August 1, 2019/InvestmentOne Report

• Topline Performance; up 22.66% q/q, 21.13% y/y.
• Gross profit margin; up 1316bps q/q, 1396bps y/y.
• OPEX/sales ratio: up 213bps q/q, 785bps y/y.
• PBT margin performance; up 3957% q/q, 1299% y/y.
  

Seplat revealed its Q2 2019 results and we observed that gas-tolling receipts from NPDC was responsible for improvements in topline performance. Consequently, we saw this trickle down positively into bottom-line performance. Nonetheless, we spotlight that excluding the receipts from NPDC, the results was not too interesting.

Topline Performance – Ameliorated By Gas Tolling Receipts

The result showed that Q2 2019 revenue was up 21.13% y/y, reaching N60.03billion. While the company recorded gas-tolling revenue (N20.52billion) from NPDC for processing its share of the gas extracted from OML 4, 38 and 41 from 2015 to 2018, we see that revenue from oil and gas sales declined by 15.18% and 33.28% to N30.16billion and N9.34billion respectively. This decline in oil & gas revenue was due to the slowdown in oil and gas production as well as decline in average realised price of oil and gas (Oil: down 5.2% y/y to US$68.7/bbl, Gas: down 32% y/y to US$2.26/Mscf).  

Moving further, the company recorded a decline in its cost, which led to improvements in Gross Profit Margin (GPM). Gross profit margin was up by 1396bps y/y to 64.22%, with gross profit growing by 54.79% y/y to N38.55billion. However, we spotlight that ex. gas-tolling receipts, GPM would have declined by 476bps y/y to 45.39%. 

Operating Expenses and Bottom-line Performance 

Operating expense for the quarter was up 85.95% y/y owing to the jump in impairment charges (N12.36billion in Q2 2019 vs N140million in Q2 2018). This drove OPEX/sales ratio up by 785bps y/y to 22.53%. The jump in impairment was due to the write-off of the interest on outstanding receivable amount from NPDC.  

Nonetheless, a decline in net finance cost (down 54.05% y/y) to N1.70billion, combined with improved gross margin, was enough to serve as cushion to the bottom-line. Hence, PBT margin recorded at 51.74%, rising from 38.75% in Q2 2018. 

On a sequential basis, it is the same story. Turnover rose by 22.66% on the back of gas tolling revenue. This sufficed to offset the dip in oil and gas sales (down by c.16% q/q and c.27% q/q), driving a the q/q rise in gross profit margin to 64.22%.  Furthermore, while OPEX/sales also rose q/q, the drop in net finance cost led to some improvements in PBT margin. 

Management Guidance – Expecting a Better Half 

While we have concerns over the company’s y/y decline in production over the past few quarters, management seemed to be positive for the rest of the year. While average barrels of oil per day is currently at 48,004 (25,030 barrels for Gas and 22,974 barrels for oil), management has indicated that it will be on point with its guidance for 2019 (49,000 – 55,000 bpd) by the end of the year. 

Furthermore, with the OPEC extending its production cut for an additional 9 months, we expect that oil price should continue to be stable above US$60/barrel and this may be positive for the firm’s topline performance. Nonetheless, we expect revenue to dip in Q3 2019 as a result of the one off revenue item recorded in this quarter. 

Source: Company financials, Investment One Research