Oge
The exceptional skills that will make you stand out in the stock market are not just your abilities to spot growth and dividend stocks, even though they are one of the big money-makers, but being able to uncover turnaround stocks that are making a huge comeback.
What are turnaround stocks you may ask? These are stocks that were affected by a temporary economic trend which eventually led to massive sell-offs and are rising again. You will see affected companies, like this, report declining sales figures on quarter to quarter basis, year on year and even make a loss, and at the end return to profitability after restructuring.
A look at Nigerian stock market
Oil and gas companies in the Nigerian stock market were worst hit by the collapse in oil price coupled with numerous attack on oil facilities by Niger Delta militant that led to low production output. This crisis was largely reflected in their share price performance in 2014, 2015 and 2016, but as the price of crude oil reversed its year-long downtrend after an agreed-OPEC output cut, we saw an increased inflow of petrodollars into the economy. Now that the activity of these militants at near zero level, some of the stocks have begun to rise again as manager of these companies had concluded facilities repairs and built alternative export routes to control future loss.
As a stock trader, I had taken time to single out one perfect turnaround stock you should focus on this year.The stock is SEPLAT
Seplat is a leading independent oil and natural gas producer in the prolific Niger Delta area of Nigeria and a leading supplier of gas to the domestic market. As a full-cycle upstream oil and gas exploration and production company, our focus is on maximising hydrocarbon production and recovery from our existing production and development assets, acquiring and farming into new opportunities in Nigeria (specifically those which offer production, cash flow and reserve replacement potential with a particular focus on the onshore and shallow water offshore areas) and realising the upside potential within our portfolio through focused appraisal and exploration activities. A strong track record and high-quality asset base Our portfolio comprises direct interests in five blocks in the Niger Delta area, four of which Seplat operates, and one further revenue interest.
One interesting discovery on SEPLAT chart is that the price pattern of the stock on a monthly chart mimics the global crude oil market price trend and NSE all share index. As of this writing, the stock is already posting weekly gain as investors’ sentiment turn positive; they had just released a full year result that beats 2016.
Here is my personal analysis that reveals the big upside potential of SEPLAT in 6 months.
Let’s talk about the company performance from 2016.
As culled from the SEPLAT’s 2016 result:
Oil price weakness continued into 2016 with Brent touching a low of US$26.01/bbl in
January. Although prices staged a modest recovery over the remainder of the year,
exiting 2016 at a peak of US$54.96/bbl following the announcement of production
cuts by OPEC members and certain other producers, they remained well below the
average of US$103.43/bbl and peak of US$128.14/bbl that was seen from the start
of 2010 to September 2014 when the abrupt decline set in.
• The challenge of adjusting to the low oil price environment was further compounded
by significant levels of price volatility in the year and uncertainty created by the overall
fragile market state.
More details about the effect of oil price on SEPLAT stock:
• Nigeria’s oil production in 2016 was severely impacted by elevated levels of militancy targeted at key export infrastructure throughout the Niger Delta, and in particular the export terminals that the onshore producers have relied upon to monetise their production.
• Seplat was significantly impacted by this and, like many other producers, was forced to halt exports via the Forcados terminal when the terminal operator, Shell Nigeria, declared force majeure on 21 February 2016 following disruption by militants to the terminal subsea crude export pipeline. The terminal remained under force majeure for the remainder of the year meaning operators reliant on that system were faced with an unprecedented level of disruption in 2016.
Financial Highlight of SEPLAT
The company’s revenue fell by 43%, from a high of N112b in 2015 to N63b in 2016 which is not unconnected to the suspension of oil export via the Forcados terminal following incessant attacks by militant. As you would also expect gross profit figure in the same period declined from a high of N49b to N16b. The huge loss on the foreign exchange market was another major driver of the N45b loss after tax in 2016.
The company had been adopting an alternative strategy to limit the impact of a possible lower price by expanding its gas business aggressively and also avoid imminent production output cut by constructing alternative export routes.
The gas business has been the single factor for consistent revenue stream throughout the period.
Current outlook and future prospect of SEPLAT:
SEPLAT is poised to deliver impressive performance in 2018 as the global oil market recovered significantly in third quarter 2017 which is responsible for the positive full year revenue growth.
Let me take you through the numbers so you will understand the continuous progress SEPLAT has made and why you should jump in now for a bumper 2018, at least the 6 months return is estimated at 48-50%.
Quarterly Report:
The company reported a decline in revenue from $83.4m to $47.3m but a significant reduction in the cost of sales, general and administrative expenses, finance cost and tax helped limit the loss after tax position from $22m in 2016 to $19m in 2017.
Financials reflect lower oil exports via the Warri refinery route whilst jetty upgrades and repairs were undertaken – Revenue US$47.3 million and gross profit US$19.1 million; 22% year-on-year reduction in G&A helped narrow operating loss to US$1.3 million; loss for the period after net finance costs US$18.3 million and loss after tax US$19.1 million – Cash generated from operations US$51.6 million versus capex incurred of US$4.9 million – Average oil price realisation US$48.34/bbl (2016 :US$35.4/bbl); average gas price US$3.05/Mscf (2016: US$2.98/Mscf)
First Quarter Opportunity in 2018
At a current estimated average oil price of $60 in the first quarter of 2018 which far better than $35 in 2016 and $48 in 2017, I believe SEPLAT will record a minimum revenue growth of 20% and stronger profit figure against the loss recorded in the same quarter last year. This should naturally drive the stock price higher.
Second Quarter Opportunity in 2018
The company grew revenue by 27% to N40.3b in 2017 but recorded loss after tax in the same period. On a half-year comparison, there was an improvement in gross and operating profit which also supported the reduced loss recognised against the previous year.
If the average oil price for 6 months remains steadily above $55, I am also forecasting a better revenue figure that will be better than the N40.3b reported in 2017. Assuming a modest 20% growth driven by a higher oil, improved production output and growing gas business, SEPLAT should deliver an estimated N48b revenue in 6 months. The planned sales of Eurobond which the company will use to finance its long-term debt at a lower interest is also a profit booster in the future as it will help lower interest repayment.
Third & Fourth Quarter 2018
If the company also maintains the level of growth recorded in Q3 and Q4 2017, then revenue for the full year 2018 should beat that of 2017.
Profit for the period before tax adjustments was US$44 million, compared to a full year loss before tax of US$173 million in 2016. This return to profitability was driven by performance in the third and fourth quarters where net quarterly profit before tax of US$24 million and US$46 million respectively offset the US$26 million loss before tax recorded at mid-year. Net tax credits of US$221 million, owing primarily to the deferred tax credits of US$224 million, increased the overall profit after tax for the year to US$265 million. The resultant EPS for 2017 was US$0.47 compared to an LPS in 2016 of US$0.29.
Maintaining the same growth in Q3 and Q4 2017 for 2018 on the basis of a $55-$60 average oil price signals a positive prospect for SEPLAT.
Estimated value:
Using the simple formula I shared on how I value growth stocks before buying again, SEPLAT is undervalued by 48%. The company reported an EPS of N144 which when divided by the 10-year average bond yield of 13% revealed an estimated share price of N1,107. What is the market price of SEPLAT? As of this writing, the oil stock is N740.
Besides, the current price-earnings of 5.34 and an assumed minimum 15% growth present a PEG ratio of 0.35 which is another indicator that SEPLAT is a good buy.
Technical Analysis:
On the chart, SEPLAT stock just surpassed the high of N700, the price it last reached before the sell-off began; this is not far from the positive investors’ sentiment towards the oil company as its return to profitability.
All my key indicators are also pointing to an uptrend; though there might be a sell-off as short-term traders take profit that should be an opportunity to buy more.
As of this writing, SEPLAT stock is part of my current portfolio.
