Impairment Loss Throws Seplat Into The Red in Q1
Seplat Petroleum Development Company closed deep in the red for the first quarter of 2020, as impairment loss alone was more than four times its gross profit. A running growth in impairment losses on financial assets last year took off to flying speed in the first quarter and caused a deep plunge from a five-year profit peak of N85 billion in 2019 to a loss of close to N35 billion in the first quarter of the current year.
The petroleum company’s five-year earnings records show major swings in profit performance ending in a big leap in 2019. The upturn is giving way for a huge loss this year, stretching from operating loss to the bottom line.
The problem began from the top line, as revenue losses entered the second year. There was a bad shift in the cost-income structure in the first quarter. Loss of sales revenue set in last year when the company’s turnover went down by 6 percent. The drop accelerated in the first quarter at 13 percent but the cost of sales advanced by 32 percent, consuming 75 percent of sales revenue.
The adverse cost-income shift slashed gross profit to 43 percent of the corresponding figure in the preceding year, which was barely sufficient to meet administrative expenses. Support came from two favorable developments. One is a rebound from another loss of N5 billion to register other income of N15.6 billion year-on-year. The other is a similar rebound from fair value loss of N3.7 billion to a gain of over N6 billion over the same period.
These gains were grossly insufficient to remedy three major adverse developments over the review period. These include the considerable loss of gross profit and a 66 percent upshot in general and administrative expenses from a drop of over 11 percent at the end of 2019. The biggest of them all is a towering growth of impairment loss from a marginal gain of N44 million to over N47 billion year-on-year.
The result is an operating loss of N25 billion for Seplat Petroleum at the end of the first quarter. Another bad turn for the company is in respect of finance expenses, which extended the operating loss. Net finance expenses shifted from a drop of 57 percent to N6 billion at the end of last year to a 65 percent rise year-on-year to N6.6 billion in the first quarter.
Also, tax saving, which was a big factor in the company’s high-profit growth last year was completely missing in the first quarter of this year. Compared to a 75 percent drop in income tax expense at the end of 2019, there was a shift from a tax credit of N4 billion to a tax expense of N3.5 billion over the review period.
Seplat Petroleum closed the first quarter operations with a turnover of over N42.4 billion, a drop of 13.3 percent year-on-year. The key functions of production volume and oil prices ended lower than in the same period in 2019. The average crude oil price for the company during the first quarter dropped from $63.59/bbl to $50.9/bbl over the period.
The group’s average working-interest liquids production was up by 52.5 percent to 33,368 barrels per day due to increased output from two oil wells. Gas sales volume dropped by 38 percent to 88 Bscf, reflecting higher downtime at the third-party infrastructure and a planned 15-day week shut down of the gas plant for turnaround maintenance in March. Also, the average realised gas price for the company was lower by 11 percent at $2.89/Mscf.
The combination of lower realised prices and lower gas sales volumes than recorded last year led to a drop of close to 45 percent in gas revenue to $23.1 million at the end of the first quarter. Gas contribution to group revenue dropped from 26 percent to 17.7 percent year-on-year.
Volatile shifts in operating figures reflect the many imponderables that strew the oil market. Average oil and gas prices are expected to be lower still in subsequent quarters in the reflection of the bearish turn of the oil market caused by coronavirus pandemic.
However, the company’s report said the business is hedged against low oil prices and with a significant proportion of group revenues now coming from gas, there is a comfortable layer of protection from oil price volatility. Group chief executive officer, Mr. Austin Avuru said, “we have the benefit of long-term contracted gas revenues that are insulated from oil market volatility”.
The group closed the first quarter operations with a loss of N34.6 billion against an after-tax profit of N10 billion in the same period in 2019. This is a quick change in fortune from 89.5 percent profit lifting to N85 billion at the end of 2019.
The rapid growth in interest expenses is expected to continue in the face of huge and rising borrowings. Interest-bearing debts soared by 120 percent to over N242 billion last year and grew further to N287 billion at the end of the first quarter. Net finance cost of N6.6 billion for the first quarter was already in excess of the full-year figure in 2019.
The company lost N59.95 per share at the end of the first quarter operations against earnings per share of N17.56 in the first quarter of 2019.
The outlook for the company this year is subject to major factors that do not lend themselves to reasonable predictions. These include the disorderly shifts in output and prices of oil and gas, massive growth in impairment loss, and rapidly growing finance cost.
Tax expenses also do change directions suddenly in between quarters with either huge savings or expenses that impact profit performance considerably. How these forces would play out to rebuild profit, cut, or extend the first-quarter loss figure are the developments to watch on Seplat Petroleum in 2020.
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