Seplat Petroleum Saves Profit With Tax Saving
Seplat Petroleum Development Company is depending on tax credit rather than revenue growth for strength to build profit in the 2019 financial year.
The company’s report for the third quarter operations in September affirms our expectation that this will be the summary of the company’s operating story in 2019.
A drop of 97 percent in tax expenses at the end of the third quarter was the key development that made the big difference during the period. It changed a drop of 13 percent in pre-tax profit into a 102 percent leap in after tax profit. The position of the tax figure has been the determinant of the company’s bottom line for the third year running.
The company has continued to lose revenue all the way and this is expected to sustain to full year. The key functions of production volume and oil prices that powered sales revenue
growth in 2018 have not been sustained thus far. Crude oil sales were under performing and costs increasing as at the end of the third quarter.
The group’s average working interest production is significantly down and the full year production outlook has been slashed.
Weak oil prices added to the drop in production volume
to register weak financial results for the company. The company’s chief executive officer, Austin Avuru attributed the earnings weakness to a slippage in the company’s drilling programme and weaker product pricing.
He is however hopeful of regaining momentum, having four rigs operational in the field and new oil and gas wells completed. The capacity enhancements are expected to lift Seplat’s net
oil production by 7,000 bopd at the 2019 close.
The company closed the third quarter operations with a turnover of slightly below N152 billion, a drop of 12.6 percent year-on-year. The drop reflects a decline in production volume and
weakness in crude oil sales. Gas sales that were holding up previously equally declined in the third quarter.
A more rapid drop in revenue would have happened but for an apparent windfall of over N20 billion from gas tolling – being revenue for processing gas for NPDC since 2015.
At the end of the third quarter, Seplat lacked the strength to grow revenue in 2019.
Management is however hopeful that significant production enhancement would impact revenue figures in the final quarter.
The company sustained sales revenue growth for the
second year in 2018 but a decline looks quite likely in 2019.
Whether the company’s management will be able to turn a third quarter drop in revenue into an increase at full year is a development to watch out for in Seplat.
Any gain in revenue will expectedly lift profit performance.
The group closed the third quarter operations with an after tax profit of N56.65 billion, a leap of 102 percent year-on-year. As in the previous interims, the company overturned a drop of 13
percent in pre-tax profit into the exceptional growth in after tax profit.
The strength to do so came from a huge tax saving over the review period. Tax expenses dropped by 97 percent to a little over N1 billion at the end of the third quarter.
This has given the company a profit figure that is otherwise not achievable from revenue. Profit has already exceeded the closing figure of N44.87 billion for the 2018 financial year.
For the third year on, the company’s bottom line has been determined by the position of the tax figure – an expense or a credit.
A huge deferred tax credit powered the profit of N81 billion
the company built in 2017. A shift to a tax expense in 2018 caused a drop of about 45 percent in after tax profit in the year. A big cut in tax expense is again the strength for holding up the
bottom line in 2019.
Four other developments also helped the company to strengthen profit performance from the position in the previous interims. One is an outstanding growth of 85 percent in other income
to over N11 billion over the period. It is also a major improvement from a negative figure at the beginning of the year.
The second factor is a significant moderation in administrative expenses – slowing down from a major increase of over 27 percent in the first quarter to a slight decline to N16.7 billion at the end of the third quarter.
Also, fair value loss – which was as much as N3.75 billion in the first quarter overturned to fair value gain of N1.5 billion at the end of September 2019.
The fourth major favourable development for the company is that net finance expenses have continued to drop at 47 percent at the end of the third quarter to N8.3 billion. The company
has been cutting down finance expenses since 2018 in line with management’s strategy to deleverage the balance sheet.
The company’s interest bearing debts dropped from N137 billion at the end of 2018 to less than N110 billion at the end of the third quarter. The company’s borrowings were as high as N174 billion at the end of 2017.
A good part of these cost savings was however claimed by a net impairment on financial assets of over N12 billion compared to a net impairment reversal of N521 million in the same period in
2018. This accounted largely for a drop of nearly 20 percent in operating profit to N64.8 billion at the end of the third quarter – which is still a big improvement from a drop of 61 percent in
the first quarter.
The company earned N97.88 per share at the end of the third quarter operations compared to
N49.20 per share in the same period in 2018. It paid an interim cash dividend of 5 cents per share last November.
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