Investors and shareholders will be puzzled on how Nigeria’s top indigenous exploration and production company, Seplat was still able to record better Profit After Tax (PAT) despite decrease in revenue and production.
According to the financials presented to the Nigerian Stock Exchange (NSE), in Q1 2019 PAT grew N10billion from N6.2billion, while tax rebate stood at N4billion, all of which was derived from the crude oil business segment, as against the N11.7billion expense of prior Q1.
Revenue dropped from N55.236bn in Q1 2018 to N48.941bn, representing a decrease of 11.4percent which reflected the lower oil production and oil price realization of $61.7/bbl compare to $65.78/bbl in Q1 2018 while crude oil sales recorded a loss of N996million, compare to a profit of N452million in the corresponding period last Quarter.
“In our view, the decline in oil production may be slightly connected to Nigeria’s compliance to the OPEC production cut deal, which, according to the Minister of State for Petroleum, was kick-started in February 2019,” analysts at CSL Stockbrokers, a wholly owned subsidiary of FCMB Group Plc & a member of The Nigerian Stock Exchange said.
Analysts at CSL Stockbrokers also believed that oil price is yet to fully recover from the impact of the supply glut that saw crude oil price crash by 38 percent to $52.2 between October and December 2018.
A breakdown of the numbers showed that crude oil sales dropped to N36.132billion from N43.138billion; while gas sales revenue was flat at N12.809billion from N12.098billion. By geographical markets, crude oil sales in Nigeria amounted to N3.665billionn, while gas sales stood at N12.809billion; while crude oil and gas sales in Switzerland contributed N32.132billion and N12.809billion respectively.
“This lack of full recovery likely explains the lower realized oil price reported in SEPLAT’s Q1’19 numbers,” CSL Stockbrokers said.
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) margin which is a more precise measurement of profitability plunged to 35.1 in first quarter of 2019 from 64.5percent in corresponding period last year due to $15.8 million over lift revaluation loss compared to $8.6 million under-lift revaluation gain in first quarter 2018 and another $7 million unrealized loss on derivatives and $5.2 million cost of hedging.
“The over-lift revaluation loss mirrored the change in the market value of the shortfall between crude oil lifted and crude oil sold during the period,” analysts at CSL Stockbrokers said.
Free Cash Flow to Equity (FCFE) surged to $63.3 million in first quarter 2019 thanks to gains from the application of SEPLAT’s huge capital allowance used to offset tax charges—implying no significant pass through to cash balance and improved working capital management.
SEPLAT’s strong working capital position is mostly evidenced by its negative cash conversion cycle in Q1‘19, which suggests that it likely generates revenue before it pays suppliers.
“This pattern is likely to subsist in coming quarters,” analysts at CSL Stockbrokers said.
Cost of sales dropped by 10.73percent to N23.955billion from N26.833billion; the bulk of which was the N8.252billion royalties, which dropped from N9.758billion; followed by the N7billion depletion, depreciation and amortization, which also fell from N9.7billion.
In Q1 2019, crude handling fees remained at N4.459billion, slightly lower than N4.5billion recorded in the corresponding quarter; just as operations and maintenance expenses climbed from N2.217billion to the N3.5billion. Gross profit, therefore, slipped 12.03percent from N28.4billion to the N24.9billion.
Other income was negative at N5.billion, representing 2.628percent drop from N2.628billion income in the first quarter of 2018; just as general and administrative expenses climbed 47.58percent up from N4.2billion to N6.2billion.
Fair value movement in contingent consideration grew by 116.94percent to N3.7billion, compared to the previous first quarter’s N1.7billion; just as operating profit slipped to N9.9billion, down from 61.07percent from N25.6billion.
Adeoluwa Eweja, oil and gas analyst at Afrinvest securities limited still expects a lot from Seplat this year because they have the best risk mitigation strategists, technical experts, geologists who were former ex shell and ex British Petroleum (BP) people with international expertise like Roger Brown (Chief Financial Officer) who can sail the ship rightly.
Finance income, being interest income on bank deposits, jumped by 98.86percent from N437million in Q1 2018 to N869million in Q1 2019; finance charges dropped by 39.48percent from N8billion to N4.8billlion, driven mainly by the N4.5billion interest on bank loans, down from N7.35billion.
Profit before tax, therefore, suffered 66.88percent slide to N5.9billion, compared to N17.9billion in the preceding Q1 while Net profit represented Earnings Per Share of N17.03, compared to N10.68.
Going forward, management is optimistic that ongoing CAPEX on drilling, ramped up in second half of 2018, would have a positive impact on crude volumes and revenue in second half of 2019. Therefore, the company retains FY’19 guidance of $200 million in capex, between 24,000 to 27,000 bopd in liquid production, and 146 to 164 MMscfd in gas production.
Recall, Seplat entered into crude price hedge contracts at an average premium price of $1.3/bbl on 4 million barrels in December 2018, which remained unexecuted at strike price of $50/bbl to $55/bbl.
The cost of this contract also weighed on EBITDA margin. Excluding the overlift revaluation and fair value losses, EBITDA margin would have declined by only 4.3ppts YoY.
