• Friday, March 29, 2024
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Seplat’s Target Price revised lower as Coronavirus dampens global oil outlook

Spread in virus cases batters oil price, equities, as investors run for cover

The United States Energy Information Administration ( EIA) 2020 average oil price forecast cut as deadly coronavirus roils global markets has necessitated a lower target price revision for upstream oil and gas stock Seplat, according to analysts at Lagos- based Chapel Hill Denham.

Seplat is now expected to trade at N770.90 in 12 months, translating to a total expected return of 27.4 percent when compared to its current price of N605 a unit (both at the time of analysis and the start of the current trading week).

The new TP is N181.65 lower than was anticipated before the virus outbreak dampened oil price outlook, but Chapel Hill Denham maintains its BUY rating on Seplat.

“The TP cut is underpinned by the lower FY20E oil price forecast of US$ 59/ b and lower longrun oil price assumption of US$60/B (US$61/B previously),” said analysts at Chapel Hill Denham.

The analysts assigned a stronger weighting to relative valuation and assumed lower multiples, to reflect the broad decline in market sentiment on upstream players and capture the recurring NAV valuation gap.

Furthermore, their analysis reflects uncertainty in the Niger Delta, frequent infrastructure downtime and vulnerability to oil price shocks.

Currently, the impact of the coronavirus outbreak on the global economy is expected to be worse than a similar epidemic in China 17 years ago.

This is because the role and size of China’s economy – at the epicentre of both outbreaks – has become more significant than when the SARS epidemic struck in 2003.

Already, China’s central bank has injected more than $ 300bn to stimulate the economy which almost ground to halt on city-wide quarantines to quell the disease.

But it would mean little as the Chinese economy will record a slowdown by the end of the first quarter and the year, owing to disruption in international trade and consumer spending especially since its biggest home- coming event was disrupted by the virus.

The resultant effect would be a slowdown in the global economy given that China is the world’s second-biggest market.

US EIA has downgraded its 2020 average oil price forecast to US$61/B from US$65/B previously.

A combination of a slowdown in demand from China and the rest of Asia, as well as, rising inventory levels in the US would pressure price lower.

Chapel Hill Denham citing Chinese Energy Executives say Chinese oil consumption in February is expected to fall by about 25 percent year-on-year, which amounts to 3 to 4 percent drop in global oil consumption.

“We note that EIA’S revised forecast compares favourably with our prior average realized oil price forecast of US$62/B for Seplat, albeit, we lower our average realized price forecast for 2020 to US$59/B,” said Chapel Hill Denham.

The analysts noted the possibility of deeper supply cuts by the Organisation for Petroleum Exporting Countries (OPEC) by an additional 600kbpd to a total of 2.7mbpd for 2020 half-year, but say a consensus with the Russian led OPEC+ will be critical to any decision.

For Seplat, 2020 revenue forecast was cut by 8.5 percent to Us$1.15bn on lower oil price and weaker demand outlook, while profit is expected to rise about 71 percent on an annual basis.