Seplat released Q1 21 results that showed PAT growing by 126% qoq to US$25mn. However, this was helped by lower taxes in the quarter as pretax profit was down 44% qoq to US$28mn owing to lower net finance cost and other income including under lifts in the quarter. Compared to our estimates, Q1 21 adjusted profit of US$14mn (excl. abnormal profit /losses) underperformed our expectation of US$17mn, owing to lower-than-expected revenue following output shut-ins at OML 40 in the quarter.
Nonetheless, Seplat surprised with an interim dividend of US$0.025, which leads us to increase our dividend forecast for 2021 to US$0.125. This translates to a yield of 11% on the LSE and 9% on the NGSE. The surprise dividend is supported by an improved cash position post Q1 21 after raising its US$650mn Eurobond in April. The stock also trades at a discount to history, with its EV/EBITDA of 2.3x and EV/2P reserve of 2.1x comparing to its 5-year medians of 5.6x and 2.5x, respectively.
Raise TP, reiterate Buy
We raise our target price (TP) to GBP2.15 and NGN1,229 (previously GBP2.11 and NGN1,203) and reiterate our Buy recommendation. The change largely reflects the increase in our realised oil price forecast for FY21 to US$64 (previously US$57) – in line with the Bloomberg forecast – while we retain US$65 over the forecast period up to 2041.
Other updates to our forecast include: (1) lower 2021 production to 53boepd (previously 55boepd); (2) the new Eurobond issuance of US$650mn used to pay off the old loans (US$600mn); (3) an increase in dividend for 2021 to US$0.125 (previously US$0.10); and (4) increased 2021f production opex to US$8.0 from US$7.5. The combined adjustments cause our FY 21 adjusted pre-tax EPS to increase to US$0.37 (previously US$0.34).
Seplat’s performance is highly sensitive to oil prices, as 85% of FY 21 total revenue is expected to be generated from the oil segment.
Risks to our target price
An unexpected decline in oil prices
Liquidity constraints in the power sector, considering the impact of the NGN devaluation on dollarised gas contracts. Although this risk has been eased by the recent electricity tariff hike, which should boost power sector liquidity.
The US$414mn loan repayment (part of Eland benefits) from Westport (2021f-24f), which we are yet to incorporate in our model.
There could be possible discoveries in the exploration well at Eland's Sibiri (formerly Amobe) asset, which could increase production over the next two years (with the prospect of up to 78MMbbls).
Other key updates
Name change to Seplat Energy to mirror future sustainable energy strategy: Management has stated that the company is seeking shareholder approval to change the company name to Seplat Energy to reflect the company’s new brand strategy positioning. Seplat’s CEO states that this will drive Seplat’s “strategy of being a low-cost energy provider delivering reliable, affordable and sustainable energy”. The company plans to deliver a broader energy mix, and we suspect this could be following the trend of many global IOCs that have moved towards cleaner and renewable energy. According to the management representative, Seplat will begin with solar energy. We will monitor progress on this.
ANOH project: Having raised the financing needed for the US$650mn project (reduced from US$700mn after optimising costs), management expects delivery of the first gas in H1 2022. The upstream operator, Shell, has begun drilling two of the four OML 53 wells (six in total) scheduled for the project in 2021.
Export route: Works on the 160,000 bopd Amukpe-Escravos Pipeline are expected to be completed by the project’s partner, the NPDC, in H2 2021. When completed it should improve production uptime (84% in Q1 2021) and reduce losses from crude theft and reconciliation (12.6% in Q1 2021), as well as de-risk the Trans Forcados pipeline.
7.75% US$650mn Eurobond to boost cash in 2021: Seplat raised Nigeria’s biggest single ticket corporate Eurobond in April 2021. This, along with stronger oil revenue receipts from increased oil prices, will likely boost the company’s cash position by FY 21. Thus, the company’s surprise interim dividend (US$0.0025/share; US$15mn) comes from a comfortable cash position. We estimate FCF growth of 59% to US$0.84 (FCF yield: 71%) by the end of the year. The gross proceeds were used to refinance US$600mn of expensive debt on the books: a US$250mn RCF loan (still open to be drawn) and a 9.25% US$350mn Eurobond which was due in 2023.
Q1 2021 result highlights
Revenue was higher qoq but oil volume was short of our expectations. Total revenue increased in Q1 21 by 7% qoq to US$152mn, following an increase in oil (+10%) which offset a decline in gas (-7%). Oil revenues (81% of total) grew to US$124mn, largely reflecting the 38% qoq recovery in oil prices. It is worth adding that the realised oil prices remain at a discount to Brent by US$0.56/bbl. On the other hand, oil volumes fell faster than we expected by 18% qoq to to 29,000 barrels per day (bpd) (we expected -3% qoq). The sharp drop was due to shut-ins at the OML 40 Gbetiokun well in January and February.
Meanwhile, gas volumes improved 10% qoq to 114mmscfd, as the company’s gas well drillings paid off. However, the lower gas prices (-3%) and increased downtime led to the decline in gas revenues.
No impairment charge improves yoy growth. The US$146mn impairment charge in Q1 20 (after the assets were devalued to reflect the crash in oil prices) gave a favourable low base for growth in Q1 21. This supported the yoy growth in PAT to US$25mn in Q1 21, compared to a US$107mn loss in Q1 20.
Lower operating costs and taxes: Total operating costs were down 23% qoq, as the company maintained low office administrative expenses. The company’s effective tax rate was also down to 11% compared to 101.5% over FY 20.
High production costs: The production opex in Q1 21 came in at US$8.7/boe, which was lower than Q4 20's US$9.4/boe but higher than our estimate of US$7.5/boe and Q1 20's US$7.7/boe. This was due to increased maintenance costs in the period, which offset lower crude handling costs from the commencement of operations of the Liquid Heater Treater, which drove down costs on volumes through the Trans forcados pipeline.