May 2, 2019/InvestmentOne Report

·         Declining Turnover: down 10.50% q/q, 11.40% y/y.

·         Mixed gross margin performance: up 307bps q/q, down 37bps y/y.

·         Higher Opex/Sales ratio: up by 1325bps q/q, 2564bps y/y.

·         Uninspiring PBT: down 67.20% q/q, 66.88% y/y.

Seplat Petroleum Development Company Plc released its Q1 2019 financial results last week which showed a decline in PBT margin from 32.56% in Q1 2018 to 12.17% in Q1 2019. This was due to a 37bps y/y drop in Gross Profit Margin (GPM), and further exacerbated by a surge in net operating expenses, particularly related to adjustments for overlift position and oil price hedges. This more than offset the company’s improvement in net finance cost position, resulting in the N12.03billion plunge in PBT. 

Surge in Opex Constrains Profitability  

The company’s topline performance was weak, driven by lower crude oil sales and average oil price realized which was US$61.7 per barrel compared to US$65.78 per barrel in 2018. Consequently, revenue was down by 11.40%y/y to N48.94billion. In the same vein, gross profit margin was down to 51.05% in Q1 2019.  

Down the P&L line, the company recorded a jump in net OPEX/Sales to 30.67% in Q1 2019 from 5.00% in Q1 2018. This was driven by the company’s overlift position in Q1 2019 from an underlift in Q1 2018 as well as cost of hedging and fair value loss. This more than offset the 47.39% decline in net finance cost position attributable to the company’s debt refinancing and deleveraging exercise in 2018. Resultantly, the company posted a 66.88%y/y decline in PBT to N5.96billion in Q1 2019.  

However, due to the tax credit of N4.06billion the company reported, PAT was up by 59.41%y/y to N10.02billion in Q1 2019. 

Tax Credit Clouds Uninspiring performance  

On a sequential basis, turnover was down by 10.50%q/q following the downward trend of average oil and gas prices realized and slightly lower production levels. However, the company showcased cost efficiency as its GPM was up by 307bps, despite a 34.7% drop in gross profit.  

The company recorded a 57.57% q/q rise in its net operating expenses, leading its net opex/sales ratio to 30.67% in Q1 2019 from 17.42% in the preceding quarter. This was led by a reversal in most lines of operating expenses from gain positions in Q4 2018, which was more than enough to offset the 48.23%q/q slash in general and administrative expenses segment.  

Down to the P&L line, finance cost further exacerbated the company’s PBT position as it recorded a N4.00billion net finance cost from a net finance income position of N1.45billion in Q4 2018. This reversal was due to the company’s repayment on its revolving loan facility in the reporting period. These led to a fall in PBT margin to 12.17% in Q1 2019 from 33.22% in Q4 2018. 

Following the tax credit in the reporting quarter, PAT stood at N10.02billion (up 48.58%q/q). 

Outlook 

Going forward, we are of the view that top line growth should continue to be supported by the strong oil price environment backed by the OPEC’s supply cut 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 should continue to significantly contribute to sales growth.  

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 and increasing the scope for further operations.

Sources: Company Filling and Investment One Research