Seplat Petroleum Development Company Plc: A year of losses

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Introduction
The 2016 financial year was a hard one for Seplat Petroleum Development Company. Going the way of most other Nigerian companies in 2016, it recorded a lower turnover than it did in 2015. Its losses after the year end was staggering, recording a loss after tax of N45.4 billion.
The company had negative profitability ratios, especially negatively impacted after the shut-in of the Forcados terminal in 2016. With the growing uncertainty in the petroleum development industry, the company might find it difficult to engineer better profitability in the coming years, if things remain as they are.

Core operations
The 2016 financial year was not a profitable one for Seplat in any way. First, it followed the general rule of earning less income in 2016 than it did in 2015. The decline in gross earnings, at 43.9 per cent, was however sharper than most other companies recorded.
Turnover stood at N63.4 billion, and this was a sharp downturn from the N113.0 billion recorded in the prior year. Even though the company was careful to curtail cost of sales, it couldn’t quite do the same for operating expenses (inclusive of advertising and promotion, distribution, administrative and interest expenses). These grew collectively faster in 2016 than it did in 2015.
For the first time in years, Seplat recorded a loss rather than a pre-tax profit. Loss before tax obligations for 2016 stood at a staggering N47.4 billion, a marked departure from a profit of N17.2 billion in the erstwhile year, and translating into 475.6 9 per cent decline rate.
As was to be expected, the company achieved one of the worst loss per share for companies listed on the Nigerian Stock Exchange (NSE) for 2016. Loss per share was a whopping N79.73, a vast improvement over the high N23.94 EPS recorded in 2015. Shareholders did not receive any dividend.

Profitability ratios
Not only did Seplat record losses instead of profitability on a stand-alone analysis basis for the 2016 financial year, all parameters also showed a regression when compared to its preceding years’ result. First to achieve a regression was the profit margin of the company. Instead of a profit margin, there was a loss margin of 74.8 per cent, meaning that for every N100 earned by the company in the course of the year, N74.80 of it translated to loss. This is as compared to a profit of N15.20 in 2015.
Also to record a decline was return on assets (ROA). Loss on assets was 7.1 per cent, as compared to a return on assets of N3.20 in the erstwhile year. For the 2016 financial year, Seplat deployed equity valued at N376.4 billion and for every N100 equity deployed, the company made an after-tax loss of N12.10, worse than and as compared to an after-tax profit of N4.60 in the preceding year.
As regards staff matters, pre-tax loss per employee stood at N121.53 million on the average. This is as compared to the N44.22 million pre-tax profit employees contributed on the average to the company’s pre-tax profit in 2015.

Other ratios
Seplat’s shareholders’ funds in 2016 could finance a higher proportion of its total capital than it did in the preceding year, and this means that its capital adequacy was more robust than that of the prior year. The result for the year was 72.6 per cent, higher and therefore better than the 68 per cent recorded in the erstwhile year. The result recorded was also on par with what was obtainable in the industry for the period under review.
As per the liquidity position of the company, it was not able to convert assets into needed funds as quickly as it did in 2015. Current ratio, which measures whether or not a firm has enough resources to pay its debts over the next 12 months, was 1.4 times (lower than 1.9 times in 2015), and was still high enough to suggest a good management of the company’s operating cycle and its ability to turn its products into cash.
Having a debt to equity ratio of 0.77 shows that the company is using only 70 kobo of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N1.70 of total capital for every N1.00 of equity capital, lower than the N1.94 result the company recorded in 2015.

Sustainable growth
For the review year, the company recorded a loss rather than a profit, so it didn’t give shareholders any dividend for the year. Therefore retention ratio was 1.0, as compared to a retention ratio of 0.98 in the erstwhile year.
Instead of a profit margin, the company had a loss margin of 74.8 per cent, as against a profit margin of 15.2 per cent in 2015. What this means is that Seplat had a loss of N74.80 for every N100 income made during the course of the year, as compared to a corresponding profit of N15.20 in 2015.
With a lower asset turnover, the company recorded a negative sustainable growth rate of 11.9 per cent, meaning that it had no inherent capacity to grow using only the resources it generated in 2016. It also did not grow at all, declining by 43.9 per cent during the course of the year. This means that Seplat was just one of the many companies who were unable to achieve growth in the face of Nigeria’s economy challenges.

Stock value
Even with a loss per share and a lack of dividend payout to shareholders, our analysis shows that Seplat’s share price (currently N460.00 on June 24 2017) is undervalued. Net assets per share was N668, much higher than the current market price and therefore suggesting that the stock is undervalued.
The company is also worth a little more in reality than it is selling for on the NSE at now, as shown by a lower market value as compared to its book value. While book value is N376.4 billion, current market capitalisation is a lower N260 billion. This also, is a sign of undervaluation.
While this stock is underpriced, it will be really hard for investors to buy into it at this point, because it is very expensive.

Unique strategies
The company is principally engaged in oil and gas exploration and production.
Seplat was incorporated on 17 June 2009 as a private limited liability company and re-registered as a public company on 3 October 2014, under the company and Allied Matters Act 2004. The company commenced operations on 1 August 2010. The company acquired, pursuant to an agreement for assignment dated 31 January 2010 between the company, SPDC, TOTAL and AGIP, a 45 percent participating interest in the following producing OML 4, OML 38 and OML 41 located in Nigeria. Seplat was successfully listed on the Nigerian Stock Exchange and the main market of the London Stock Exchange on 14 April 2014.

Conclusion
Seplat’s loss showing for its 2016 financial year shows how events beyond a company’s control can have an effect, either negative or positive, on its bottom line. Asides the economic recession Nigeria has been experiencing, Seplat’s revenues were also negatively impacted during the year due to the shut-in of the Forcados terminal after the terminal operator, Shell Nigeria, declared force majeure in February 2016 following disruption in to the Forcados terminal subsea crude export pipeline. The terminal remained under force majeure for the remainder of the year.
*Source: Seplat’s 2016 financial report
*The Nigerian Stock Exchange

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