Considering Investing in SEPLAT IPO? Read This! Based at 25A Lugard Avenue, Ikoyi, Seplat Petroleum Development Company Limited (Seplat) is an indigenous exploration and production company incorporated in 2009 by Shebah Nigeria and Platform Nigeria.
The company’s main objective is to take advantage of oil assets divestitures by IOCs in the onshore and shallow water areas.
Seplat holds 45% interest in – and operates – OML 4, 38 and 41 acquired from Shell Petroleum Development Company (SPDC) in 2010. The company also has a 40% working interest in OPL 283.
The company plans to raise a minimum of $500 million via issuance of new shares in an Initial Public Offer (IPO) with dual listing on the Nigeria Stock Exchange (NSE) and the main board of the London Stock Exchange (LSE).
Book building commenced on Friday 28th March 2014 and is scheduled to close Tuesday 8th April 2014, with final pricing expected next day. Indicated price range is N535 – N700.
According to management, there are two primary uses of proceeds:
1. To fund acquisitions of additional divestments by IOCs, including Chevron’s OML 53 for which the company has deposited $69 million.
2. To pay back outstanding shareholder loan of U$48 million from Maurel & Prom. According to management, while the loan is not due, the decision to pay back is hinged on ensuring all shareholders – including incoming ones – have equal rights.
Since the acquisition of 45% stake in OMLs 4, 38 and 41 in 2010, the company ramped up daily gross production from 13.9kboe to end 2013 at 60kboe (28.8kboe net to Seplat).
Specifically, oil and gas production have respectively averaged 23.1kbpd and 35mscf (5.8kboe/d) in 2013, from 3.2kbpd and 19mscf (3.2kboe/d) in 2010, which against a backdrop of stable oil – and rising gas – prices caused revenues to double in the last 3 years to $880 million.
In the same period, earnings have jumped from $13 million to $458 million, though significantly buoyed by zero taxes in 2013.
Management projects daily gross production to exit 2014 at 72kboe (32kboe net to Seplat) and plateau – based on current assets – at 85kboe (38kboe to Seplat) by 2016.
In a bid to give credence to the projections, the Chairman (Dr Bryant Orjiako) stressed that production targets of 30kboe/d, 40kboe/d, 50kboe/d and 60kboe/d for 2010, 2011, 2012 and 2013, respectively were all achieved.
•The company’s target debt to equity ratio is 3:1, though it currently has a debt to equity ratio of 0.2x, which implies ample flexibility to increase debt level for acquisition and execution of projects.
•The CEO (Austin Avuru) sounded optimistic on the prospects of gas earnings, particularly in view of the recent privatization of the ailing power sector.
He stated that, with improvement in domestic gas prices, the company has commenced commercialization of its gas reserves.
According to him, Seplat has already signed 10-year Gas Supply Agreement (GSA) with Sapele Power Plant (50MMscfd) and Geregu Power Plant (80MMscfd) at a rate of $2.00/Mcf adjustable for inflation.
In addition, a GSA (108MMscfd at $3.00/Mcf) scheduled to commence in 2017 has also been signed with Azura Power Plant.
To meet demand, the company will invest ~$300 million through 2016 to develop gas infrastructure that will boost gas production from 35MMscfd to 300MMscfd by 2016.
Accordingly, management expects gas to contribute between 20 and 30% of profits by 2016.
•According to the CEO, a large part of oil losses is also due to incorrect metering at the point of feeding crude oil into third party (Trans Forcados) pipeline.
To this end, the company installed a lease automatic custody transfer (LACT) unit which allows for better measuring of actual volumes of oil injected into the pipeline vs. quantity at export terminal.
According to him, this has reduced crude reconciliation factor from 22% in 2010 to 10% in 2013, with positive impact on volumes. Management stated that Seplat is the only indigenous company with the facility.
•Nonetheless, to tackle oil theft, the company developed the “Seplat Model” which seeks to encourage involvement of local communities at various stages of oil exploration and production, based on competence.
For instance, local community representatives are involved in the process of contract awards and qualified local contractors have been awarded pipeline laying contracts.
Seplat-controlled oil installations received zero attacks in 2013 down from 4 in 2012 and 6 in 2011.
Alternative pipeline to reduce losses further
•Management identified the dependence on Trans Forcados pipeline as a key risk to Seplat’s operations.
To this end, Seplat recently concluded construction of an alternative 100kbpd throughput capacity pipeline that runs from the LACT unit to Warri Refinery Limited, with which it has executed a swap agreement.
However, ramp up is expected to be gradual, starting possibly with 10kbpd, as the company renegotiates capacity contract on the Forcados pipeline.
Under the swap agreement, Seplat will deliver crude oil to Warri Refinery and receive the same quantity at the Forcados export terminal
Seplat has increased 2P reserves from ~74mbbl in 2011 to 111mbbl in 2013 despite the ramp up in production, with another 10mbbl of 2C awaiting certification of conversion into 2P.
Gas reserves have also increased from 76mboe to 114mboe in the same period.
The company’s long term strategy is to maintain a reserve to production (R/P) ratio of 20 years through acquisitions.
Based on our estimates current R/P is ~10 years.
CORPORATE GOVERNANCE
In a bid to distinguish the company from the corruption-driven negative perception about Nigeria, the Chairman stated that Seplat adopted an Anti Corruption Policy which is being implemented from top to bottom of the company. Amongst other benefits, this encourages whistle blowing. Furthermore, he added that half of the representation on the 12 member board comprises independent directors, with 5 of them heads of various committees.
DIVIDEND POLICY
Dividend is split into two portions, core and special, which is paid depending on capex requirement in the period. In 2013 the company paid a total dividend of 10 cents (N16.50[1]) with core portion being 50%. For 2014, the CEO guides to a core dividend of 10 cents (N16.50) which he emphasized as being attractive in view of the company’s growth plans. Target dividend yield is indicated at 2%, which based on 10 cents implies $5.00 (N825.00) per share and market value of $2.0 billion (N330 billion).
Whilst the company continues to develop existing assets, strategic focus is on inorganic expansion to attain long-term growth targets. Specifically, management expressed little interest in offshore exploration opportunities given high risks, adding that interest lies primarily in producing or near producing onshore or shallow water fields in which the company has competence.
INTERESTING PROPOSITION, REASONABLE PRICE
Pioneer tax status buoys near to medium term prospects…
n the last 4 years, Seplat has shown strong technical capability and competence in development of assets. Accordingly, we believe managements’ 2016 gross production target of 85kboe/d is achievable. More importantly, 2P reserve levels, which can sustain production at current levels for up to 10 years, suggests that the company’s earnings will be well supported in the near to medium term – barring any significant downturn in oil prices – bolstered by pioneer status tax holidays that run till 2017.
Furthermore, we are sanguine on the medium term benefits of the planned $300 million investment in gas infrastructure, on the back of rising domestic gas prices and prospects of increase.
Analysts at Asset & Research Management Limited ( ARM ) reiterate their positive view on the offer in light of our core valuation which sits within the book build range of N535 – N700. “We anticipate favorable market sentiment, underpinned by Seplat being the first to offer investors direct access to the mainstay of the Nigerian economy, will trail the offer. Barring any significant dip in oil prices, we are sanguine on Seplat’s near to medium term earnings growth potential, but more cautious on the company’s long term growth due to potential merger and acquisition risk. Overall, we are comfortable with the offer pricing range but would recommend bidding within the range of risked and non risked value (N536 to N618 per share) implied in our core valuation, to maximize value.”
[EasyKobo]