Earnings Report /
Nigeria

Seplat: Crude oil theft erodes earnings

  • Crude oil thefts and force majeure drove the Q3 loss, the first since oil price crash in 2020

  • We have revised our target prices lower to reflect lower volumes, but our recommendations are unchanged

  • Updates: Seplat is converting OMLs to the new Petroleum Act; management is still positive on Mobil asset acquisition

Seplat: Crude oil theft erodes earnings
Janet Ogabi
Janet Ogabi

Senior Research Analyst

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Tellimer Research
3 November 2022
Published byTellimer Research

Seplat Energy reported a pre-tax loss in Q3 of US$24mn – the first quarterly loss since the oil price crash at the start of Covid in 2020 and, before that, the militant attacks in 2016/17. This time around, the poor result can be attributed to the oil thefts that have forced oil operators to declare force majeure.

The Nigerian government has taken numerous steps to put a stop to the thefts, which drove the country's oil production to under 1mn barrels per day (mbpd) in August lower than the figures for Angola, Algeria and Libya. Seplat's management is confident this will result in a recovery in production, which will be positive for the company, whose total production fell by 42% qoq to 30kboepd in Q3 22. The road ahead will be challenging but there are still some grounds for optimism.

Lower TPs on Seplat; retain Buy on London line and Hold on Lagos line

We have lowered our target prices on Seplat's Lagos (NL) and London (LN) lines to NGN1,067 (previously, NGN1,130) and GBP2.09 (previously, GBP2.20), respectively, largely due to lower volume projections. But we reiterate our Buy recommendation on the London line and Hold on the Lagos line. Seplat LN trades at EV/EBITDA of 3.0x and 1.5x in 2022 and 2023 forward multiple, respectively, while Seplat NL trades at EV/EBITDA of 5.0x and 2.8x in 2022 and 2023. This compares with the Middle East and Africa peer average of 6.7x in current EV/EBITDA.

In US$ terms, the London listing (US$1.23) trades lower than the Lagos listing (US$2.50). This makes the multiples cheaper for the London stock, creating room for arbitrage.

Seplat London (LN) and Lagos (NL) prices in US$ show there is room for arbitrage

Changes to our model

  1. We have lowered our total production forecasts for 2022 and 2023 to 42,000 barrels of oil equivalent per day (kboepd; previously, 51kboepd) and 69kboepd (previously, 72kboepd), respectively. These compare with 48kboepd in 2021. Our lower estimates reflect our concerns about the impact of the thefts on production. However, the scheduled resumption of pipeline activities and the operation of the newly launched Amukpe-Escravos Pipeline suggest some grounds for optimism (at least compared with the Q3 22 level of 30kbpd). Our revised forecast is in line with management's downward revision to 40-44kboepd from 50-54kboepd for 2022.

  2. There is a higher operating cost per barrel of oil equivalent (boe) in 2022 of US$9/boe (up from US$8).

These adjustments translate into lower adjusted pre-tax profits per share of US$0.33 (previously US$0.72) for 2022.

Upside risks to our forecasts

  1. A surge in oil prices.

  2. A better-than-expected recovery of oil and gas production/volumes.

  3. Approval for Seplat's purchase of the Mobil assets, which we are yet to incorporate into our model. Management, though, remains confident the sale will happen.

  4. The devaluation of NGN/USD holds significant upside for our valuation of the Lagos line, as we currently use official FX rates in our valuation, which trade 45% lower than the parallel market rates.

Downside risks to our forecasts

  1. More crude oil theft and/or a less successful recovery of oil production than we expect.

  2. A crash in oil prices.

Q3 results highlights

  • Seplat's total revenue fell by 68% qoq to US$92mn in Q3. The biggest decline was in oil revenues (74%), in light of the plunge in oil production of 59% qoq to 12kbpd and decreasing oil prices (-6% to US$110/barrel). Gas revenues also fell, by 20% qoq to US$26mn, due to the decline in associated gas production to 104mmscfd, from 128mmscfd in the previous quarter.

    As we have previously stated, the fall in oil and gas volumes can be attributed to the oil thefts that have forced other major oil operators to declare force majeure on their assets, including key pipelines and terminals. The force majeure on the 400kbpd Trans Forcados Pipeline (the major evacuation route for Seplat's key assets, OMLs 4, 38, 40 & 41 and OPL 283) was lifted in October and bolsters our cautious optimism for improved volumes going forward.

  • The lower volumes in Q3 also translated into lower direct costs – down 36% qoq to US$82mn. But these fell at a slower pace than revenue, and so translated to lower gross margins in the quarter – 10% from 55% in Q2 22. Adjusted operating costs/boe in the quarter printed at US$11 in Q3 from US$8.1 in Q2 (excluding the impact of one-off credit notes deductions which lowered cost in Q2).

  • Seplat declared a dividend of US$0.025 in the quarter (9m: US$0.075, versus FCF/share: US$0.25).

Seplat Energy quarterly financials (US$'000)

Other key updates

  • Update on Mobil asset acquisitions: Seplat reiterated that the sales & purchase agreement (SPA) signed on 25 February to acquire Exxon Mobil’s shallow water operations in Nigeria remains valid. We will continue to monitor the progress of the acquisition, which stalled after regulators blocked the sale.

  • Seplat is converting OMLs to PIA: Seplat has made provisional applications to the NUPRC (Nigerian Upstream Petroleum Regulatory Commission) for the voluntary Petroleum Industry Act (PIA) conversion of its operating oil mining leases (OML) – specifically, OMLs 4,38 & 41 and OML 53. Management says the provisions for lower oil and gas royalty rates and the removal of taxes on condensates are attractive enough to begin the process of the voluntary conversion. The deadline for the voluntary conversion is 18 months after the passing of the PIA, ie, 15 February 2023. Beyond this, OML operators will have to operate their licenses until expiration under the old provisions.

Seplat Financials – US$'000 (year end, December)