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Published On: Mon, Nov 13th, 2017

Company Analysis: Much Ado about Seplat

 

By TESLIM SHITA-BEY
The oil and gas sector has had a bumpy since the beginning of 2017 with local oil major, Seplat, seeing its financials whipped raw by prior year liabilities despite rising revenues over the nine months (9M). The company in the last two years has moved from being distinctively bad to singularly terrible.  The company’s third quarter results show up a staggering post tax loss of N1.6 billion. But this was surprisingly better than the numbing N23.6 billion reported in the contemporary period of 2016. Indeed for many analysts Seplat seems to have mastered the art of losing grandly and keeping a straight face; or has it?

As bad as the Seplat’s results appear in 9M 2017, writing the company off would be a mistake.  A resurgent oil market and a conscious effort at paring down losses suggest that management is carefully addressing the company’s adverse operating challenges by combating cost headaches aggressively. Besides lower cost outlook, revenues of Seplat have begun to perk up nicely as the company’s 9M 2017 revenues rose from N 49.9billion in 2016 to N 85.2billion in 9M 2017, a growth of 71 per cent for the nine months year-on-year.

Sleek margins, stronger revenue

Gross profit margins rose from 40 per cent in 9M 2016 to 45 per cent in the contemporary period of 2017, as management pulled the stops to muscle down on direct operating costs while slashing top line expenses that previously hurt gross margins. Noteworthy is that the company cut back sales, general and administrative (SG&A) expenses as a proportion of gross revenues from 36 per cent in 9M 2016 to 20 per cent in 9M 2017. If the company keeps costs in check an international oil market price holds up at about USD$60 per barrel, Seplat should turn a profit by, at the latest, the first quarter of 2018. On the down side the company’s income from its financial activities slid by per cent from N6.1billion in 2016 to N483million in 2016; this is not so much of a dim outcome as the company’s principal activity is trading in oil and gas and not in finance. What is important going forward is that Seplat is able to sustain revenue growth in its core activities. At an operating level the company turned an operating loss margin of -26.4per cent in 9M 2016 to an operating profit margin of 19.1 per cent in the same period of 2017. ‘This clearly shows that we are taking the next bend towards growing bottom line profit by next year’ says a company official who declined being mentioned as he was not authorized to speak on the matter officially.  Most of Seplats improved operating profit was claimed by its growing finance charges which grew from N14.4 billion in 9M 2016 to N17.5 billion in the similar period of 2017, a rise of 21.5 per cent or a fifth of the previous year’s cost.

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Getting operating figures right

Retreating from its previous years sad story Seplat is re-juggling its operations to scale down direct and administrative costs while also trying to optimize its balance sheet. Working capital has remained positive and grown strongly. Working capital rose from N60.8 billion in 2016 to N110.2 billion in 2017, a growth of 81 per cent year-on-year, and a clear indication of improved operating liquidity. The company’s quick ratio (an index of how much short term assets are available to cover short term costs) may have fallen from 3.3 in the nine months of 2016 to 2.08 in the same period of 2017 but the ‘cover’ of two to one is still comfortable; meaning that the company had twice the liquid or near liquid assets it needed to take care of short term liabilities. With decent liquidity Seplat can, if revenues improve, begin to address issues of negative bottom lines and provide shareholders with modestly better returns on investment in 2018. The company’s average receivable day has, however, been worrisome. This could adversely affect corporate liquidity in months ahead. Although receivable days on hand fell from 670 days in 2016 to 562 days in 2017 (a good redirection of the statistic), taking more than a year to recover trade debts is certainly not a cheery  sign of business liquidity no matter how tough the business corner or  how reliable the trade debtors.

Seplat’s finance income slipped from $27.1 million in 2016 to $1.6 million in the nine months of 2017, an uncomfortable 94 per cent dip in dollar incomes from the company’s placements with local banks. This was understandable as the oil major had to use most of its financial resources to meet rising operational expenses as the naira to United States dollar exchange rate tipped like a mini waterfall and access to foreign currency became as tight as a drum. Dollar balances flew out of the company’s accounts to meet pressing operational needs.

Leveraging from a valley

Total debt leverage skidded down from $202.5m in 9M 2016 to $187.3m in 9M 2017, a deleveraging of 7.5 per cent year-on-year. The company’s debt to equity ratio in the nine months of 2017 at 50 per cent compared favourably with the 54 per cent of the same period in 2016. According to one Broad street analyst, ‘Seplat may have definitely given a few  investors heart palpitation by its ugly billion naira loss in the last year or so but both its short and long term debt position, marks the difference between a slight tremor and a full blown heart attack; the company seems set for a rebound.’

Seplat’s total debt to liabilities rose from 22 per cent in the nine months of 2016 to 44 per cent in 2017, indicating that the tough business environment has pushed the company to increase its use of bank borrowings to augment cash in the normal course of its business, this is not necessarily a bad thing as Seplats former low leverage level gives it leeway to add further liabilities without compromising overall balance sheet stability. With international oil prices twittering above $60 per barrel, Seplat should see steady revenue growth over the last quarter of the year if the Niger Delta region stays as calm as it has over the last few months and export volumes hold firm. The cessation of armed hostilities by militant groups in the region could help Seplat gain greater control over revenues and pull up its bottom line. This would allow it stall the recent growth in its short term debt and cut back its rising finance costs. The major corporate risk for Seplat is its huge dependence on international oil prices, such that when the market sneezes the company catches cold, According to chief portfolio strategist at Imperial Finance and Assets, Oluwasegun Atere, ‘in a market price upward swing the company does exceptionally well but when prices double back and move in a reverse direction, Seplat is left flat on its back waiting to be sacrificed by international market forces and its capricious manipulators’. That level of vulnerability may cause a backlash as investors try to head for the door.

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But perhaps the good thing about the company is that it is essentially owned and controlled by institutional investors that may have a longer term perspective of its business and are not likely to get panicky during market swings, especially on the way down.

Investor’s eye on the market

From June to November 2017, Seplat’s share price has strolled like a drunken sailor. Bouncing from a low of N350 in June the company’s price has since risen to N495 recently but only after the stock had done at least six downward flips over the last five months. Nevertheless the indigenous oil major has over the last six months had a support price of N450 with a year-to-date yield (YTD) of 37.12 per cent or 60 basis points under the market’s recent year to date yield of 37.72 per cent. This brings Seplat’s stock price yield to date to about twice the official inflation rate of 15.98 per cent per annum, leaving investors with a tidy inflation adjusted real return of about 16 per cent.

If oil prices stay steady at between $58 and $60 per barrel and output volumes remain as high as at about 2 million barrels per day both Seplat and the national economy should slurp up a lot of  gravy as revenues of both entities rise. Seplat is a turnaround story waiting to be told, but whether market story tellers will be ready to regale fresh-faced investment acolytes with the trading exploits of their forbears will depend on the auguries of a viciously whimsical international oil market.

 

 

 

 

 

 

 

     Source: Teslim Shitta-Bey
 
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