Analysts have predicted that improvements Seplat development Corporation Company (Seplat) has made to the deleveraging balance sheet will pave the way for future dividend payment. “With the significant deleveraging in the balance sheet based on our estimates there is the clear capacity for enhanced shareholder return via resumption of dividend payments in 2018,” said analysts at ARM Securities Limited.
The Nigerian oil and gas firm has been reducing debt and interest payment obligations since the start of 2016. It should be noted that the exchange rate that moves from an average of N198/199/$ in 2015 to N370 in 2016 as a result of the adoption of a flexible exchange rate by the central bank might have led to the jump in the naira equivalent of dollar debt.
Total debt in the balance sheet as at September 2015 stood at N178.87 billion, an 18.98 per cent increase from the N202.23 billion recorded in September 2016 while it reduced by 8.02 per cent to N187.21 billion as at September 2017. Times interest coverage ratio declined to -2.45 per cent as at December 2016 (which means the company’s interest expenses overwhelmed operating income) as against 92.86 per cent as at September 2017.
READ ALSO: Seplat Petroleum cuts debt leverage by $100m as low oil prices hit profit
When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. 1.5 is generally considered to be a bare minimum acceptable ratio for a company and a tipping point below which lenders will likely refuse to lend the company more money, as the company’s risk for default is too high.
The chart shows that the company’s best performance was in 2015 when it recorded a profit of N12.93 billion while times interest coverage was 1.85 times operating income. Seplat had suffered huge losses as a result of militant attacks on oil facilities of International Oil Companies (IOC). The attacks on IOCs facilities affected local oil firms because the oil majors own most of the infrastructure for transportation to the Niger Delta.
This was on top of the sharp drop in the price of oil since mid-2014 that sent a predawn chill down the spine oil majors that had borrowed money from banks when oil prices were above $100 with the expectation that expected cash flow would make for interest payment. However, the resumption of exports at the Trans Forcados Pipeline (TFP)-thanks to the relative calm in the Niger Delta region – was a boon to Seplat as the company was able to de-constrain production.
The Forcados terminal has an export capacity of 400,000 BPD and it also accounts for over 90 per cent of Seplat’s total exports. “I don’t see the company returning to profit in 2017 but they turn a profit in 2018 if the oil price stays as it is and there is no militant attack on oil facilities,” said Dolapo Oni Head of Energy Research at Eco Bank. “The loss the company recorded at the nine months is still huge,” said Oni.
READ ALSO: Seplat’s Q3 revenue dips to $388million on lower oil prices
Seplat’s losses are shrinking, a sigh of the possible rebound to growth, as net loss fell by 93.27 per cent to N1.62 billion in September 2017 from N24.08 billion the previous year. Oil prices have reached a two year high at $60 a barrel, an added advantage for oil majors though there exist the downside risk that militant may resume destruction of oil facilities. “Although in the near term, aside from pricing in higher crude oil prices, we maintain our stable outlook for the stock, our optimistic outlook for 2018 is reinforced,” said analysts at ARM Securities.
“In line with this adjustment, comes the prospect for Seplat to relatively outperform its larger peers. Seplat trades at a 2018 P/CF of 1.7x compared to African peers’ and FTSE 350 Oil & Gas index of 5.5x and 12.05x respectively,” said analysts at ARM Securities. According to the investment house, the key catalysts for the oil and gas giant includes its operated $1.30 billion ANOH gas and condense condensate project for which a final investment decision (FID) remains in place for YE 2017 as well as the planned completion of the Escravos pipeline which offers a third export route for the company.
Seplat’s shares have gained 37.12 per cent since the start of the year to close at N495.15 as of 2:00 pm in Lagos while market capitalization stood at N278.50 billion. “Seplat is well-positioned to return to profitability by FY 17 with a sturdy footing for substantial upside in earnings in 2018F,” said analysts at ARM Securities.
BALA AUGIE
