Seplat Plc: Upbeat Outlook in 2018 But Risk Persists
By Dipo Olowookere
Analysts at ARM Research have disclosed that beyond 2017, they expect a more improved performance by Seplat Petroleum Development Company Plc (Seplat).
In its report released yesterday titled ‘Seplat Plc – In the clear,’ ARM research noted that starting off in 2018, it expects the company’s exports to rise largely reflecting the planned completion of the Escravos pipeline which offer a third export route for the company.
ARM Research said it revised its estimates for Seplat and increased its fair value estimate (FVE) to N518.74/share (previously N346/share) after the lifting of the force majeure on the TransForcados Pipeline (TFP) alongside upgrade at the alternative route (Warri refinery).
In the report obtained by Business Post, ARM Research said, “We see substantial upside in earnings in 2018F where we expect weighty ramp-up in exports, benign cost, and earnings derisk (opening 2 additional evacuation routes) to drive a stellar performance. On basis of valuation, Seplat trades on 2018F P/E of 8.6x which is at 30% discount to its EMEA peers.”
Earlier this month, Seplat’s management reported it has received notification from the operator of TPS (SPDC) on the lifting of the force majeure on the pipeline at the end of May 2017.
The company further stated that it has successfully reinstated production levels at the OMLs 4, 38 and 41 to net working interest production levels of 56kboep/d. Also, Seplat informed that upgrade at the Warri refinery will be completed by Q2 17, the report said.
“Our cautious view with regards to project completion and ramp up in export guides our 180 days downtime forecast for 2017E (previously 280 days).
“Consequently, we revise working interest production for 2017E to 39.27bopd (+52% YoY) to drive revenue 48% higher YoY to $376.6million – Oil revenue (+50% YoY to $222.7million) and Gas revenue (+46% YoY to $153.8million).
“We recall from our FY 16 earnings update ‘Striking FY 16 loss: is Seplat off the hook?’ where we noted that Seplat will need its working interest production to cross 32kbopd before the company can post a profit.
“Thus, given the earlier than expected re-opening of TFP to drive higher production, our estimate implies PAT of $27.3million for FY 17E (2016: loss after tax of $166million),” the report said.
Management has indicated it was working with the FG to complete the Escravos pipeline where it expects to export circa. 160kbpd.
Though Seplat expects this to be operational in H2 17, the report said it is less sanguine about the target completion time of the Escravos pipeline owing to government’s delayed completion on similar projects, and therefore see 2018 as a more realistic date for the project.
The combination of an upgrade at the Warri refinery as well as fully operational Trans-Forcados and Escravos pipelines drive its forecast of a 90-day downtime in 2018 with working interest production forecast of 44.8bopd (+14% YoY) and over four-fold increase in PAT to $84.1million, the research report stated.
“Farther out (2019-2022F), Seplat’s intention to make the Escravos pipeline its primary route guides to lower reconciliation cost.
“Consequently, we forecast an average working interest production of 50kbopd and mean PAT of $95million over our forecast period. Another catalyst to earnings is Seplat’s operated $1.3bilion ANOH gas and condensate project which a final investment decision (FID) for the upstream and midstream elements is expected in H2 2017 and should guide a revision to forecast. Irrespective, downside risk to earnings persist.
“Ongoing national security concerns with recurrent threat by new militant groups in the Niger delta region pose risk to production and export volumes from pipeline attacks.
“To add, oil prices below our $40/bbl. Estimate would result in a downward revision to our estimate.
“The stock currently trades at an FY 17E and FY 18F P/E of 22x and 8.6x compared to 15.4x and 12x for its EMEA peers. We forecast a sturdy 5-year earnings CAGR of 55%. Cumulative impact of the adjustments results in an attractive valuation with NAV per share of its oil and gas assets at $2.19 and $0.43 respectively having applied 35% discount to asset values to reflect our risk to future earnings.
“The foregoing, combined with our exchange rate forecast of N360/$ for 2017, drives our FVE higher to N518.74 (previously N346).
“Our FVE is at a 13% premium to the last closing price of N460. We have an OVERWEIGHT rating on the stock,” ARM Research stated in the report.
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