Analysts at ARM Securities Limited have placed BUY ratings on Seplat Petroleum Development Company Plc. (Seplat)’s stocks, citing improved cash flow generation and higher receipt from crude oil lifted from OML 55 as the major reasons for the recommendation.
“Given the foregoing, we see the potential for a strong run up in Seplat’s shares over 2018 as the pieces fall into place,” said analysts at ARM Securities.
“Consequently, we place a BUY recommendation with an upgraded FVE of N952.81/share (up from N663.85/share). On basis of valuation, Seplat is trading at a 2018 P/E and P/CF of 7.2x and 2.8x relative to African peers of 21.1x and 7.01x respectively,” said Analysts at ARM
The leading indigenous Nigerian oil and gas exploration and production Company return to profitability after lower oil price and incessant attacks on oil facilities by Niger Delta militants on Forcados terminal subsea crude export pipeline resulted in significant drop in revenue in 2016.
Seplat posted a net income of $265.13 million in December 2017 from a loss of N116.09 million in 2016.
The company has $450 million in free cash flow in 2017, which represents a 275.75 percent surge from $119.76 million recorded as at December 2016.
Net cash flow from operating activities spiked by 161.40 percent to $447 million, from $171.59 million recorded last year.
The political bedlam in the Niger Delta region between January 2016 and February 2017 disrupted production and forced Seplat to cut down on spending as it incurred $33 million in capital expenditure in 2017.
This compares with a record spend of $321 million in 2014 when oil prices were around $100. See Chart.
“Seplat will continue to exercise discretion over spend Selectively considering production drilling opportunities in the existing portfolio with a view to reinstating a work programme designed to capture the highest cash return opportunities committed capex in 2018 isv currently minimal,” said the company in its 2017 financial statement presentation.
The company has a free cash flow yield of 29.71 percent, which means it is in good financial health.
Free Cash Flow Yield is an indicator that compares free cash flow and market cap. It is a representation of the income (free cash flow) created by an investment.
A yield of 12 percent means that a company is generating 12 percent of its Market Capitalization in free cash flow yearly. Generally, higher yields are more appealing, because they indicate that investors pay less for each unit of cash flow.
BALA AUGIE
