Seplat Petroleum: Earnings may drop for the second year

Seplat Petroleum Development Company is headed for drops in revenue and profit for the second year based on the first quarter performance. The petroleum drilling and exporting company is under pressure from the drop in crude oil prices as well as rising cost, resulting in rapidly falling profit.

Though sales revenue grew by 12.5% year-on-year in the first quarter, the full year outlook indicates a drop. Profit fell by more than one-half last year and may fall again by about the same margin this year. A favourable development for the company is the increasing contribution of gas sales to revenue, which is moderating the decline in crude oil sales.

The company closed first quarter operations with a sales revenue of N25.56 billion, which is an increase of 12.5% over the corresponding figure in 2014. Sales of crude oil, the main revenue line of the company dropped by 26.6% to N18.60 billion during the period but gas exports grew by 234.4% to N2.15 billion. Changes in lifting added N4.81 billion to revenue, rising from a negative figure of N3.26 billion in the same period last year.

Based on the first quarter growth rate, sales revenue is projected at N106.22 billion for Seplat Petroleum Development Company at the end of 2015. This will be a drop of 14.6% from the turnover figure of N124.38 billion the company reported at the end of last year. It will also mean a drop for the second year from the sales revenue of N136.66 billion in 2013.

After tax profit amounted to N4.83 billion at the end of the first quarter, which represents a drop of 33.4% year-on-year. Full year outlook indicates after tax profit in the region of N20.21 billion for Seplat Petroleum Development Company in 2015. The company may therefore lose as much as one-half of the profit figure of N40.48 billion it reported in the preceding year. The company’s profit had fallen by 52.6% in 2014 from the peak figure of N85.43 billion in 2013.

The growth of 12.5% in revenue and a drop of 33.4% in profit reflect major kinks in the company’s cost structure. Three major cost elements are responsible for undermining the company’s profit capacity and they are cost of sales, foreign exchange losses and interest expenses. Cost of sales rose well ahead of sales revenue at 38.5% compared to 12.5%, which caused a decline of 2.3% in gross profit to N14.18 billion. Gross profit margin went down from 63.8% in the first quarter of last year to 55.5% this year.

A foreign exchange loss also affected the company’s profit performance in the first quarter. It suffered a foreign exchange loss of N391 million compared to a gain of N266 million in the same period last year. A foreign exchange loss of N2.75 billion was also a major factor in the profit drop the company recorded in 2014.

The third leg of the rising cost tripod is interest cost, which advanced by 138.1% year on-year to N3.57 billion at the end of the first quarter. This represents 45% of the total finance charges the company paid in all of 2014. Rising interest expenses follows rising balance sheet borrowings. Long-term debts came close to tripling at N173.17 billion in the first quarter from the closing figure last December. Short-term borrowings dropped by 51.3% to N35 billion over the same period. The borrowings are required to finance heavy investing activities in oil and gas assets.

The cost-income ratio continues to increase, resulting in a sustaining decline in profit margin. Net profit margin continues to drop rapidly from 62.5% at the end of 2013 to 32.5% in 2014 and further to 18.9% at the end of the first quarter.

The company earned N8.80 per share in the first quarter, a decline from N18.80 in the same period in 2014. Earnings per share is projected at N38 for Seplat Petroleum Development Company at the end of 2015. This will be a continuing rapid drop from N213 in 2013 and N79 in 2014. The company paid an interim dividend of N9.30 and a final dividend of N18 per share for its 2014 operations.

The company faces much cash flow difficulties with a net cash utilisation of N12.14 billion in operating activities. This is largely due to inability to collect trade debts. All the money the company needs to finance its operations are tied down in trade and other receivables, which rose from N58.20 billion in first quarter of last year to N233 billion at the end of the first quarter.

This is at a time that huge funds are needed for increased investments in oil and gas properties. Net cash utilisation in investing activities amounted to N74.55 billion in the first quarter. The company had to resort to bank borrowings to meet its cash requirements.