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SEPLAT PLC Q120 - Q1 asset impairment to yield losses for full year

Oil underlift, weaker oil prices drag Q1 topline

In its recently released Q1’20 results, Seplat reported a 36% q/q drop in turnover to $130 million, underperforming our estimate of $145 million. This was largely a result of smaller lifted crude and weaker oil prices (average realised oil price- Q1’20: $50/bbl, Q4’19: $65/bbl). Although actual oil production came in higher at 3.1 mbbls in Q1’20 – thanks to Eland consolidation, Seplat only lifted 2.2 mbbls (down 19% q/q) for its crude sales. As a result, oil revenue fell 38% q/q to $107 million, underperforming our estimate of $118 million. However, the 0.9 mbbl shortfall in lifted oil, which was in effect a sale to the NPDC, was reported under Other Income ($48 million). Like its oil business, Seplat’s gas operations posted an underwhelming performance in Q1, revealing a contraction in turnover for the third consecutive quarter. Dragged by a two-week maintenance downtime, gas output declined 22% q/q and 38% y/y to 8.0 Bscf in Q1’20, bringing gas revenue to a multi-quarter low of $23 million (down 25% q/q).

 

Asset impairment precipitates losses in Q1

Following the inclusion of Eland numbers in its Q1 results, Seplat reported upward movements in almost all constituents of cost of sales. Notably, royalties (stipulated at 20% of oil revenue) jumped 50% q/q to $32 million, while operational and maintenance costs advanced 63% q/q to $14 million. That said, cost of sales came in higher at $97 million (up 36% q/q), resulting in a sharp decline in gross margin to 25% (Q4’19: 65%, Q1’19: 51%). Further down the income statement, the company’s gross profit was subdued by an asset impairment charge of $146 million—reflecting the revaluation of the Group’s oil and gas assets amidst the slump in oil prices. As such, Seplat recorded an operating loss of $77 million, a U-turn from an operating profit of $101 million in Q4’19 (Q1’19: $33 million). Furthermore, with Eland acquisition shooting the company’s debt to $789 million in the preceding quarter, finance costs climbed to $21 million (Q1’19: $16 million), coming in line with our estimate. All in, Seplat reported a loss before tax and a loss after tax of $96 million and $107 million respectively for the quarter.