·         Topline Performance; down 21% q/q, up 3% y/y.

·         Mixed gross profit margin; down 1035bps q/q, 246bps y/y.

·         Declining Opex/sales ratio; down 600bps q/q, 399bps y/y.

·         Mixed PBT performance; down 35% q/q, up 28% y/y.

Seplat released its Q4 2018 results yesterday revealing a somewhat commendable performance, reflecting stability in oil and gas production as well as strong commodity prices. Following the company’s loan restructuring and reverting back to its Forcados terminal, both finance cost and operational costs were contained to support bottom-line performance.  

Higher Crude Price Fosters Topline Growth 

The company’s revenue grew slightly in Q4 2018 compared to Q4 2017. This was largely driven by an improvement in the group’s realized weighted average crude oil price, which supported crude sales by 10.0% in Q4 2018 from the comparison quarter in 2017. However, gas sales dropped by about N3billion y/y. This may have been the major reason for the uninspiring growth in revenue despite the significant improvement seen in the preceding quarter. 

Consequently, Gross Profit Margin (GPM) took a slight cut of 250bps q/q in Q4 2018. Nonetheless PBT margin rose from 26.8% to 33.2% in Q4 2018. This was largely driven by a better finance position in Q4 2018 as the company recorded a net finance income of N1.45billion against a net finance cost of N5.44billion in Q4 in 2017. The improvement in finance position could be attributable to the loan restructuring exercise undertaken by the company last year and more favorable interest payments on bank loans in Q4 2018.  The improvement in finance position more than offset the 399bps y/y jump in OPEX/sales to 17.4% in Q4 2018. As such, the PBT rose by 27.8% to N18.2billion in Q4 2018. 

Decline in Production Levels Weighs on Profitability

On a sequential basis, turnover dipped by 20.7% q/q on the back of higher downtime, resulting in lower working interest production levels. This was further exacerbated by lower average oil and gas price realization compared to the preceding quarter. As a result, crude and gas sales declined by 18.3% q/q and 31.2% q/q respectively. This also reflected in gross profit, down by 34.7% to N26.2billion, and gross profit margin – down from 58.3% to 48.0%. Down the P&L line, a 600bps rise in opex/sales more than offset the N5.8billion improvement in finance position from a net finance cost of N4.4billion in Q3 2018 to a net finance income position in Q4 2018 to deliver a PBT of N18.2billion; 35.0% lower q/q. Consequently, PBT margin printed lower (Q4 2018: 33.2% vs Q3 2018: 40.6%).  

Record PBT levels on Higher Commodity Prices and Debt Restructuring Gains

The company reported an impressive performance for FY 2018 as top line rose by 65.2% y/y to c.N228.4billion. This was largely supported by the jump in crude oil sales by 80.0% to N180.8billion and a complimentary N9.7billion increase in gas sales. In the same vein, higher oil price realisation (2018: US$70.1 vs 2017: US$50.4) and improved cost efficiency drove gross profit margin up by 552bps y/y to 52.4%. Also flattering the FY numbers is the low base in 2017, due to the force majeure of the trans-Forcados Pipeline in H1 2017. 

Resultantly, PBT was up to N80.62billion from N13.5billion in FY2017 with support of a notable N6.7billion decline in net finance cost following the company’s loan restructuring and refinancing as well as a N5.6billion decline in operating expenses.  

Outlook

Going forward, we are of the view that top line growth should continue to be supported by a strong 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, albeit lower than 2018 levels. Also, in support of topline performance, we opine that gas revenues would continue to significantly contribute to sales growth- 21% of revenue.  

Company management hinted towards increased operations in the latter part of 2019, following expansion plans in both oil and gas businesses. With the company’s strong cash position, management gave a capital expenditure guidance of US$200million geared towards improving on production levels in the medium term. 

We believe the gains in Seplat’s net finance position witnessed in 2018, following its successful loan restructuring and Eurobond issuance in Q1 2018, should trickle into future performances; thus maximizing profitability.  

Seplat’s management notified that the Escravos pipeline is anticipated to be commissioned in Q2 2019 and fully operational by Q3 2019. After completion, the company would have access to 3 evacuation routes; limiting the risks of a force majeure. 

Management has proposed a dividend payout of N18.00 per share which translates to a dividend yield of 3.02%.