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Initial View - Seplat Plc - Weak Q3 19 performance…but in line with estimates

• Earlier today, Seplat published Q3 19 result which showed a decline in EPS by 44% YoY to $0.11 (in line with our estimate of $0.10). The lower earnings stemmed largely from 38% YoY decline in revenue, following lower production and average prices. However, cumulative 9M 19 EPS expanded 98% YoY to $0.31, thanks to significantly lower effective tax charge.
• The lower revenue stemmed from decline in both oil (-42% YoY to $107 million) and gas (-21% YoY to $33 million) segments. Total working interest production printed lower by 10% YoY to 45,483boepd, with most of the decline stemming from gas (-18% YoY to 118mscfd) while oil production was 6% lower YoY at 25,028bopd. That said, Seplat’s improved capex spend on drilling activities (especially in the OML 53 Eastern asset) led to increased oil production by 4% QoQ, while gas production (-20% QoQ) was lower following the postponed gas capex plan, particularly the Oben booster compression project. Over 9M 19, production is down 7% YoY to 47,163boepd. It is worthy of note that management revised its FY 19 production guidance lower to 45-48,000boepd (prev. 49-55,000 boepd). On the other hand, average realised price was 30% lower YoY at $34.3/boe, with oil prices dropping 18% YoY to $62.3/bbl as gas increasing 15%YoY to $3.68/mmscfd.
• Mirroring impact of the lower realised prices, gross margin contracted 17ppts YoY to 41.2% in the quarter. This offset impact of Seplat’s improved cost efficiency which drove cost/boe lower to $20.2/boe in Q319 compared to $20.5/boe in Q3 18. Operating profit was 32% lower YoY, despite a 25% YoY decline in operating expenses, while EBIT margins contracted 1ppts YoY to 32%. Seplat also posted lower net finance cost (-42% YoY to $8.2 million) reflecting impact of the repayment of the RCF facility, which leaves only the $350 million 2023 Eurobond in the loan book.
• Seplat’s performance in the quarter left significant imprints on the cashflow position, as Q3 19 CFO dropped 64% YoY and 70% QoQ to $51 million, while CFO margin contracted 26ppts YoY and 53ppts QoQ to 37%. FCF/s also declined significantly by 88% YoY to $0.03, fuelled by higher capex. Over 9M 19, FCF/s prints 61% lower YoY at $0.24. Overall, Seplat’s cash as at 9M 19 printed at $449 million, which, although prints 29% lower YoY, is more than enough to fund the $29 million interim dividend ($0.05/s) declared. The company still has $225 million headroom in its 2022 RCF facility and recently secured a $350 million bridge facility to finance the £382 million ($493 million) Eland Oil & Gas acquisition.
• Seplat’s Q3 19 performance was weak, but largely in line with our forecast. That said, Seplat continues to trade at significant discount, with forward P/E and P/FCF of 4.4x and 5.4x compared to MENA peer average of 12.6x and 6.1x. We also think Seplat’s cheap pricing is quite unjustified, more so considering the potential upsides stemming from the ANOH Gas project as well as the recent acquisition of Eland Oil & Gas Plc (See our note: ). Our FVE on Seplat of N828.90 holds 58% upside from market price of N517.