Seplat makes more money than it spends as margins surge

Undoubtedly, Seplat Petroleum Development Company Plc is an attractive investment, which is why investors keep swooping on its stock, as it continues to maximize shareholders’ value.

After surmounting the headwinds brought in by a precipitous drop in crude price of mid 2014 that crimped the cashflow of oil majors across the globe, the Nigerian upstream oil and gas giant has continued to thrive.

The company an economic moat, which is the unique, sustainable, advantage that keeps competitors away, and allows it to generate higher than-average-profit.

For instance, the company’s policy of creating multiple export routes for all of its assets has resulted in it actively pursuing alternative crude oil evacuation options for production at OMLS 4, 38 and 41.

It has plans to further grow and diversify production in order to reduce any over- reliance on one particular third party operated export system.

Seplat makes more money than it spends, which means it charges enough to cover costs, as evidenced in strong profit margins. This means for every Naira invested in sales, it generates higher profit.

The company has a robust cash flow, which means it has the financial strength to embark on more exploration activities and magnify sharholders earnings.

It is able to generate enough cash flow to provide a solid return per share, while its solid working capital position means there are no threats to its going concerns.

Financial performance for HI 2019

For the first six months through June 2019, Seplat recorded total revenue of N108.97 billion, this compares with N104.79 billion it generated in 2018, N40.31 billion in 2017, N31.12 billion in 2016, and N48.71 billion in 2015.

The growth in revenue was largely driven by the gas segment. Revenue from gas spiked by 63.65 percent to N42.67 billion in the period under review from N26.09 billion as at June 2018.

Seplat plans to increase revenue from gas, as it will raise will raise $700 million for a joint gas project scheduled to start production next year as the government steps up plans to reduce the country’s reliance on oil.

The project, known as Assa North-ohaji South, is one of seven to boost gas production and infrastructure development in the West African nation, the continent’s biggest producer of crude. ANOH Gas Processing Co., which is owned by Seplat and the Nigerian Gas Co., a unit of the Nigerian National Petroleum Corp., will develop, build and operate the plant in southeastern Imo State.

Seplat has managed direct cost attributable to projects as gross profit surged to N63.12 billion in June 2019, from N53.30 billion in 2018, N16.40 billion in 2017, N14.72 billion in 2016, and N21.39 billion in 2015.

Gross profit margin increased to 58.30 percent in June 2019, from 50.87 prcent in June 2018, 40.69 percent in 2017, 46.62 percent in 2016, and 43.82 percent in 2015.

This means the company is currently achieving a 58 percent gross profit (GP) on its products. It also means that for every Naira of sales Seplat generates, it earns 58 kobo in profits before other business expenses are paid.

The upstream oil and gas giant’s net profit hit a five year high of N37.49 billion in June 2019. See Chart.

Seplat is able to turn each Naira invested in sales into higher profit as net profit margin increased to 34.14 percent in 2019 from 14.16 percent the previous year.

That represents the fastest expansion in 5 years, and the negative figure in 2016 was caused by the disruption of Forcados pipeline, during the restiveness in the Niger Delta region.nigeria’s oil production was also disrupted, but the country existed a recession in the third quarter of 2017, thanks to a rebound in crude oi price and relative peace in the Niger Delts region.

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Seplat’s operating income can cover its interest expense, which means are no threat to the bottom line.

Interestcoverage ratio hit 5.60 times operating income, which is more than the 1.50 percent international bench mark.

The interest coverage ratio is calculated by dividing earnings before interest and taxes (EBIT) by the total amount of interest expense on all of the company’s outstanding debts.

The company is efficient in utilizing its balance sheet in generating higher profit as return on asset ( ROA) increased to 4.76 percent in June 2019 from 1.71 percent the previous year.

In other words, every Naira that Seplat invested in assets during the year produced N0.05 of net income.

The return on assets ratio, often called the return on total assets, is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets.

Seplat’s cash flow from operating activities is N78.33 billion, which means it has the financial strength to pay dividend, reduce its debt, and fund future expansion plans.

The company has revised downwards its capital expenditure (CAPEX) to $150 million, while targeting targeting longer term oil and gas production together with the Oben and Sapele LPG projects.

Seplat has a cash conversion ratio (CRR) of 2.08, as it possesses excellent liquidity, and it also indicates that the company has excess cash flow compared to its net profit.

The Cash Conversion Ratio (CCR), also known as cash conversion rate, is a financial management tool used to determine the ratio of the cash flows of a company to its net profit.

“Today’s results further emphasize the strong cash generation potential of our low- cost production base and the good progress we are making at the large scale ANOH gas and condensate development project,” said Austin Avuru, Seplat’s Chief Executive Officer

Our H1 work programme has been impacted owing to unforeseen delays from rig contractors as well as the need to undertake higher levels of maintenance and asset integrity work for longer-term benefit of the assets. Both have affected production during the H1 but we have now secured the necessary rig capacity for the second half to implement the revised work programme which will drive us towards a 2019 exit working interest production rate of 62,000boepd and bring annualized production within the unchanged guidance range of 49,000 to 55,000 boepd. Meanwhile, we remain on an extremely solid financial footing and concentrated on furthering our growth strategy as we target both organic and inorganic opportunities to grow shareholder returns,” summed Avuru.