Seplat Petroleum: Delivering on production and profitability

Seplat Petroleum Development Company is delivering on its promise to accelerate field development activities across the existing portfolio as well as profitability in second half of the year. It is good news for the company on both sides of production volume and price in the third quarter – resulting in the doubling of sales revenue and a big turnaround in profit.

The company has reported a nine-month working interest production of 50,834 boepd, which remains within its guided full year working interest production guidance of 48,000 to 55,000 boepd. Uptime on the Trans Forcados System improved to 88% during the third quarter, raising the year to date average to 80%, which is in line with budget numbers for the year.

The company’s chief executive officer, Mr. Austin Avuru, said the result of keeping production on target and oil price remaining firm is another consecutive quarter of very strong financial performance and profitability. Significant free cash flow and a robust balance sheet are part of the success story of the company at the end of September, 2018.

His plan is to build on the strong performance in the coming quarters. The strategy, he said, is to step up organic development activities across the existing portfolio and also capitalise on inorganic growth opportunities as they arise.

The full year profit outlook for the company continues to point to a sharp drop despite the strong year-on-year growth. This is explained by a sharp reversal of a huge deferred tax credit that contributed 84% of net profit last year to a tax expense that consumed 57% of pre-tax profit at the end of the third quarter.

After tax profit amounted to about N28 billion for Seplat at the end of the third quarter, a big lift from a loss of N1.62 billion in the same period last year. The company may close the year with after tax profit in the region of N41 billion, a likely drop of 50% from the closing profit figure of N81 billion in 2017.

The company’s key strengths in 2018 include strong sales revenue performance, which more than doubled year-on-year at the end of September. There is other income of over N6 billion that was completely absent last year. Finance income multiplied more than four times and two major expense lines – administrative cost and finance expenses were prevented from rising.

Sales revenue grew by 103% year-on-year to N173.7 billion at the end of the third quarter with gas sales contributing 22% of the earnings. Gains in production volume and improved average prices of oil and gas account for the strong revenue growth.

Based on the current growth rate, sales revenue projection for the full year remains on target of beating its 2013 peak. Turnover is expected to close in the region of N243 billion for Seplat in 2018, an expected increase of 76% from the closing figure of N138 billion last year. The company had lifted sales revenue by 118% in 2017 – the first revenue growth since 2013.

Seplat has maintained significant cost savings alongside the strong growth in sales revenue and other income lines. Cost of sales keeps growing at a considerably slower pace than sales revenue, boosting gross profit by 145% to over N93 billion. That has continued to stretch out gross profit margin from 27.5% at the end of 2016 to 47% in 2017 and from 51% at half year to 54 at the end of the third quarter.

Administrative expenses declined slightly by 2% to N16.9 billion while net fair value loss dropped by 4% to N2.4 billion. That lifted operating profit nearly five times to about N81 billion at the end of September.

Net finance cost declined by 8% to N15.7 billion over the review period, which again strengthened profit capacity. Net profit margin recovered from negative figure in the same period last year to 16.1% at the end of the third quarter, improving further from 14.2% at the end of half year.

The company’s management said its process of deleveraging the balance sheet is still going on. The balance sheet debts declined further from N166 billion at the end of June to N164 billion at the end of September, 2018 against N174 billion at the end of last year.

The company earned N47.98 per share at the end of September 2018, rising from loss per share of N2.88 in the prior year. It has announced an interim cash dividend of 5 cents per share. The company’s register closed on 14th November and payment is scheduled for 6th December, 2018.