Top line Performance: down 31.91% q/q, 13.35% y/y.

·         Gross profit margin: down to 25.37%, from 64.61% in Q4 2019 and 51.05% in Q1 2019.

·         OPEX/sales ratio: up to 121.30%, from 12.79% in Q4 2019 and 20.39% in Q1 2019.

·         PBT margin performance: down to -73.36%, from 52.30% in Q4 2019 and 12.17% in Q1 2019.

Seplat released its Q1 2020 results and we observed the impact of the decline in crude oil price following the outbreak of COVID-19. Furthermore, reflecting the significant fall in oil price, the oil and gas firm recorded a significant amount of impairment charge on its non-financial assets on the back of downward review on future cash flow. The effects of this charge reflected in bottom-line performance as the company recorded an operating loss and loss before tax of N25.03billion and N31.11billion respectively.

Company’s Performance Impacted by COVID-19 

The result showed that Q1 2020 revenue was down 13.35% y/y, reaching N42.41billion. The company’s oil revenue printed at N34.90billion (down 3.41% y/y) while gas revenue declined to N7.51billion from N12.81billion in Q1 2019. The decline in oil revenue is on the back of the decline in crude oil price following the outbreak of COVID-19 and price war between Saudi Arabia and Russia, which led to a supply glut. Accordingly, Brent crude price averaged US$49.06/barrel in Q1 2020 vs U$/60.50barrel in Q1 2019. Although Seplat experienced stock build at terminal (underlift) as opposed to an overlift in the same period last year, we believe the additional volume produced and sold from Eland’s OML 40 could have supported oil revenue performance. The stock build at terminal could be a resulting effect of demand destruction in the global oil market. 

The 41.37% decline in gas revenue was due to the slowdown in gas volume sales (Q1 2020:88Bscf vs Q1 2019:143Bscf) as well as decline in average realised gas price (down from US$3.24/Mscf in Q1 2019 to US$2.89/Mscf in Q1 2020). The lower gas sales volumes, according to management, reflected higher downtime at the third-party infrastructure and a planned 15-day week shut down of the gas plant for the turnaround maintenance executed in March. 

Moving further, the company recorded a jump in its cost, which led to deterioration in Gross Profit Margin (GPM). Gross profit margin was down to 25.37% (from 51.05% in Q1 2019), with gross profit declining by 56.95% y/y to N10.75billion. The surge in the firms cost of sales resulted from a 42.90% and 26.03% jump in crude handling fees and royalties to N6.57billion and N10.40billion respectively. This was due to additional production volume sales from OML 40, which it recently acquired from Eland Oil & Gas. We highlight that total oil production from Eland’s OML 40 amounted to 10,056bpd (total oil produced by Seplat stood at 33,368bpd vs 21,885 in Q1 2019)

Bottom-line Performance Marred by Impairment Provision

Operating expense for the quarter was up 415.38% y/y owing to the impairment charges on non-financial asset (N47.45billion). According to the management, the impairment was primarily as a result of re-assessment of future cash flows from the Group’s oil and gas properties due to significant fall in oil prices. Consequently, OPEX/sales ratio jumped to 121.30%, from 20.39% in Q1 2019.  

Moving down the P&L, the jump in net finance cost (up 64.20% y/y) to N6.59billion, combined with depressed operating profit, was enough to hamper bottom-line performance. Hence, the oil & gas producer recorded a loss before tax of N31.11billion. The jump in net finance cost was on the back of a c.60% decline in finance income to N347million, and a 45.21% increase in finance cost to N6.58billion, which could have been as a result of the US$350 million revolving credit facility taken in December 2019. 

Nonetheless, we spotlight that excluding the impairment charge, OPEX/sales ratio and PBT margin improved to 9.39% and 38.54% in Q1 2020, from 20.39% and 12.17% in Q1 2019 respectively, as the firm realised a fair value gain of N6.23billion resulting from crude oil economic hedge contracts.

Sequential Performance 

On a sequential basis, much of the story remains the same as turnover declined by 31.91% on the back of lower oil and gas prices. This, combined with a 43.58% rise in cost of sales, pressured gross profit margin down to 25.37%. Furthermore, the q/q rise in OPEX/sales offset the drop in net finance cost, as the company printed a LBT of N31.11 billion, from a PBT of N32.57billion in Q4 2019.

Outlook – Oil Price to Remain a Major Concern 

So far this year the oil market has been volatile with price dwindling rapidly on the back of multiple unfavorable interconnected events. We maintain a negative outlook on oil price as we expect the reeling effects of the virus and the resultant restriction policies to linger for the near future. Furthermore, IMF’s negative 2020 output growth projections for developed economies (-6.1%) and weakened outlook for other large fuel consumers such as China (1.2%) and India (1.9%) may mute a resurgence in the commodity’s price. 

We believe this could play out negatively for Seplat in terms of topline performance. Nonetheless, we believe the company should continue to be profitable given its cost efficiency (US$7.7/boe as at Q1 2020). In addition, the diversification of its topline to include gas exploration and sales should provide some buffers for overall performance. We highlight that, the company’s hedging strategy of 1.5MMbbls/quarter at US$45/bbl from Q1 to Q3 2020 could continue to protect the company from low oil prices.  

The company’s management affirmed that the integration process with Eland oil will continue to be implemented over the course of the year; we believe the oil producer would continue to gain value added from its acquisition of Eland’s OML 40 nonetheless, we posit that production operations at Eland’s facility may be needing an increase in cost efficiency. 

Elsewhere, the company plans to invest US$120 million on capital expenditure in 2020 as it plans to drill two new gas wells. We opine that construction activities around the gas wells may be slowed in the face of a continued economic lockdowns and spread of COVID-19.  According to management, the Amukpe to Escravos pipeline construction has faced some delays due to COVID-19 however, it is set to provide a third export option for liquids production from OMLs 4, 38 and 41 in H1 2020. We believe the operation of this export route would bode well for the firm in the face of shutdowns at Forcados terminal.

Source: Investment One Research, Company Financials