Seplat Petroleum Builds Profit On Tax Saving
Seplat Petroleum Development Company finished the 2019 trading in line with our expectation that building profit on tax saving will be the summary of the company’s operating story for the year. As expected, two years of sustained growth in sales revenue to 2018 overturned to a drop in turnover in 2019.
The oil and gas producing company recorded a cut down of 75 percent in income tax expenses at the end of the financial year and this is the key development that made the big difference in the bottom line in the year. It extended an increase of 11.5 percent in pre-tax profit to over 89 percent leap in after-tax profit. The position of the tax expense has remained the main determinant of the company’s bottom line position for the third year running.
Loss of sales revenue through the quarters sustained to full-year as expected, as the key functions of production volume and oil prices ended lower than in the preceding year. Crude oil sales underperformed the year’s initial targets while management tightened its cost control measures in the final quarter.
The group’s full-year average working interest production for 2019 was down by close to 7 percent. The company reported that the drop was caused by slippage to the intended production drilling program as a result of rig mobilization delays. Weak oil prices added to the drop in production volume to register revenue losses in the year. The company’s average price dropped from $70.10/barrel in 2018 to $64.40/barrel in 2019.
Seplat Petroleum closed the 2019 full year operations with a turnover of over N214 billion, a drop of 6.2 percent from the sales revenue figure in 2018. The drop reflects the loss of production volume and average crude oil sales and price in the year. Gas sales that had been improving in the preceding years dropped even more rapidly than crude oil at close to 10 percent compared to 6.8 percent.
A more rapid drop in revenue was prevented by an apparent windfall of over N20 billion from gas tolling – being revenue for processing gas for NPDC since 2015. The hopes expressed by the company’s management that significant production enhancement would impact revenue figures in the final quarter came true for Seplat.
The company generated N62 billion or 29 percent of its full-year turnover in the final quarter. The gain in revenue improved profit performance as well, which changed a drop of 13 percent in pre-tax profit at the end of the third quarter into an improvement of 11.5 percent in pre-tax profit at the end of the year.
The group closed the full year operations with an after-tax profit of over N85 billion, which is an advance of 89.5 percent over the 2018 closing profit figure. More than N28 billion or one-third of the full-year profit was earned in the final quarter.
The company closed the year with a pre-tax profit of nearly N90 billion, which is an increase of 11.5 percent. The difference between the 11.5 percent increase in pre-tax profit and the exceptional growth of 89.5 percent in after-tax profit is a huge tax saving over the review period.
At N8.94 billion, income tax expenses dropped by 75 percent at the end of the year. The resulting cost saving yielded the company a profit figure that is otherwise not achievable from sales revenue. The company closed the 2018 operations with an after-tax profit of N44.87 billion.
For the third year on, the company’s closing profit has been determined by the position of the income tax figure – which has been swinging from credit to expense and to a drop. A huge deferred tax credit powered the profit of N81 billion the company built-in 2017. The position shifted to a tax expense in 2018, which caused a drop of about 45 percent in after-tax profit. The large drop in tax expense in 2019 provided the strength for the outstanding profit improvement in the face of a revenue drop in 2019.
Four other developments enabled Seplat to improve profit performance in the year. These include the doubling of other income to over N9 billion. There was also a reasonable cost saving from a drop of over 11 percent in administrative expenses during the year. This reflects a further tightening of cost controls in the final quarter.
Also, a fair value loss of N593 million in 2018 overturned to a fair value gain of N1.7 billion at the end of 2019. The fourth major favorable development for the company is that net finance expenses dropped by close at 57 percent to a little over N6 billion at the end of the year.
There was a favorable combination of a 38 percent rise in finance income to over N4 billion and a drop of 40.5 percent in finance expenses to N10.3 billion. The company has been cutting down finance expenses since 2018 in line with management’s strategy to deleverage the balance sheet.
The deleveraging program appears to have been discarded as management piled up new debts in the final quarter. From less than N110 billion at the end of the third quarter, the company’s interest-bearing debts soared to over N242 billion at full year.
The closing debt figure has exceeded the company’s peak borrowing of N174 billion at the end of 2017 from which management commenced its deleveraging program. The new debts were contracted to finance the company’s huge investing programs of which the acquisition of a subsidiary is the largest.
A good part of the cost savings was however claimed by a net impairment on financial assets of close to N15 billion – a jump of 233 percent over the 2018 figure. This left operating profit flat at N95.7 billion, which is, however, a big improvement from a drop of nearly 20 percent at the end of the third quarter.
The company earned N149.35 per share at the end of 2019 operations compared to N78.92 per share in 2018. It paid an interim cash dividend of 5 cents per share last year and has proposed a final cash dividend of 5 cents per share, closing on 13th May and to be paid on 4th June 2020.
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