" /> Company Analysis: Much Ado about Seplat | Hallmarknews
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.

READ  Nigeria lacks leaders with moral compass - Amb Keshi

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.

READ  Non Yoruba in S/West inaugurate forum, vow to take rightful place in zone's politics

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
 
       SWOT
 

 

 

Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Recent posts

  • Nigeria lacks leaders with moral compass – Amb Keshi

    By Obinna Ezugwu Former Permanent Secretary, Ministry of Foreign Affairs, Ambassador Joe Keshi has decried what he called the lack of moral compass among Nigeria’s political elite, noting that poor leadership was the country’s biggest challenge. Keshi who bared his mind in a chat with BusinessHallmark in his Lagos home recently, regretted that virtually all […]

  • Non Yoruba in S/West inaugurate forum, vow to take rightful place in zone’s politics

    By Obinna Ezugwu Political and cultural leaders of various ethnic groups resident in the South West, Saturday last week at Ota, Ogun State, came together under the aegis of Non Yoruba Indigenes Empowerment Initiative, to seek ways of working together for a fair deal in the zone’s polity ahead of the 2019 general election. Various […]

  • Don’t celebrate yet, agitation for restructuring not over- Uko warns presidency

    By Obinna Ezugwu Founder, Igbo Youth Movement (IYM) and Secretary General, Eastern Consultative Assembly (ECA), Evang Elliot Uko has warned against any suggestion that the South East geopolitical zone has been “forcefully” and “violently” pacified as according to him, such is false. Evang Uko who is also the Deputy Secretary of Igbo Leaders of Thought […]

  • Nigeria’s Debt Service ratio falls to 45%

    Nigeria has made significant improvement in its debt-service-to-revenue ratio as it dropped from 66 per cent to 45 per cent. This is coming on the back of improved revenue mobilisation from both domestic and foreign sources. The government has been aggressively driving its tax reform with the introduction of Voluntary Assets and Income Declaration Scheme […]

  • Banks’ NPLs reach 10-month high in Q3

    FELIX OLOYEDE Non-Performing Loans (NPLs) in the Nigerian banking industry hit 10-month in September, latest data from the the Nigeria Deposit Insurance Corporation (NDIC) has shown. The report quoted by CNBC states that NPLs in the Nigerian banking sector reached N2.42 trillion at the end of Q3 2017, which is 10-month record high. Muyiwa Oni, […]

  • OPEC Crude Output Drops to Six-Month Low

    Crude production from the Organization of Petroleum Exporting Countries dropped again in November to a six-month low. Total production fell 80,000 barrels a day to 32.47 million a day last month, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data. That was the lowest level since May, when output was 32.29 […]

  • Lagos revives abandoned waste to energy resourcing projects

    By ABATAN ADEWALE JOSEPH Lagos state government is exploring every available opportunity to ensure power supply in the state in view of the dwindling performance of the energy companies in the country. As the business and industrial hub of the economy, Lagos has suffered huge economic losses on account of poor power supply. Governor Akinwumi […]

  • FG appoints Abdul Zubair to replace suspended SEC DG

    The Securities and Exchange Commission (SEC) on Monday announced the appointment of Abdul Zubair as acting Director General. The commission while making the announcement, also reassured the investing public of continued stability of the Nigerian capital market following last week’s suspension of its Director General, Mounir Gwarzo. It would be recalled that Gwarzo was directed […]

  • Kano spends N9bn monthly on salary payment, says Ganduje

    The Kano State Governor, Dr. Abdullahi Ganduje, has said his administration spends N9 billion monthly on payment of workers’ salaries. He added that this effort was commendable in a period where most state governments have not been able to pay salaries as a result of the economic situation in the country. He spoke  in Kano state […]

  • FG’s Npower scheme derailing, faces imminent collapse – Investigation

    By AYOOLA OLAOLUWA The N-Power scheme, introduced by the Federal Government, as a social safety net to reduce the rate of graduate unemployment afflicting the country, is fast derailing from its original objective, and faces imminent collapse, Business Hallmark findings have revealed. While the Federal Government, particularly its major proponent, Vice President Yemi Osinbajo, had […]

  • Gwarzo: The many troubles of a regulator

      By FELIX OLOYEDE These are unpleasant times for Mounir Gwarzo, Chief Executive Office, of the Securities and Exchange Commission (SEC) as he was placed on suspension last week by a previously gun shy Minister of finance, Mrs. Kemi Adeosun. Gwarzo’s position as SEC boss became shaky as a nongovernmental organisation,   Centre for Anti-Corruption and […]

  • 2018 budget: High on hope, low on prospects

      .           Promises of growth and development may be unattainable The 2018 budget will go down in history as the most vilified and repudiated by the legislature that is supposed to give it a stamp of authority. Last week, the two chambers of the National Assembly took a perfunctory appraisal of the budget and consigned […]

  • Anxiety rises over health of banks

    …as recent Fitch downgrade poses new questions BY TESLIM SHITTA-BEY All may not be as well with Nigerian banks as the domestic regulator, Central Bank of Nigeria (CBN), would have many believe. Buried in a heap of poor quality loan assets in the guise of high none performing loans (NPL’s), a growing number of banks […]

  • Maina’s can of worms

    By OBINNA EZUGWU At the hearing conducted by the Hon. Aliyu Madaki-led House of Representatives adhoc committee investigating the reinstatement of former chairman of the Presidential Task Force on Pension Reforms, Abdulrasheed Maina into the federal civil service last week, Nigerians were treated to a show of childish buck-passing. One could draw a parallel between […]

  • Resurgent Equity market signals stronger economic recovery

    By OKEY ONYENWEAKU Investors in the Nigerian equity market have every reason to be happy as the year gradually winds down. Those of who invested early in the year and carefully mixed their portfolio based on the NSE 30 Index would have made a kill should the market close bullish. This is reflected in the […]

  • (Editorial) APGA, a future in jeopardy  

    The All Progressives Grand Alliance (APGA) fought a good fight to retain power in Anambra state last month. Should the result have been different, and it easily could have been, it would have marked the beginning of the end for the party. Power of incumbency, emotional attachment to APGA among the Igbo, rifts within the […]


Visit us on Google+