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Seplat Energy Shields Itself From Industry Downturn With Excellent Balance Sheet

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Seplat Energy Plc stable balance sheet and ample cash reserves enhances the upstream oil and gas major’s valuations and shields it during industry downturn.

In the period of soaring oil prices, a healthy balance sheet provides a financial stronghold as investors pay attention to the debt levels or leverage in the books of majors due to the capital intensiveness of their businesses.

While excess debt can undermine financial flexibility, it is important to maintain low debt during the period of lower oil prices and companies tap the debt market during the lean years to finance capital projects.

It is equally important to note that mounting financial obligations can put a pressure on credit ratings as banks will not be willing to extend credit facilities anymore, and that is a recipe for disaster as a firm is hindered from acquiring new businesses.

Seplat Energy is in excellent financial health. It has a cash and cash equivalent of N286.91 billion as at September 2023, which is 97.03 percent higher than 2022’s N145.47 billion.

Moreover, the oil and gas giant has a debt to equity ratio of 42.68 percent in September 2023 from 43.76 percent the previous year.

Debt-to-equity ratio is a measure of how much debt a company has taken on relative to its shareholder equity.

The ideal debt-to-equity (D/E) ratio varies by industry, but it should not be above a level of 2.0. A D/E ratio of 2 indicates the company derives two-thirds of its capital financing from debt and one-third from shareholder equity.

The median interest coverage ratio for Seplat Energy stood at 3.19 in the first nine months of 2023, lower than 2022’s 6.85 according to data from MoneyCentral Intelligence. The figure is a measure of a company’s ability to repay its debts, with a ratio of at least 2 generally considered the minimum acceptable amount for a company with solid revenues. Analysts typically prefer a coverage ratio of 3 or higher.

Of course, the company has delivered higher returns to shareholders as the cost of debt is lower than the cost of capital.

In short, its projects are viable, given that the return on equity (ROE) is greater than the cost of capital.

A higher crude price throughout last year that pills into 2024 will continue to support profit margins and ensure an increment in dividend.

Last year, the oil and gas index was the best performer on the exchange, with a year to date (YTD) of 125.54 percent.

Seplat Energy is having a bumper start to the year. Its shares have gained 33.1 percent so far this year, however, it underperforms the NGXASI index of 36.95 percent.

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