Topline expands on improved output
Amidst lower oil prices (-17% y/y), and in line with our estimates, Seplat grew its revenue by 12% y/y to $1.1 billion (inclusive of overlifts), driven by improved oil production. Stripping out overlifts, revenue only posted a 4% y/y growth. For specifics, oil receipts came in 12% higher y/y, as oil production increased 14% y/y to 10.3 mmbls (FY’22: 9.0 mmbls). Similarly, gas revenue came in 10% higher y/y, driven by a mix of higher pricing and increased output. Gas production inched up 3% y/y to 41 bscf, while average gas price inched up 6% y/y.
Operational performance dips on higher opex and FX losses
While Seplat was able to grow its revenue, operating profit dipped as foreign exchange losses and a higher Opex (+4% y/y), driven by litigation costs, pressured operating results. For specifics, the company’s operating profit declined 9% y/y to print at $249.3 million, as the company recognized a foreign exchange loss of about $27 million while general and administrative expense rose 5% y/y. However, given a lower tax expense due to deferred taxes, PAT increased 18% y/y to $123.9 million.
Outlook
We only see modest upside for production growth in the new year, as much of Seplat’s drilling plan is aimed at arresting production declines in aging wells. That said, our projections for oil output prints at 11.4 mmbls (FY’23: 10.3 mmbls), while gas output is expected to come in at 44 Bscf (FY’23: 41 Bscf). Also, with oil prices set to average $80/bbl on a base case scenario, we anticipate a somewhat flattish performance in revenue, with revenue projected to print at $1.1 billion. On the operational front, we anticipate improved results, driven by the reduction of one-off costs, particularly litigation expenses, which negatively impacted the company’s operations in the previous fiscal year. This will bring our projections for operating profit to $304 million, up 22% y/y. Also, we anticipate some deleveraging in the year given the company’s positive cash position; thus, after accounting for finance costs and taxes, our projection for PAT prints at $150.5 billion. Overall, we value Seplat at ₦2,102 per share.
On the MPNU deal
Seplat still retains interest in acquiring Mobil producing Nigeria unlimited share of the MPNU/NNPC joint venture and awaits approval. However, there has not been certainty on when this approval will materialize, and as such, we have not factored in the potential impact from MPNU into our current valuations.
What shaped the past week?
Equities: Trading in the equities market this week was lifted by Transcorp power (+46% w/w), which was listed on the exchange by way of introduction, hence, the local bourse gained 2.61% w/w. For sectoral performance, gains in BUACEMENT (+4.4% w/w) drove positive performance in the Industrial sector (+1.59% w/w). Meanwhile, sell-offs in banking stocks such as UBA (-4.78% w/w) and GUINNESS (-17.55% w/w) dragged the Banking (-1.40%) and Consumer goods (-1.21% w/w) index respectively.
Fixed Income: Bearish sentiments dominated the market this week, as investors reacted to the decision by the CBN to hike the MPR, hence, we saw selloffs across the NTBs space. Similarly, in the bonds segment, we did see broad-based selloffs as investors demanded higher yields following the CBNs hawkish monetary policy stance.
Currency: At the NAFEM, the Naira depreciated w/w to close at ₦1,627.40 per dollar.
Domestic Economy: Recently, the staff of the International Monetary Fund (IMF) completed its 2024 Article IV Mission to Nigeria. Commenting on the real sector, the IMF acknowledged that while growth reached 2.8% in 2023, it fell short of the growth in the country’s population. Projections for 2024 indicate potential growth of 3.2%, fueled by increased oil production (reaching 1.65 million barrels a day in January) and an anticipated strong harvest later in the year. However, significant headwinds persist high inflation (nearly 30% year-on-year in January 2024), a weakened naira, and the need for stricter economic policies.
According to the Fund, the most immediate concern is food insecurity, affecting roughly 8% of Nigerians. The IMF applauds the government’s approval of a targeted social safety net program with cash transfers for vulnerable households. However, they emphasize the crucial role of full implementation before tackling the burden of expensive fuel subsidies. The Central Bank’s recent decision to raise interest rates by 400 basis points (to a total of 22.75% since May 2022) is another positive step welcomed by the IMF. This aims to curb inflation and stabilize the naira.
Global: The global markets experienced a mixed trading week. In Asia, Japan’s Nikkei 225 hit a record high of 40,000, echoing Wall Street’s recent gains. However, major Asia-Pacific markets fluctuated amid mixed service sector reports from Japan and China, alongside China’s GDP growth target announcement of around 5% for 2024. Meanwhile, in the US, stocks initially dipped as investors awaited Federal Reserve Chair Jerome Powell’s testimony and assessed PMI and trade data. Despite a brief downturn fueled by tech sector sell-offs, optimism returned mid-week following Powell’s testimony, boosting indices.
In Europe, markets closed mixed with investor focus on economic reports and the European Central Bank’s monetary policy decision. The Euro Stoxx 50 reached a fresh high, driven by the ECB’s announcement to maintain interest rates amid projections of moderate inflation and economic growth. Industrial production in Germany showed positive monthly growth but remained lower year-on-year. Overall, global markets navigated economic data, central bank actions, and geopolitical tensions, reflecting a cautious yet resilient sentiment among investors.
What will shape markets in the coming week?
Equity market: Boosted by the newcomer (TRANSPOWER) and rebound in MTNN, the bulls took center stage this week, as the ASI closed in the green all through the week. We expect a cautious trading week, as investors look for other opportunities in the market.
Fixed Income: Looking ahead, we expect bearish sentiments to persist as liquidity levels remain constrained. Meanwhile, in the bond segment, we expect investors to remain on the sidelines in anticipation of higher yields.
