Seplat Development Corporation Company (“Seplat”) problem isn’t cash but how to spend it, as the company has a strong free cash flow, thanks to diligent management of liquidity.
Investors pay more attention to the cash flow position of upstream stream oil and gas firms because without a solid liquidity position, a firm will find it practically difficult to drill more oil and magnify earnings, pay debt, absorb operating costs, and pay dividend to the owners of the business.
The 2018 audited financial statement of Seplat- the upstream oil and gas giant- showed there were improvements in key financial ratios while revenue and profit grew has been growing at a fast since 2016.
Looking through the flames of wisdom shows Seplat is in a position of financial strength and is well funded to capitalise on growth opportunities
Higher Oil production underpins revenue
For the year ended December 2018, Seplat’s revenue was up 65.18 percent to N228.39 billion from N138.28 billion as at December 2017; eclisping the N63.38 billion recorded in the corresponding period of 2016.
Sales from crude oil increased by 61.32 percent to N180.75 billion in December 2018 as against N112.75 billion as at December 2017.
The chart below shows revenue from crude oil has been in an upward trajectory since 2016 when it last touched down at N34.57 billion.
2016 was horrendous for Seplat as Royal Shell declared force majeure on crude oil lifting from the Forcados oil terminal after Niger Delta militants blew up a major trunk of the Forcados oil pipeline system.
The company reverted to growth after relative calm returned to the Niger Delta region while a rebound in crude price added impetus to earnings.
What’s more, sales from gas were up 25.67 percent to N47.64 billion in the period under review from N37.91 billion the previous year.Revenue from gas has been increasing since 2014.
Operating efficiency adds impetus to margins
Seplat has turned each Naira invested sales into higher profit as pretax margins increased to 35.30 percent in December 2018 compared to 9.79 percent while earnings before interest and tax margin otherwise known as operating profit margin moved to 42.13 percent in 2018 from 25.12 percent as at December 2017.
Gross profit margin increased to 52.43 percent in December 2018 from 49.60 percent as at December 2017.
Seplat’s pretax profit surged by 500 precent to N80.61 billion in the period under review from N13.61 billion as at December 2017.
Operating profit surged 176.06 percent to N94.87 billion in December 2018 from N34.37 billion as at December 2017 as the company continues to manage direct costs attributable to projects as evidenced in a 45.85 percent jump in gross profit to N119.75 billion in December 2018 from N64.86 billion the previous year.
“Seplat has delivered an excellent operational and financial performance resulting in robust profitability and cash flow generation providing us with an extremely solid foundation for growth in the coming years,’’ saidsaid Austin Avuru, Seplat’s Chief Executive Officer.
“At our core assets in the West, OMLs 4, 38 and 41, the extension of the license to 2038 means that we can confidently plan and invest long into the future to realise the full potential of those blocks,” said Avuru.
Significant deleveraging while preserving a liquidity buffer
A disciplined approach to capital allocation has seen a substantial deleveraging of Seplat’s balance sheet as debt to equity ratio fell to 27.87 percent December 2018 from 37.85 percent the previous year.
Also, the company’s operating income can cover its interest expense as times coverage ratio improved to 5.48 times in December 2018, from 1.58 times the previous year.
Seplat successfully refinanced its balance sheet in the first quarter of 2018 as follows:
Debut $350 million bond issuance diversifies long term capital base.Issued at 9.25 percent and currently trading at ca. 8.4 percent. previous $300 million RCF refinanced with a new $300 million RCF due 2022 at LIBOR +6 percent (will reduce to LIBOR +5 percent when AEP is completed)
-Bond US$350 million drawn
-RCF initially drawn to US$200 million but reduced in November 2018 and February 2019. Current balance zero
Strong free cash flow generation and diligent management of group liquidity
Sepat has enough cash to finance future expansion plans, pay dividend and reduce debt as cash flow from operation increased by 12.33 percent to N153.56 billion in December 2018 from N136.70 billion the previous year.
“The Group has continued to receive the proceeds of gas sales from its partner NPDC in lieu of cash calls for ongoing operations. Tolling fees arising from NPDC’s share of processed gas from the Oben Gas Expansion Project, which was financed on a sole risk basis by Seplat, are yet to be settled by NPDC and Seplat is currently in discussions with NPDC to finalise terms,” said the company.