Seplat Plc FY/Q4 2020 Results: Tough Year for the Oil Producer

March 3, 2021/InvestmentOne Report 

·         Top line Performance: down 0.39% q/q, 11.21% y/y.

·         Gross profit margin: down to 23.78%, from 33.81% in Q3 2020 and 53.48% in Q4 2019.

·         OPEX/sales ratio: Jumped to 22.12%, from 8.92% in Q3 2020 and 12.79% in Q4 2019.

·         PBT margin performance: up to 30.05%, from 7.84% in Q3 2020 but down from 52.30% in Q2 2019.

Seplat released its Q4/FY 2020 results and we observed continued recovery in its business in line with recovery in the global scene. 

Top line Performance

The result showed that Q4 2020 revenue was down 11.21% y/y, reaching N55.30billion. While gas revenue rose by 25.07% y/y to N40.50billion, the company’s oil revenue printed at N150.42billion (down 17.66% y/y). This occurred despite increase in working interest oil production, which we estimate to be around 34,099bopd compared to 24,212bopd in Q4 2019 – due to the acquisition of Eland OML assets. The decline in oil revenue is a reflection of depressed crude oil price relative to the same period in 2019. Accordingly, Brent crude price averaged US$45.26/barrel in Q4 2020 vs U$/62.42barrel in Q4 2019. 

The company recorded a jump in its cost of goods sold, which led to a deterioration in Gross profit margin (GPM). GPM was down to 23.78% (from 53.48% in Q4 2019), with gross profit declining by 67.32% y/y to N13.15billion. The surge in the firms cost of sales resulted from significant jump in DDA ¹ and O&M ² expenses to N12.13billion and N10.87billion respectively. This was due to additional field expenses from OML 40 and OML 17, which it recently acquired from Eland Oil & Gas. 

Bottom-line Performance

Operating expense for the quarter was up 53.62% y/y owing to the 83.37% y/y rise in admin expenses – due to inclusion of Eland staff cost. Consequently, OPEX/sales ratio jumped to 22.12%, from 12.79% in Q4 2019.  Moving down the P&L, the fall in net finance income (down 97.14% y/y) to N62million, combined with depressed gross and operating profit margin, was enough to hamper bottom-line performance. Hence, the oil & gas producer recorded a PBT margin of 30.05% (vs 52.30% in Q4 2019). The fall in net finance income may not be unconnected with the low interest rate environment that was prevalent during the period relative to 2019. 

Full-year Performance

On a full-year basis, the company’s performance was severely marred by the outbreak of the pandemic and its attendant effect on the global oil market. The oil price war between Saudi Arabia and Russia during March and April 2020 also took its toll on the overall company performance. Nonetheless, the company is on a path of recovery after recording after tax profit in Q3 and Q4 2020. 

Full year turnover declined by 10.85% y/y on the back of lower average realised oil price (US$39.95/bbl) compared to FY2019 (US$64.40/bbl). This, combined with a 57.60% rise in cost of sales, pressured gross profit margin down to 23.48%. Furthermore, the rise in OPEX/sales and net finance cost pushed the company’s bottom-line to a Loss Before Tax (LBT) of N28.87billion, from a PBT of N89.28billion in FY 2019.   

Seplat’s oil and gas production averaged 51,182bopd (up 10.08% y/y) on a working-interest basis in FY 2020 (FY 2019: 46,497bopd); this was bolstered by contribution from Eland OML 40 assets: 8,855bopd (26.30% of group oil volumes). On the other hand, Seplat’s gas production for FY 2020 was 101MMscfd at an average selling price of US$2.87/Mscf (FY 2019: 131MMscfd, US$2.84/Mscf). According to management, the drop in volume was due to the impact of COVID-19, which affected offtake from Oben gas plants as well as delays in production from Oben, following demand recovery towards the end of the year.  

Bottom-line Improves Quarter on Quarter

On a sequential basis, topline performance in Q4 2020 compared to Q3 2020 came in on a flattish note. However, faster rise in COGS saw GPM decline to 23.78% from 33.81% in Q3 2020. While OPEX/sales ratio rose to 22.12%, from 8.92% in Q3 2020 – due to fair value loss on its financial interest in OML55, PBT margin improved to 30.05% (from 7.84% in Q3 2020) on the back of the plunge in finance cost. 

Outlook

With crude oil price recovering stably in the global markets, 2021 is poised to be a much more favorable year for the oil producer. This should be supported by the ramp up in vaccine creation and administration as economic activities continue to recover. In addition, the IMF’s 2021 economic growth projections for developed economies (+4.3%) and strong outlook for other large fuel consumers such as China (+8.10%) and India (+11.50%) may indicate continued resurgence in the commodity’s price.  

Furthermore, the diversification of its topline to include gas exploration and sales (accounting for 21.21% of revenue in FY 2020) should provide some buffers for overall performance. Management’s guidance for oil and gas production for 2021 is 48,000-55,000bpoed.  

Elsewhere, The oil producer also has some interesting projects in the pipeline that are expected to bode positively for its overall performance. Management indicated that its CAPEX for 2021 is set to the tune of US$150million. 

The Amukpe to Escravos pipeline construction that faced some delays due to COVID-19 is expected to provide a third export option for liquids production from OMLs 4, 38 and 41 in H2 2021. We believe the operation of this export route would bode well for the firm in terms of reducing downtime and reconciliation losses. In addition, the company plans to drill one oil well at Ohaji (OML 53) and it is expected that this well has a capacity of 2,000bopd. While the oil producer has budgeted to drill three gas wells at Oben – further strengthening its diversification strategy, the company expects new Sapele Gas plant output to be at around 75MMscfd by H2 2022.

Source: Company Financials, Investment one Research

¹ Depletion, depreciation and amortisation

² Operational & maintenance expenses