October 30, 2024/InvestmentOne Report

Seplat Energy Plc’s revenue reached NGN1.07trn as at 9M:2024, marking a significant increase from NGN478.13bn in 9M:2023. Adjusting for underlift and overlift volumes, the total revenue reflected a 6.00%YoY growth, illustrating Seplat’s solid performance amid challenging market dynamics. In Q3:2024, quarterly revenue surged to NGN495.85bn from NGN199.80bn in Q3:2023, driven by steady oil price realization and a slight uptick in production. This contributed to a strong year-over-year return on sales growth and suggests improved efficiency and resilience in Seplat’s revenue-generating capabilities.

Return on Equity (ROE) and Profitability Analysis: Seplat’s return on equity (ROE) for the 9M:2024 was pressured by increased tax expenses, which significantly reduced net profit. Despite a robust operating profit increase of 77.50% year-on-year, reaching NGN411.34bn, the company’s ROE was lower due to a steep tax increase that decreased net income. For context, Seplat’s ROE in 9M:2023 benefited from a relatively lower effective tax rate of 25%, whereas the 9M:2024 effective tax rate was notably higher at 86.00%. This rise in tax expense led to a net profit of NGN52.78bn in 9M:2024, down from NGN46.93bn in 9M:2023, dampening ROE.

Production, Return on Assets (ROA), and Sales Efficiency: Production in 9M:2024 averaged 47,525 boepd, a 1.30% decrease from 48,152 boepd in 2023, reflecting a slight decline due to maintenance activities at the Oben gas plant. However, Seplat optimized its asset utilization by focusing on high-margin crude liftings, resulting in a year-over-year increase in the average gas price realized, up 10.80% to USD3.18/Mscf.

Consequently, the return on assets (ROA) remained steady, with Seplat managing to achieve a stable asset turnover ratio, showcasing the company’s operational resilience despite a minor production decline.

Q3 2024 production stood at 45,768 boepd, down from 47,558 boepd in Q2:2024, but Seplat’s production adjustments aligned well with its strategy to enhance profitability and maintain effective utilization of assets.

Operating Costs, Gross Profit Margin, and Return on Investment (ROI): Cost of sales increased to
NGN539.38bn in 9M:2024 from NGN232.51bn in 2023 due to higher direct operating costs, including elevated gas flaring penalties and increased maintenance costs. Adjusted gross profit decreased by 14.70% to NGN531.52bn in 9M:2024 from NGN416.30bn in 2023, although Q3 gross profit rose to NGN 284.03 illion from NGN 105.03 billion in Q3 2023. Despite these cost increases, Seplat maintained an impressive return on investment (ROI) by focusing on high-yield assets and leveraging its crude production volume to offset cost pressures. Adjusted for gas flaring penalties, the company effectively controlled production costs, enabling it to preserve profitability and sustain a healthy gross margin.

Operating Profit, EBITDA Margin, and Cash Flow Generation: Operating profit grew significantly by 77.50% in 9M:2024 to NGN411.34bn, compared to NGN91.32bn in the prior year. This improvement was largely due to favorable foreign exchange gains, lower general administrative expenses, and a significant reduction in litigation-related costs. Seplat’s adjusted EBITDA for 9M:2024 reached NGN573.40bn, representing a 25.00% YoY increase, which translated to an adjusted EBITDA margin of 53.50%, underscoring the company’s cost efficiency. Q3:2024 operating profit further increased to NGN126.16bn, indicating strong operational performance in a challenging environment. These financial metrics illustrate Seplat’s focus on efficient resource allocation, leading to a notable ROI and sustained operating cash flow generation, with cash from operations rising by 17.00% to NGN 633.76 billion.

Net Profit Margin, Taxation Impact, and Earnings Per Share (EPS): The company’s net profit margin faced substantial pressure in 9M:2024, primarily due to a significant increase in tax expenses. The income tax expense climbed to NGN313.94bn, compared to NGN15.93bn in 2023, due to deferred tax liabilities stemming from foreign exchange gains and the impact of underlift adjustments. As a result, net profit declined by 55.70% to NGN 52.78 billion. Q3:2024 reported a net loss of NGN15.28bn, emphasizing the effect of the increased tax burden. Despite the high tax burden, the 9M:2024 net income attributable to equity holders was still substantial at NGN233.54bn and therefore increasing the EPS to NGN98.37 in 9M:2024.

Outlook: Seplat anticipates maintaining steady production levels in Q4 2024, with output expected to range between 46,000 and 50,000 boepd. This is primarily driven by the development of new oil fields, such as Abiala, alongside enhanced performance from existing assets. Additionally, major projects like the Sapele Gas Plant and the ANOH Gas Processing Plant, which are slated to begin deliveries by Q2 2025, are expected to significantly boost gas production. With the recent approval of Seplat’s acquisition of MPNU, we remain confident in the company’s ability to deliver sustained value. Consequently, we place an OVERWIGHT recommendation on Seplat.

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