Investors and shareholders will be puzzled on how Nigeria’s largest listed Oil & Gas firm by market value, Seplat, was able to deliver more than double growth in net profit despite weaker oil sales in the first nine months of 2019.
According to the financials presented to the Nigerian Stock Exchange (NSE), Seplat grew after-tax profit by 103 percent to N56.6 billion from N27.96 billion. The growth was supported by the management’s decision to cut the income tax rate to 1.84 percent in 9m 2019 from 57 percent in September 2018.
The Nigerian independent oil and gas company, which is listed both in Nigeria and London noted that income tax expense is recognised based on management’s estimate of the weighted average effective annual income tax rate expected for the full financial year.
“The estimated average annual tax rates used for the period to 30 September 2019 were 85percent and 65.75percent for crude oil activities and 30percent for gas activities, Seplat said.
Revenue of the oil and gas firm shrank by more than one-third to N42.9 billion between July and September 2019, largely driven by 41.6 percent dip to N32.78 billion in crude oil earnings – which form a larger chunk of its earnings. This weighed on Seplat’s cumulative revenue which declined by 12.5 percent from the start of the year to N151.88 billion as against N173.71 billion recorded last year.
According to Austin Avuru, Seplat’s Chief Executive Officer, the decline in Seplat third-quarter earnings was attributable to lower production and crude oil prices.
Brent crude traded at $62.03 per barrel on the average between July and September 2019, compared with an oil price of $68.47 per barrel in the preceding three months thanks to weaker oil pricing followed the escalation of the trade spat between the United States and China, as well as a surprise build in the former’s crude stockpiles.
“The core business remains highly cash generative and with four rigs now operational in the field we expect to quickly regain momentum. This is reflected in our decision to declare an interim dividend of $29 million,” Avuru noted.
Four drilling rigs are now operating across Seplat’s portfolio to drive liquids working interest production to an expected exit rate of 30,000 bopd with three oil wells (Sapele-29, Sapele-33 and Jisike-06) been drilled and completed to date.
Seplat announce plans to commence the process of drilling two additonal oil wells (Ovhor-18, Sapele-34) and a gas well (Oben-48) while two additional oil wells (Ovhor-19 and Sapele-35) are expected to be completed by early 2020.
Seplat’s expects its net oil production to rise by 7,000 bopd to achieve a 2019 exit rate of 30,000 bopd.
In the face of the dwindling revenue, Seplat tamed cost of sales by 12 percent to N70.6 billion from N80.2 billion, resulting in a gross profit of N81.22 billion in the first nine months of the year as against N93.5 billion recorded in the same period a year earlier.
The marginal reduction in administrative expenses to N16.7 billion, and N11 billion realised as profit on the back of shortfalls between the crude oil lifted and sold to customers were not enough to offset N12.32 billion impairment loss recorded during the period.
Seplat explained that the shortfall is initially measured at the market price of oil at the date of lifting and recognised as other income.
“The shortfall is remeasured to the current market value. The resulting change, as a result of the remeasurement, is also recognised in profit or loss as other income,” Seplat said.
Finance expense fell 44 percent buoyed by a 34 percent decline in borrowings. “This reflects management’s sustained intent to deleverage its balance sheet,” Khalil Woli, oil and gas analyst at Lagos-based CardinalStone said in a note. The company is having more of equity capital than debts as its debt-to-equity ratio fell 20.2 percent from 27.8 percent.
“However, it is likely that the potential acquisition of Eland may require some debt financing. This could potentially weigh on interest costs in subsequent quarters,” Woli said.
While Seplat’s net finance cost almost halved to N8.3 billion from N15.7 billion, the company’s operating profit which came in lower at N64.8 billion from N80.75 billion resulted to a 12 percent decline in pre-tax profit N56.7 billion in the first three quarters of this year compared with N65 billion recorded in the same period of 2018.
The company’s net profit margin, a profitability metric that measures how much a company generates as profit from every unit of sales, rose to 37.3 percent compared with 16.1 percent recorded last year. This shows for every N100 the company generated as revenue, it realised N37 as profit.
Similarly, Seplat showed improved efficiency in utilizing its assets to generate profit as the portion of its net profit relative to total assets increased to 9.7 percent from 4.7 percent.
But all these failed to spur investor sentiment as the value of the company’s stock fell some 5.22 percent to N490 per share on Tuesday after it released its financial results for the nine-month period.
Meanwhile, the company said it would pay an interim dividend of $0.05 (United States Five Cents) per share “on or around 5th December 2019” to its shareholders whose names appear in the Register of Members as at the close of business on November 12, 2019, according to a notice filed on the Nigerian Stock Exchange (NSE) on Tuesday.
Seplat further said the exchange rate for the naira or pounds sterling amounts payable would be determined by reference to the relevant exchange rates applicable to the US dollar on November 11, 2019, and would be communicated by the company on November 12, 2019.
