Seplat Energy PLC (LON: SEPL) – Reported decent total revenue growth of around 32.30% in H1 FY21

Seplat Energy PLC (LON: SEPL) is an FTSE listed company engaged in oil & gas exploration and production. Its operations are in Nigeria and portfolio consists of seven oil and gas blocks (approx.). SEPL focuses on maximising hydrocarbon production and recovery from its existing assets while investing in new opportunities in Nigeria and realising the upside potential within its portfolio through exploration and appraisal activities. The company recently changed its name from Seplat Petroleum Development Company PLC to Seplat Energy PLC.

On 28 October 2021, SEPL would release the Q3 FY21 results.

Recent trend of dividend payments

(Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by SEPL from FY18 to FY20. Since its IPO, the company has paid more than USD 400 million in dividend.

 In FY21, SEPL would pay an interim dividend of US 2.5 cents per share. It would be paid on 13 September 2021 and had an ex-dividend date of 11 August 2021.

Nigerian Energy Outlook

(Source: Company Presentation)

The country has Africa’s largest population with more than 200 million people and growing rapidly. The GDP is estimated at more than USD 600 billion, including the informal economy. The energy demand is rapidly increasing amid rising urbanization, and currently, only 57% of the population have access to energy. The country has a vast potential to grow and abundant energy resources of more than 40 years of reserves.

The rising population and urbanization will increase the GDP and improve the energy demand. It is estimated that by the end of FY40, more than 85% of the population will have access to energy. As a result, the electricity consumption will increase from 121TWh (“Terawatt-hour”) in 2021 to 240 TWh in 2040. This will provide ample opportunity for the Company to grow and reduce the cost of energy and improve its margins in the future.

Growth Prospects

• Transition in Product Portfolio: The Company plans to develop its business by selectively expanding its asset base and optimizing its product mix. The Company also plans to diversify export routes and optimize efficiency while reducing cost. SEPL also plans to develop Nigeria's gas resources to accelerate the replacement of diesel and biomass through the supply of reliable, low-cost energy. The Company has also taken steps for selective entry into the new power generation market, combining gas and solar energy. In addition, the Company continues to explore carbon offset markets for sustainable energy.
• Improved ESG Reporting: The Company aims to minimize the impact on the environment and remains committed to more sustainable and environmentally friendly products. As a result, the Company improved its MSCI ESG ratings from "BB" to "BBB", reflecting its steady progress in reducing ESG risk, enhancing performance and reporting.
• Focused on Cash Generation: SEPL follows a multi-pronged approach to ensure strong cash generation, including diversifying export routes to reduce downtime and losses, increasing gas in the revenue mix, and creating a hedge against volatile oil prices. The Company also focuses on improving operations and targets cost reduction to USD 9.10 / boe. They also plan to reduce barging costs and renegotiated contracts.
• Investment Plan: SEPL focuses on low-risk strategies to grow the business and improve stakeholder returns. They plan to invest USD 0.9 billion to USD 1.2 billion in existing assets, funded by cash flow. 
  

Key Risks

• Operational Risk: Failure to manage operational activities in line with planned expectations can lead to production misses, project delays and cost overruns, high production costs and earlier than expected field decommissioning.
• Third-party Risk: Over-reliance on third-party operated transportation infrastructure can expose the Company to an extended period of production shutdown.
• Political Disruptions: The Company operates in a region where security incidents such as kidnappings, vandalism and criminal attacks on Oil and Gas installations can occur, which could cause unexpected losses to the Company. The country has also faced the continuous risk of terrorism to destabilize and undermine the central government's orderly and effective rule.
• Financial Risk: Failure to procure capital to continue development activities and fund M&A could impact the operations and financial outlook.
  

Now we will analyze some key fundamental and shareholders statistics of Seplat Energy PLC.

Financial and Operational Highlights (for the six months ended 30 June 2021 as of 29 July 2021)

(Source: LSE Website)

• On the back of improved performance in Q2FY21, the Company reported revenue growth of 32.3% to USD 308.8 million.
• The cash generated from operations was USD 125.8 million, mainly due to the commencement of production in Oben-50 and 51 gas wells.
• The gas production was up by 21% to 120 MMscfd (“Million standard cubic feet per day”) while liquids production was 30,028 bopd in H1FY21.
• On the financial front, the Company successfully issued USD 650 million 7.75% senior notes to redeem existing USD 350 million 9.25% senior notes and repay USD 250 million drawn on USD 350 million RCF. Furthermore, the Company refinanced the USD 100 million Westport RBL facility and raised a USD 50 million offtake linked to the RBL in July 2021.
• On the operations front, the Amukpe-Escravos Pipeline’s first lifting is expected in Q4 FY21, and the ANOH project remains on track for H1 2022 first gas.
• Till H1FY21, the Company has made a total capex of USD 57.5 million, and the full-year capex is expected around USD 180 million. 
  

Financial Ratios (Q2 FY2021)

 Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 8 September 2021, at 08:59 AM GMT, SEPL’s shares were trading at GBX 92.00, same as the previous day closing price. Stock 52-week High and Low were GBX 110.58 and GBX 54.77, respectively.

On a daily chart, SEPL's price is sustaining above 200-day EMA of about GBX 86.90, indicating the possibility of an upward movement. Moreover, the MACD line remained above the signal line, indicating an upside momentum in the stock price. In addition, the stock price has also broken above downward sloping trendline resistance. Hence, there could be an uptick in the stock price in the near term.

In the last year, SEPL’s stock has delivered a decent positive return of ~55.41%. Also, it has outperformed the FTSE All-Share Oil, Gas & Coal index with a return of about 42.30%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

SEPL delivered an excellent performance in H1 FY21, with revenue rising 32% YoY and the underlying EBITDA rose to USD 178.9 million. SEPL has a strong balance sheet and cash position with almost USD 650 million available liquidity. The Company has a solid 5-year plan with expected 53 oil well drilling and 160 MMbbls of total liquid reserves production. In their gas portfolio, the Company plans to drill 19 gas wells with an estimated production of 1.5 Tcf gas reserves. In addition, the Company plans to invest USD 0.9 billion to USD 1.2 billion in existing assets and maintains a disciplined approach towards investment in additional assets. The Company also plans to increase production and reduce production costs to cater to rising demand in the Nigerian Economy. With subject to market conditions, the Company had anticipated total production ranging from 48 kboepd to 55 kboepd for FY21.

Considering the Company’s market opportunities in Nigeria, its increased production volume, its capex plan, improved profitability, liquidity and leverage position of the business than the industry, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Seplat Energy Plc at the current price of GBX 92.00 (as on 8 September 2021 at 08:59 AM GMT), with lower-double digit upside potential based on 7.67x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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