November 5, 2018/InvestmentOne Report

·         Impressive Topline Performance; up 39% q/q, 54% y/y.

·         Higher gross profit margin; up 808bps q/q, 1002bps y/y.

·         Declining Opex/sales ratio: down 777bps q/q, 956bps y/y.

·         Commendable PBT performance; up 46% q/q, 281% y/y.

Last week, Seplat released its Q3 2018 results, which reflected the impact of higher oil prices and stable production so far in 2018. The report showed a significant yearly improvement in crude oil and gas sales, supported by a reduction in net finance cost, which combined to deliver an impressive boost in bottom line performance. 

Higher Crude Price Fosters Topline Growth 

The company’s revenue growth was driven by a 12% y/y rise in working interest production, which stood at 50.3kbpod (Q3 2017: 44.8kbpod) on the back of higher crude oil and gas volumes and an uptrend in average realized crude oil and gas prices for Q3 2018; US$75.2/barrel and US$3.10/mscf from US$49.5/barrel and US$3.09/mscf in Q3 2017 respectively based on our estimates. This was largely anticipated given the high oil price environment in recent months. 

Consequently, Gross Profit Margin (GPM) was up to 58.34% in Q3 2018 from 48.31% in Q3 2017, while PBT jumped to N27.96 billion in Q3 2018 (N7.33billion in Q3 2017), supported by a 15.6% y/y fall in net finance cost to about N4.4 billion as well as a 956bps y/y decline in Opex/sales, resulting from declines in general expenses and crude oil hedging payments. 

While the comparison period- which could be characterized as the beginning of the company’s recovery from the closure of the Forcados terminal – may flatter y/y performance, we highlight that the company delivered record quarterly revenue, about N69 billion. 

Higher uptime suppresses rise in finance cost 

On a sequential basis, turnover rose by 39.0% q/q on the back of improved uptime on the Trans Forcados system and a 57.9% q/q boost in crude oil sales (constituting 81% of revenue), which sufficed to offset the first dip in gas sales since 2016 (down by 9% q/q). In the same vein, higher oil price realisation and improved cost efficiency combined to drive the rise in gross profit margin by 808bps q/q to 58.34% in Q3 2018.  

Moving down to the P&L line, the improvement in gross profit margin and a 777bps q/q decline in Opex/sales offset the impact of 18.1% q/q increase in net finance cost. As a result, Seplat’s PBT margin improved by 202bps q/q to 40.6% and a 46.3% q/q jump in PBT to its quarterly highest of N27.96billion in Q3 2018. We opine that the increase in the company’s net finance cost may be as a result of the increase in LIBOR rate during the quarter. 

Still on Course to Deliver Stronger Year End Performance 

For 9M 2018, turnover jumped 103.9% y/y on the back of improved uptime on the Trans Forcados system, better crude oil and gas sales and higher oil price. In the same vein, higher oil price realisation and improved cost efficiency drove gross profit margin up by 913bps y/y to 53.83% in 9M 2018. We highlight that there was an uptrend in average realized crude oil and gas prices for 9M 2018; US$71.1/barrel and US$3.06/mscf from US$46.5/barrel and US$3.01/mscf in 2017 respectively. 

Moving down to the P&L line, the improvement in gross profit margin and the decline in Opex/sales to 9.7% in 9M 2018 from 22.0% in 9M 2017 offset the impact of the marginal 1.4% y/y increase in net finance cost. As a result, the company’s PBT margin jumped to a positive of 37.4% in 9M 2018 from a negative of 0.8% in 9M 2017 and a PBT of N65.05billion in 9M 2018 from a N760million loss in 9M 2017. 

Overall, we believe the company is on course to pose a decent result at the end of 2018 considering the inspiring results that we have seen over the first 9 months in 2018. 

Outlook 

Going forward, we are of the view that top line growth should continue to be supported by the prevailing high oil price environment and relative stability in production levels. Our view is backed by management’s recent efforts to diversify its export routes in response to Niger Delta vandalism/ proliferation risks as well as our outlook for oil prices in the medium term.  

Also in support of topline performance, we opine that gas revenues should continue to significantly contribute to gross sales growth.  

Worthy of note is the management’s ability to manage its net finance cost following its successful loan restructuring and Eurobond issuance in Q1 2018. 

Furthermore, we believe that the company’s strong financial position, with N194billion in cash and cash equivalents, and recent debt refinancing should be supportive of finance cost management and capital expenditure plans.