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Seplat misses Q3 oil rally; we cut the TP, but reiterate Buy

  • Seplat was unable to take advantage of the oil price rally in Q3

  • The force majeure at the Forcados Terminal led to lower oil and gas volume and revenue. Pre-tax profit rose only 3% qoq

  • We have cut Seplat's TP to GBP1.90 (from GBP2.10) and NGN1,076 (NGN1,202), given lower volumes and gas price forecast

Janet Ogabi
Janet Ogabi

Senior Research Analyst

Tellimer Research
2 November 2021
Published byTellimer Research

Unlike international kingpins such as Saudi Aramco, Seplat Energy, one of Nigeria's largest indigenous upstream oil and gas operators, missed out on the oil rally in Q3, when average Brent prices increased by 6% to US$73/barrel.

This was due to forced shut-ins in Seplat's OMLs 4, 38, 40 and 41, after Shell Petroleum Development Company Limited (SPDC) declared force majeure at the Forcados Oil Terminal for a month. As a result, total production in the quarter declined by 24% to 40kboepd, from 53kboepd in Q2 21 and 50kboepd in Q3 20.

In turn, this led to declines in revenue and operating profits, although lower finance costs to an extent rescued pre-tax profit, which increased by a meagre 3% qoq to US$35mn from US$34mn in Q2 21. Post-tax, Seplat reported a loss of US$1.1mn in Q3.

The good news is, according to CEO Roger Brown, Seplat has managed to pull through the tough quarter and restored oil production to stronger levels, averaging 33kbpd in October. Meanwhile, in line with the new quarterly dividend policy approved by shareholders after the end of Q1, the company declared a dividend of US$0.025 for Q3 (giving a total of US$0.075 in 9M 21).

We have updated our model and made the following significant adjustments:

  1. We have cut our total production volume estimate for 2021 to 48kboepd from 53kboepd. This is a conservative estimate and within the company's narrowed guidance of 48-50 kboepd (previously 48-55 kboepd). However, we are optimistic total production can print at 51kboepd in Q4 21 (Q3 21: 40kboepd).

    For 2022 and 2023, we forecast total production of 66kboepd and 78kboepd, respectively, as gas volumes increase following wet gas production from OML 53 (275mmscfd gross; 40% working interest) for the ANOH gas project. The long-awaited project is still scheduled to commence in H1 22, although we now conservatively expect H2 22 in our model (previously, H1 22). The drilling of the four gas wells (done by Shell and Seplat) needed for the 300mmscfd ANOH gas processing plant is currently underway but is now expected to be completed in 2022 (previously 2021).

    Meanwhile, on oil, the commissioning of the long-awaited Amukpe-Escravos Pipeline has begun, with the first oil flow expected in December. Amukpe-Escravos Pipeline is more underground than the Trans Forcados pipeline and will mean less reliance on Trans Forcados, improve uptime (Q3 21: 60%, 9M 21:74%) and reduce reconciliation losses (Q3 21: 9.7%, 9M 21: 11.3%).

  2. We have increased our oil price assumptions: In light of the recent rally in oil prices, we have increased our 2021e and 2022f price forecasts to US$69 and US$70 (previously US$64 and US$65), respectively, in line with Bloomberg's forecast.

  3. We have lowered our gas price assumptions: In July (effective August 2021), Nigeria's government reached an agreement with trade unions to reduce the price of gas for power generation under the domestic supply obligation (DSO) agreement, which accounts for 30% of Seplat's gas volumes. The price was reduced from US$2.50/Mscf to US$2.18/Mscf until 2023, when the ‘willing buyer/willing seller’ model will take effect and allow for a deregulated market. Thus, over our forecast period, we have lowered our gas price forecast from US$2.87/mmscfd to US$2.67, in line with the company's estimates.

These adjustments bring 2021e and 2022f adjusted pre-tax EPS to US$0.28 and US$0.57, respectively, from US$0.31 and US$0.63. They imply a cut in our target prices for Seplat to GBP1.90 (previously GBP2.10) and NGN1,076 (NGN1,202), which means upside from the current prices of GBP0.856 and NGN731.50. We retain our Buy recommendation on the stock.

The stock (Seplat LN) trades at a discount to history and peers, with 2021e and 2022f EV/EBITDA of 2.8x and 1.5x (5-year median: 4.8x), and 2021e and 2022f EV/2P reserves of US$2.3/boe and US$1.7/boe (5-year median: US$2.1), respectively. Peers' 2021f and 2022f EV/EBITDA medians are a premium, at 5.69x and 5.66x.

For detail on the risks to our valuation and a sensitivity analysis of Seplat's share price to oil and gas prices, see here.

Seplat Plc (year-end December)

Key positives

  • Increased oil prices: Tracking the rally in global oil prices, Seplat's realised oil prices in the quarter printed 6% higher qoq to US$73/b. As a result, despite the lost oil volume, oil revenue was up 3% qoq to US$124mn. However, including "underlifts" (adjustments included in "other income" to correct under-estimated crude oil revenues), oil revenue was down 19% qoq at US$139mn from US$172mn.

  • Lower finance cost: The finance cost in the quarter fell 56% qoq to US$14mn in Q3 21. This was much lower than our expectation of US$18mn and likely reflects the results of restructuring in Q2, which resulted in built-in financing cost charges. We held off making any changes to our estimates, as we wait to see if this was a one-off effect.

Key negatives

  • Low oil and gas production: The shut-ins in the Trans Forcados pipeline resulted in low oil and gas volumes but with more impact on the former. Oil volumes, particularly in OMLs 4, 38, 40 and 41, dropped 26% qoq to 23kbpd – the lowest since prior to the Eland acquisition in 2020. Approximately 885kbbl of oil was reportedly lost in the OMLs during the quarter due to the downtime. Gas volumes in the quarter also dropped 21% qoq to 99mmscfd, as the force majeure affected the Associated Gas (AG) station units. However, as we stated earlier, production has been restored since the lifting of the force majeure on 14 September. Total revenues (plus underlifts) dropped 20% qoq to US$166mn.

Other key updates

  • Negotiated settlement on the Access Bank/Cardinal drill case: As we reported in March, Access Bank sued Seplat regarding a US$86mn debt owed by Cardinal Drilling (which used to be a third party to Seplat). The court case was initiated in December 2020 and led to the closure of Seplat's rented corporate office earlier in 2021. Access Bank had also seized US$40mn worth of Seplat's cash and investments that was in the bank's possession. In Q3, Seplat reached a negotiated settlement with Access Bank, which resulted in Seplat acquiring four of Cardinal's rigs for US$36mn, although Seplat maintained its position that the case was without merit.

    Seplat Energy quarterly financials (US$'000)