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According to its earnings report for the first three months of the year, Seplat’s revenue rose 17% y/y to $152 million (Vetiva: $161 million) on stronger oil prices and increased sales volume of gas.

With further improvements on some line items such as operating expenses and finance costs, Seplat posted an after-tax profit of $25 million (Vetiva: $24 million). After adjusting our model for the misses in Q1, we value Seplat at a one-year target price of ₦680.41 and reiterate our BUY rating on the counter.

In the quarter under review, oil revenue advanced 16% y/y to $124 million amidst strong recoveries in oil prices – average realized oil price came in at $61/bbl, 22% more than the average a year ago – even as the volume of oil lifted declined 5% y/y. On a quarter-on-quarter basis, oil output showed a steeper fall of 20% to 2.0 mbbls, which was due to lower output from OML 40 in January and February, after MV Harcourt, a storage vessel for evacuating crude from the OML, was damaged in November last year.

Meanwhile, a 29% y/y surge in gas output to 10.3 Bscf saw gas revenue jump 23% y/y, subduing the adverse effect of a 5% y/y decline in average price (Q1’21: $2.76/Mscf, Q1’20: $2.89/Mscf). However, we highlight that gas well. Overall, aggregate revenue for the period came in at $152 million, 5% lower than our estimate.

Driven by the two-digit growth in revenue, gross margin for the quarter rose to 35% from 25% last year; in absolute terms, gross profit was propelled 59% y/y to $53 million. Furthermore, a 43% y/y decline in operating expenses, as well as the absence of impairment losses on oil & gas assets (Q1’20: $145 million), brought operating profit to $44 million, a marked improvement from an operating loss of $77 million in the same period last year. Underpinned by lower debt levels (Q1’21: $694 million, Q1’20: $794 million), net finance expenses dropped 17% y/y, bringing net income to $25 million (up from a net loss of $107 million).

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Seplat is still riding on high crude prices and we expect this trend to be sustained for the rest of the year, as OPEC+ cuts and improving global economy will continue to keep Brent price north of $60/bbl. Meanwhile, with MV Harcourt now replaced with another storage vessel, we see Seplat’s oil output gradually reverting to the Q4’20 run rate of 2.5 mbbls in subsequent quarters.

This drives our expectation of $559 million (2020: $418 million) for oil revenue in 2021. With regard to the gas business, we expect to see an 8% growth in output to 42.4 Bscf, driving gas turnover 6% higher to $119 million in 2021. Seplat recently refinanced a large chunk of its debt by issuing a $650 million Eurobond, which carries a much cheaper rate of 7.75% vs 9.25% on the previous Eurobond that had been redeemed.

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Based on this, we see net finance costs declining 9% to $46 million, which brings our projection for net income to $127 million in 2021, contrasting with an after-tax loss of $85 million last year. As a side note, the Board of Seplat has approved the payment of quarterly dividends, starting with an interim dividend of 2.5 cents per share for Q1’21.

 

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