Seplat: Forcados factor weighs H1 results

Seplat Petroleum Development Company Plc, an independent indigenous Nigerian upstream exploration and production company last week released its half-yearly results for the six months ended June 30, 2016. The leading Nigerian indigenous oil and gas company is listed on both the Nigerian and London Stock Exchanges.

Finance review

Gross revenue for H1 2016 was $143 million (29 billion), a decrease of 42% compared to the same period in 2015 (H1 2015: $247.6 million /48.8 billion).Working interest sales volume for the period was maintained fairly flat at 4.2 Million Barrels of Oil Equivalents (MMboe) from 4.1 MMboe during the same period in 2015.

Gross profit for the first six months was $59 million (12 billion), a decrease of 45% compared to the same period in 2015 (H1 2015: $108.6 million /21.4 billion). Operating loss for the first six months was $42 million (N10billion), compared to an operating profit in the same period in 2015 (H1 2015: $70.6 million / N13.9 billion).

The Group loss after tax for the first six months was $61.2 million (12.8 billion), compared to a profit in the same period in 2015 (H1 2015: $41.5 million, 8.1 billion).

Its Basic Earnings Per share which is the portion profit allocated to each outstanding share of common stock (which also serves as an indicator of its profitability) was  in negative of N23.33 from a positive of N11.98 in half-year 2015. 

Seplat management explains the half-year results 

While explaining the results to shareholders and investors at the Nigerian Stock Exchange, Seplat said that the working interest production of 25,695 boepd which declined by -21% Year-on-Year was due to shut-in of the Forcados export terminal from mid-February.

Trans Forcados System (TFS) is Seplat’s major export pipeline route.  Shell Nigeria, had declared force majeure at the terminal on February 21 following disruptions to production and exports caused by vandalism.

Austin Avuru, Chief Executive Officer, Seplat Petroleum Development Company Plc said: “The shut-in and suspension of oil exports at the Forcados terminal since mid-February means we have faced significant challenges in the first half of the year.  However, our underlying fundamentals remain strong and we continue to invest to grow our gas business at a rapid rate”.

He explained that “the first half results have been heavily impacted by events outside of the Company’s control at third party operated infrastructure. We expect the second half to see a resumption of exports via the Forcados terminal and concurrently a regular offtake schedule established via the Warri refinery jetty, which in turn will also help ensure gas sales into the domestic market are de-constrained.  Meanwhile, Phase II expansion of the Oben gas processing plant remains on track and is set to increase our gross processing capacity from the current 300MMscfd to a minimum of 525MMscfd by year end. Although 2016 to date has proven challenging, we remain committed to our long-term strategy of maximising production and cash flows from our operated blocks to deliver value for our stakeholders.”

Seplat also noted that liquids production down -51% year-on-year at 11,526 barrels of oil per day (bopd); gas production up 59% year-on-year at 85 million standard cubic feet per day (MMscfd) – “Continuity of gas production achieved throughout the period, albeit at managed levels due to constraints associated with handling condensate volumes – FY 2016 production guidance issued in Q1 is no longer valid. Guidance will be re-set and communicated once force majeure is lifted and exports have resumed from the Forcados terminal”.

“Alternative crude oil evacuation route established via the Warri refinery and first cargo sold Free on Board (FOB) from the Warri refinery jetty (funds received post period end on 8 July) to Seplat’s offtaker Mercuria.  Following the successful initiation of barging operations, the Company’s intention is to establish a regularised offtake pattern on a longer-term basis.

“This alternative liquids export solution will allow gas supply to be de-constrained. Phase II expansion of the Oben gas processing facility remains on track. 3 x 75 MMscfd new processing modules have arrived in the country with installation and commissioning expected by year-end to take overall Company processing capacity to a minimum of 525 MMscfd (gross).

“Continuing progress towards substantially reducing the Nigerian Petroleum Development Company (NPDC) receivables balance – confirmation received from Minister of State for Petroleum that 2016 cash calls will be paid current by NPDC.  New funding protocol also agreed with additional crude oil allocation equivalent to around $100 million due to Seplat in 2016 to offset against legacy balance. Seplat will also continue to withhold NPDC gas revenues. Additional oil entitlement to be assigned by NPDC’s funding partner, Seven Energy, to Seplat in 2017 onwards which will be monetised through Seplat’s offtaker Mercuria to fund future cash calls (initial arrangement to run for period of up to two years),” Seplat noted.

Analysts’ comment

Pabina Yinkere, head, research at Vetiva Capital Management notes that Seplat is still reeling from production disruption.

“Management did not give a firm guidance on when they think the Force Majeure on Forcados exports will be lifted, thus creating uncertainty around volume recovery in H2,” he added.

Yinkere further said: “Despite SEPLAT’s efforts at de-risking exports, we think volumes in FY’16 will be considerably lower. Management says its production guidance is no longer feasible given the longer than expected downtime at Forcados and will provide revised guidance when the Force Majeure is lifted.”

Also, according to Uwadiae Osadiaye-led team of research analysts at FBNQuest in their first reaction to Seplat half-year results, “Year to date, Seplat shares have gained +46.7%, outperforming the All Share Index by 48%. We expect the market to react negatively to the results. At current levels, on our published estimates, Seplat shares are trading on a 2016E P/E multiple of 10.6x for an EPS growth of around 170% over the 2016-18E period. We rate the stock outperform. Our estimates are under review.”

Iheanyi Nwachukwu