adjusted for its net debt of NGN140.11bn to arrive at our 2020FY target price of NGN500.06. This implies an upside potential of 4.97% from its current price, thus we recommend a HOLD.