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Seplat Q3'20 - Valuation yet attractive albeit performance subdued

• Recently, the management of Seplat announced its Q3’20 results, which showed an operating profit of $33.5m. While this compares favourably to the last two quarters where the company posted operating losses, it was however lower compared to Q3’19. We note that this was due to lower average realized crude oil prices ($45.92/bbl in Q3’20 vs $62.26/bbl in Q3’19), higher operational and maintenance expenses as well as Depletion, Depreciation and Amortization charges and most importantly, impairment on its financial and non-financial assets owing to the impact of covid-19. Over the 9M’20 period, Seplat has posted an operating loss and loss before tax of $79.3m and $130.1m respectively (vs an operating profit and PBT of $211.2m and $184.8m respectively over 9M’19). Additionally, Seplat announced an interim dividend of $0.05/share (same as 9M’19), which translates to a dividend yield of 4.52% at current price level of N420/share ($1 converted at N380).
• Total revenue in Q3’20 grew by 10.3% YoY to $154.23m. This was mainly supported by higher crude oil revenue (up 17.5% YoY to $125.5m) which more than offset the YoY reduction in gas revenue over the same period (down 12.8% YoY to $28.7m). Although average realized crude oil prices was 26.2% lower YoY, the improvement we saw in crude oil revenue in Q3’20 reflects the higher crude oil production in the period, particularly from the recently acquired OML 40 and Ubima assets (contributed 18.5% of total crude oil production in Q3’20). Furthermore, we saw c. 129% QoQ recovery in crude oil prices in Q3’20. This supported a 72.6% QoQ increase in crude oil revenue despite the reduction in volume in Q3’20 relative to Q2’20 levels (Q2’20 WIP was 33.81kbbl). However, revenue from gas declined both QoQ. Management has associated this to higher downtime in third party infrastructure.
• While we are of the view that management cost cutting initiative may have started to feed into performance following the 69.4% QoQ and 61.7% YoY reduction in general and administrative expenses in Q3’20, we continued to see further impairment charges on Seplat’s oil and gas infrastructures in Q3’20 as management re-evaluate potential future cashflow from these assets in light of recent developments in the global economy and most especially, in the global oil space.
• Thus, to account for the impairment charges on Seplat’s assets, we have lowered our long-term crude oil price forecast to $40/bbl from $45/bbl. We have also reduced our forecasted production uptime for the year to 79% (previously 83%) given that it came in lower than we expected in Q3’20 and currently prints at 77% for the nine-month period. Furthermore, we increased FY2020E oil production forecast to 33.30kbbl (previously 30.80kkbl).
• In the near term, we expect to see improvement in Seplat gas production. Management mentioned the two new gas wells it recently completed (Oben 48 and Oben 49), which is expected to produce a combined output of 75MMScfd. Also, we expect to see continued improvement in crude oil production from OML 40 and Ubima fields. This should support output and moderate the negative impact of lower crude oil prices on revenues. We also expect to see reduced losses on the OMLs 4, 38 and 41 oil fields as the Amukpe-Escravos pipeline comes on stream. We have a STRONG BUY rating on the stock as our fair value estimate of N964.45 suggests an upward potential of 129.63% from current price level