Seplat could suffer its steepest revenue decline in seven years, excluding 2016, analysts at Lagos-based Chapel Hill Denham said in a new report that downgraded the oil stock on expected tough 2020 for oil producers.
Chapel Hill Denham said expects the Federal Ministry of petroleum to allocate supply cuts to oil producers following Nigeria’s agreement to OPEC+ production cut (1.41mbpd ex-condensates). The analysts now see Seplat revenue declining by 27.7% to $504.38mn.
This “could potentially be the steepest fall since the Trans-forcados Export Route crisis in 2016,” said Chapel Hill Denham, noting its key forecast of 36.9% production cut to 45.2kboepd including Eland Assets.
The analysts also assumed an average realized oil price of $43/b (per barrel), which is at an 8% premium to their base case forecast of $40/b for the year, due to Seplat’s $45/b hedge for 60% of its liquid production through Q1-Q3 2020.
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“We also expect gas revenue to be impaired as the Oben gas plant is scheduled to go off for maintenance to improve asset integrity,” said Oil sector analyst Ebovi Wali and Research Head Tajudeen Ibrahim.
Despite Seplat’s cost efficiency which would allow for profitability at current oil prices, the analysts say EBITDA margin will likely contract to 47.1% in 2020 from 58.6% in 2019 on account of the lower production and price outlook.
“We also expect Seplat to book FX losses on its government receivables due to the recent devaluation in Nigeria, which was a similar case in 2016,” said the analysts. “we are now less constructive on Seplat’s ability to maintain its current dividend policy of 5cents each as interim and final dividends.”
Chapel Hill downgraded Seplat to a SELL from BUY previously with a 12-month target price of N406.05 per share.
Last month, Seplat CEO Austin Avuru said the company would draw from its experience with a similar crisis to surmount headwinds in a challenging phase for the global economy induced by the COVID-19 pandemic and short-term oil over-supply due to demand and supply shocks.
“Seplat will benefit from being a resilient company built on the solid foundations of prudent financial management and the careful mitigation of risk,” he said. “We are a low-cost producer and will continue to manage our finances prudently.”
Avuru also said buffers for Seplat in its gas business, while with the recent addition of Eland and the availability of new pipelines, Seplat’s oil business is broadening and derisking its production fields and routes to market to assure even greater security of revenues in the future.
The CEO who spoke in March, before the new OPEC+ deal, said Seplat expects production to hit between 4757 kboepd (including Eland 6-10kbopd) for 2020, although this is subject to market conditions.
