Seplat Petroleum Development Company Plc

SEPLAT PETROLEUM DEVELOPMENT COMPANY PLC

Company Overview
SEPLAT is an oil and gas exploration and production company listed on the Nigerian Stock Exchange and London Stock Exchange in April 2014. The company which was established in June 2009 commenced operations in August 2010.

SEPLAT has six subsidiaries of Newton Energy Limited, Seplat East Onshore Limited, Seplat East Swamp Company Limited, Seplat Gas Company Limited, ANOH Gas Processing Company Limited and Seplat Petroleum Development Company UK. Seplat UK was established in August 2014 to provide technical and administrative support services to the group.

The board of directors comprises three executive directors and nine non-executive directors. The board is chaired by Ambrosie Bryant Chukwueloka while Augustine Ovuru is the chief executive officer of the company.

Investment Thesis
With interest in six oil blocks in the Niger Delta region of Nigeria, SEPLAT boasts of large stock of drilling opportunities. The licences for three major oil blocks have been renewed to expire in October 2038. These blocks (OMLs 4, 38 and 41) were responsible for 100% of gas production and 92% of oil production.

Crude oil sales expanded by 25.7% while gas sales grew by 46.2% on a 3-Year Compound Annual Growth Rate (CAGR) basis. Downward pressure on costs has improved profit margins. Cost of sales dipped from 74.3% of turnover in 2016 to 47.6% in 2018. Likewise, general and administrative expenses dropped from 47.3% of turnover in 2016 to 10.7% in 2018.

The oil segment produces the bulk of revenue (2018:79.1%, 2017:81%). However, the gas business offers SEPLAT the opportunity to broaden its revenue sources considering the unpredictability of crude oil prices. Consequently, the company has made a huge investment in gas capacity upgrade in order to cushion oil price volatility. A substantial part of the NGN26.2 billion investment in gas and oil properties in the year under review is in gas production and processing capacity (2017:NGN9.8 billion). We think that this is a step in the right direction because it positions the company to take advantage of opportunities in the natural gas business in Nigeria. Crude oil produced 79.1% of total revenue while 81.2% of Profit After Tax (PAT) come from the gas business. Besides,the gas business has a better operating profit margin and returns than the oil business. Though the operating profit margin for oil increased from 10.7% to 32.3%, it trailed the operating profit margin of 76.5% produced by the gas business.  Return on Equity (RoE) for crude oil closed at 2.1% compared to 14% recorded in 2017. In contrast, the gas business produced RoE of 28.9% in the year under consideration (2017:32.4%). Return on Assets (RoA) for oil was 1.2% compared to 23.9% for gas.

SEPLAT has the capability to grow its gas processing capacity through Oben Gas processing facility and ANOH Gas Processing Company Limited (AGPC). AGPC is a joint venture between SEPLAT and Nigerian Gas Company Limited (NGC).

Valuation
Book Value Per Share increased to NGN864.5 from NGN815.8. Forward Price Earnings Multiple (P/E) is 7.5 times. Our Dividend Discount Model (DDM) produced a   value ranging from NGN705.1 to NGN763.1 per share while our Discounted Cash Flow Model (DCF) estimated a share of SEPLAT to worth between NGN731.9 and NGN794.5.

Financial Overview
SEPLAT made revenue of NGN228.4 billion in 2018, up 65.2% from NGN138.3 billion of 2017. The revenue growth was largely due to a rise in crude oil sales. Crude oil revenue gained NGN68.7 billion which amounts to a year-on-year growth of 61.3%. Gas sales jumped 25.7% from NGN37.9 billion to NGN47.6 billion; operating profit of NGN94.9 billion was 2.8 times the figure recorded for prior year, 2017. Profit Before Tax (PBT) rose from NGN13.5 billion to NGN80.6 billion representing about 500% year-on-year increment. However, PAT fell from NGN81.1 billion to NGN44.9 billion owing to income tax credit of NGN67.7 billion in 2017.

Profit margins improved due to reduced costs. Operating profit margin jumped to 41.5% from 24.9%; PBT margin was up 25.6% between 2017 and 2018. Cost of sales to turnover ratio shed 5.5 percentage points to 47.6% at 2018 year end. The company incurred general and administrative expenses of NGN24.4 billion compared to NGN28.2 billion of the previous year; general and administrative expenses now form 10.7% of turnover, down from 20.4% of 2017. Furthermore, RoE and RoA declined; RoE moved to 9.1% from 17.7% while RoA was 5.8%, down from 10.1%.

Total assets and shareholdersꞌ fund gained 12.5% and 20.5% respectively on a 3-year CAGR basis. Total debt stood at NGN136.8 billion; it formed 27.8% of shareholdersꞌ fund and 17.6% of total assets. Both operating profit and operating cash can pay cover interest payment 5.5 and 8.9 times in the order given.

Business Risk
Crude oil price fluctuates in response to changing market forces and this makes earnings vulnerable. Restiveness in the Niger Delta where SEPLAT is located may disrupt operations. In addition, oil and gas industry is highly regulated which implies that it is subject to the dictates of the government.

Recommendation: Buy