Tuesday, March 29, 2016 06:57 PM / ARM Research 

Seplat Plc (Seplat) released FY 15 audited results. Revenues dropped 36% YoY to $570.5 million as weaker oil receipts (-34% YoY) on lower oil prices masked the surge in gas sales (+200% YoY). PBT fell to $87.1 million (-68.9% YoY), while the first tax charge in three years worsened PAT to $65.6 million (-74% YoY). 

Working interesting 2P reserves climbed 71% over 2015 to 480mmboe (gas: 57% & oil :43%) due to conversion of 2C to 2P on legal assets (OML 4, 38 and 41) as well as first time recognition of 2P associated with OML 53 and 55. 

Responding to low oil price induced cashflow pressures, Seplat cut final dividend to $0.04 (N8.00) per share, relative to $0.09 (N18.00) in FY 14, bringing FY 2015 gross pay-out to $0.08 (N16.00) vs. $0.15 (N30.00) in FY 14. 

Low oil price continue to mask surge in volumes

In the fourth quarter of 2015, cumulative output doubled to 53.2kboed YoY driven by higher oil (+84% to 34kboed) and gas volumes (+161% to 114mscf YoY). 

Management links the increase in volumes to drastic reduction in downtime of Trans Forcados Pipeline (TFP) with only 6% recorded over H2 15 relative to 35% in H1 15. However, due to lower oil prices which nearly halved YoY, revenue was still 28% lower at $150.6 million—in line with our forecast. Reflecting increase in gas contribution, Q4 15 sales on a barrel of oil equivalent (boe) basis was 65% lower YoY at $30.76. 

Figure 1: Composition of Seplat’s volumes

Similar to the prior quarters, the impact of low oil prices was compounded by relatively stable cost base. Specifically, production costs rose 25% YoY due to additional field costs related to recently acquired OML 53 and 55 as well as higher crude handling fees to accommodate the increase in volumes.  

On the other hand, administrative expenses was cutback, a modest ~5% YoY, to $37 million as management took steps to reduce recurring expenses like contract labour and traveling costs. Overall, amidst slowdown in sales, overall costs which increased (+14% YoY), pushed Q4 15 operating profit to $35 million (-63% YoY).  

This implies that Seplat earned only $4.00/boe in operating profit in Q4 15 relative to $28.9/boe in the same period in 2014. Similar Q4 15 EBITDA was $6.3/boe vs. $36.2/boe in 2014, with corresponding margin halving to 21%. 

Higher finance charges and taxes drive Q4 loss

Q4 15 earnings pressure was aggravated by higher net finance charges (+126% YoY to $24 million) on the back of elevated net debt position of $573 million (+60%YoY), with PBT 64% lower YoY at $18 billion—23% ahead of our estimate. 

A tax charge of $21 million drove a loss of $3 million in the quarter. Management linked the tax to timing difference on a deferred tax obligation and expect it to reverse in the future. In sum, Seplat posted a loss of $0.65/boe in Q4 15, relative to profit of $21.9/boe and $5.2/boe in Q4 14 and Q3 15, respectively. 

NPDC receivables remain sticky despite robust liquidity and leverage ratios

Importantly, despite the somewhat elevated debt levels, liquidity and leverage ratios remain at comfortable levels.  

Based on the company’s FY 2015 EBITDA, Seplat can pay-off existing net debt in less than 3 years, relative to average maturity of 5 years. Furthermore, current asset is a healthy 2x urrent liabilities while debt is only 40% of equity. 

That said, the slow rate of depletion of NPDC receivables remain a source of working capital pressure. Specifically, after the dip over Q3 15 (-8% QoQ), NPDC receivables climbed 6% over Q4 15 to $491 million, despite the agreement signed in July 2015 that allows Seplat to offset outstanding receivables with 55% of gas revenues attributable to the NPDC. This suggests that cash calls related to ongoing CAPEX often exceeds the gas receipts. 

Figure 2: Seplat's liquidity and leverage ratios

Overall, the impact of low oil price environment was quite visible in the final quarter of 2015 where Seplat posted EBITDA of $6.3/boe vs. $47.5/boe in the same period the prior year. Over 2016, we expect low oil prices, elevated production shut-ins and resumption of tax payment to keep earnings depressed and we will make necessary adjustment to our model.  

Seplat is trading 5x and 18.7x 2016E EV/EBITDA and P/E, relative to respective 6.7x and 22.2x for Bloomberg EMEA peers. Our FVE of N301.84/share is nearly at par with current market price of N300. We have a NEUTRAL rating of the stock 

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