Seplat Plc. Q1 2021 Results: Year of Recovery

May 5, 2021/InvestmentOne Report 

·         Top line Performance: up 4.76% q/q, 36.60% y/y.

·         Gross profit margin: up to 34.63%, from 13.78% in Q4 2020 and 25.37% in Q1 2020.

·         OPEX/sales ratio: dropped to 15.47%, from 22.12% in Q4 2020 and 121.30% in Q1 2020.

·         PBT margin performance: down to 18.38%, from 30.05% in Q4 2020 but up from LBT margin of 73.36% in Q1 2020.

Seplat released its Q1 2021 results and we observed continued recovery in its business in line with recovery in the global economy. 

Top line Performance

The result showed that Q1 2020 revenue was up 36.60% y/y, reaching N57.93billion. This was supported by twin increase in its oil and gas revenue during the quarter. Gas revenue rose by 43.55% y/y to N10.78billion, while the company’s oil revenue printed at N47.15billion (up 35.11% y/y). While we observed a slight increase in working interest oil production, which settled around 19,842bopd compared to 19,722bopd in Q1 2020, the rise in oil revenue is largely a reflection of recovering crude oil price relative to the same period in 2020. Accordingly, the oil and gas producer’s average oil price realised in Q1 2021 was US$60.8/bbl (Q1 2020: $49.9/bbl). On the other hand, improvement in gas revenue was on the back of increase in gas volume sales (Q1 2021: 10.3Bcf vs Q1 2020: 7.9Bcf) due to new gas well (Oben-50) which commenced production during the quarter. 

The company’s gross profit margin (GPM) improved by 926bps y/y to 34.63% on the back of faster rise in realised price relative to increase in cost of sales (COGS) (up 19.65% y/y). The rise in the firms COGS resulted from the jump in DDA ¹ and O&M ² expenses to N11.75billion (+30.23% y/y) and N8.73billion (+94.14% y/y) respectively. 

Bottom-line Performance

Operating expense for the quarter was down 82.57% y/y owing to the high base of Q1 2020 when the firm recognized huge asset impairment due to the outbreak of the pandemic. Consequently, OPEX/sales ratio fell to 15.47%, from 121.30% in Q1 2020.  We highlight that excluding the impact of asset impairments, OPEX/Sales ratio would have rose from 9.83% in Q1 2020 to 15.47% in Q1 2021; this was on the back fair value loss on derivatives (oil hedge contracts) of N1.78billion recorded during the quarter compared to fair value gain of N6.23billion recorded in Q1 2020. 

Moving down the P&L, the slight fall in net finance cost (down 3.15% y/y) to N6.38billion combined with higher gross margin and lower OPEX/Sales ratio to boost bottom-line performance. Hence, the oil & gas producer recorded a PBT margin of 18.38% (vs a 73.36% loss before tax margin in Q1 2020).  

Net Finance Cost hampers improvement in Bottom line Performance (Q/Q)

On a Q/Q basis, the company’s performance reflected continued improvement in the global oil market with topline registering at N57.93billion, up 4.76% q/q. The oil and gas producer recorded a 10.16 q/q decline in its COGS, which combined with higher oil prices to boost GPM to 34.63%, from 13.78% in Q4 2020. 

Furthermore, a 665bps q/q decline was recorded in OPEX/sales ratio; however, this was not enough to boost bottom line performance as PBT margin fell to 18.38%, from 30.05% in Q4 2020. The fall in PBT margin was owing to the jump in Net finance cost to N6.38billion, from a net finance income of N62million recorded in the preceding quarter. 

We highlight that the company was able to successfully issue US$650 million 7.75% senior notes to redeem existing US$350 million 9.25% senior notes and repay US$250 million drawn on US$350 million RCF. 

Outlook

With crude oil price recovering stably in the global markets, 2021 should 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 sustenance of oil price between US$60-70/bbl. However, major downside risks center around the resurgence of coronavirus cases in India, Japan and Brazil, which may lead to restriction on economic and travel activities in those regions.  

Furthermore, the diversification of its topline to include gas exploration and sales (accounting for 18.61% of revenue in Q1 2021) should provide some buffers for overall performance. Management’s guidance for oil and gas production for 2021 is 48,000 – 55,000bpoed. Furthermore, Oben-51 gas well is slated to begin gas production in May 2021; this should bode positively for growth in gas revenue for the rest of the year. 

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 two more 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