EUR 3.48 For Business Accounts Only

Seplat Plc - Will the Bulls Crossover?

• Following our last note Seplat Plc – Revision to Forecast published on Nov 7th, Seplat has returned 20.5% with YTD return of 57%. Much of the early gains was underpinned by the lifting of force majeure on the Trans-Forcados Pipeline (TFP) which drove a marked rebound in performance in the third quarter of 2017 with the company posting profit after tax (PAT) of $22.3million, after realizing losses in six consecutive quarters.
• At the latter, it was a play of cheap valuation and bargain hunting. In sync with our investment case for Seplat which tilts towards 2018 wherein we had projected a substantial upside in earnings hinged on balance sheet deleveraging as well as improved and more stable P&L. Our view was premised on the company’s return to past production levels and de-risked earnings via the addition of a new export route to existing two routes.
• Consequently, we forecasted a 90-day downtime in 2018 with working interest production forecast of 45.5bopd and over four-fold increase in PAT to $108.6 million. In line with this adjustment, Seplat remained well positioned to relatively outperform its larger peers, trading at a 2018 P/CF of 1.7x compared to African peers’ and FTSE 350 Oil & Gas index of 5.5x and 12.05x respectively. As it stands, the stock is currently trading at a premium of 130bps to our last communicated FVE of N588.11. So how does it look from here?
• Beyond our earlier views on higher production, lower all-in cost, balance sheet deleveraging and deceleration in Capex which should drive cash-flow and ROE improvement, the recent rally in crude oil prices (Brent) and Seplat’ s tax allowance provision (estimate: $98 million) provides fresh upside to earnings.
• Riding the oil price upswing. As a pure E&P play, Seplat’s earnings are more sensitive to oil prices. Consequently, we run a scenario analysis of 2018 key financial metrics at varying crude oil prices while keeping our production forecast intact. We have now raised our 2018 earnings by 26% in FY 2018, in line with house views on 2018 Brent price (base case of $60/bbl.). However, crude oil prices below $40/bbl. and a reappearance of insecurity in the Niger delta may trigger a downward review to earnings. 
• Balance sheet should de-leverage significantly. Seplat is expected to rake in stronger operating cash flows of c.$300million over 2018 well above capital spending (estimate: $20 million capex). Thus, there is clear capacity for enhanced shareholder return via resumption of dividend payments in 2018. Furthermore, while Seplat has no explicit dividend policy, we find that full-year dividend per share (DPS) has displayed strong correlation to its operating cash flow per share. Lower-than-expected oil prices and production are the key risks.
• Valuation is more compelling. We raise our FVE from N588.11 to N663.85 after reviewing our model and considering the possibility of higher crude oil prices. Our revised target equates to 2018 P/E and P/CF of 5.0x and 1.4x compared with African peers of 14.4x and 3.5x respectively. 
• See attached for full report