Operating under better circumstances in 2018 

Moving from Neutral to Outperform:

 Seplat Petroleum Development Company’s (Seplat) Q1 2018 results were boosted by strong oil revenues which rose 534% y/y to US$141m. However, these results did not surprise significantly due to steady output following the resumption of exports via the TransForcados System (TFS) and a recovery in global oil prices. Given renewed confidence in predictability of exports, management is guiding to a full year average working interest production of between 48,000 and 55,000 barrels of oil equivalent per day (24,000 to 29,000 bopd liquids and 148 to 158 MMscfd gas) in 2018. Our average working interest production of 55,000boepd is set at the upper limit of the firm’s guidance and implies an uptime of c.75%. Recently, exports via the TFS have been shut following leakages. Following our conversations with the firm we expect exports via the TFS to resume within a forthnight. We understand that these leakages are due to the age of the TFS rather than by vandalism. The 160,000bpd Amukpe-Escravos export route is set to become operational in Q3 2018. Until then, the TFS will continue to be a major factor in our production outlook, mainly because exports via the Warri Jetty provide only partial and relatively more expensive relief. Our relatively more bullish production and pricing expectations in 2018 have led to an increase of c.4% on average to our 2018-19E EBITDA estimates. Our new price target of N971.0/share (US$2.7) is up 36%, primarily driven by a long term oil price forecast of US$66/b from 2021 (up 9% from US$61/b), representing an upside potential of 32.2% from current levels. Year-to-date, Seplat shares have gained 17.3%, outperforming the NSE ASI by around 11.6%. Given the potential upside on the stock and our view of relatively stronger production this year, we have upgraded our recommendation on Seplat shares from Neutral to Outperform. At current levels, on our published estimates, Seplat shares are trading on a 2018E P/E multiple of 5.6x for an EPS growth of around 4% over the 2018-19E period.

Q1 2018 recap: PBT of US$59m driven by strong sales growth: 

Q1 2018 to a large extent continued to reflect positives from undisrupted exports. Seplat’s sales came in at US$181m, up 282% y/y, while PBT of US$59m compares with a loss before tax of -US$18m in Q1 2017. Sales growth was boosted by a recovery in oil sales which grew by over 534% y/y to US$141m, driven by working interest oil production growth of 434% y/y to 27,306bpd and average realised oil prices, also up 31% y/y to US$65.8/b. Production uptime was around 82% while average reconciliation losses stood at 7.3% in Q1.