Seplat Petroleum faces another year of falling profit

Seplat Petroleum Development Company is likely to see its profit fall for a second year based on the performance reported at the end of the second quarter. Both revenue and profit dropped sharply at the end of June and the full year outlook shows that the company’s revenue and profit could drop faster than they did in 2014.   

The petroleum company had lost more than one-half of its prior year’s profit last. It faces operating pressure from the drop in crude oil prices and rising operating cost. Profit margins are down to the lowest levels in three years.

Its earnings constraints are more clearly expressed in dollar terms than in naira due to the depreciation of the local currency. Sales revenue dropped by 36.2% year-on-year in dollar terms in the second quarter but moderated to 19.1% in naira. The company posted a turnover of N48.76 billion at the end of the second quarter and we expect N98.7 billion for Seplat Petroleum Development Company at full year.

Declining crude oil earnings is moderated by increasing contribution of gas sales to revenue. Sales of crude oil, the main revenue line of the company, dropped by 57.4% to N26.71 billion during the period while income from gas exports grew by close to 252% to N5.22 billion in the same period.

Gas sales accounted for an increased proportion of revenue from 2.5% in the corresponding period last year to 10.7% this year. Another favourable development came from changes in lifting, which contributed N16.83 billion to sales revenue against a negative figure of about N3.90 billion in the same period last year.

The projected revenue for 2015 means that the company may record about 21% drop from the turnover figure of N124.38 billion it earned in 2014. It also means that the company’s revenue is likely to drop for the second year from the 2013 peak of N136.66 billion.

The company reported an after tax profit of N8.17 billion at the end of the second quarter, which is a drop of 66.3% year-on-year. In dollar terms, after tax profit fell by 73.4% during the same period. Full year projection indicates a net profit of N17 billion for Seplat Petroleum Development Company in 2015. This will be a drop of 58% from the profit figure of N40.48 billion it reported in 2014. Its profit in 2014 was again a drop of 52.6% from the peak figure of N85.43 billion in 2013.

The company’s profit capacity is undermined by two major cost lines, which are cost of sales and interest expenses. Cost of sales grew by 25% against the drop of 19.1% in sales revenue, which caused a drop of 44.3% in gross profit to N21.39 billion. Gross profit margin went down from 63.7% in the second quarter of last year to 43.9% this year.

The second factor responsible for the company’s falling profit is interest cost, which advanced by 135.7% year on-year to stand at N7.92 billion at the end of June. This is already more than the total interest expenses the company paid in the entire 2014 operations. Rising interest expenses follows rising balance sheet borrowings. Compared with the closing figure last December, long-term debts grew by over 276% to N166.36 billion at the end of June. Short-term borrowings dropped by 55.3% to N32.15 billion over the same period. The borrowings are required to finance heavy investing activities in oil and gas assets.

Profit margin has continued to decline, as the cost-income ratio keeps increasing. The company closed 2013 operations with a net profit margin of 62.5%, which feel to 32.5% in 2014 and has declined further to 16.7% at the end of the second quarter.

The company earned N14.77 per share at the end of the second quarter, which is a decline from N52.47 in the same period in 2014. Earnings per share is projected at N31 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.

Cash flow difficulties have necessitated the rising borrowings. Net cash generation from operating activities has dropped from over N41 billion to a net cash utilisation of N7.20 billion over the review period. Inability to collect trade debts is responsible for much of the company’s cash flow difficulties. As much as N251 billion are tied down in trade and other receivables, far more than all its interest bearing debts. Trade and other receivables rose by 26.8% from N198 billion in second quarter of last year.