Africa Oil, Seplat favoured but Nigerian oil faces under-investment: Rencap

By David Whitehouse
Posted on Thursday, 17 February 2022 12:03

Photo supplied by Seplat.

Trying to drag investors back into Nigerian oil is like pushing a boulder up the hill. Like the oil price, there is no way it is going to stay at the top.

Africa Oil,  Seplat and Decklar Resources are best placed to thrive in a climate of international under-investment in the sector, according to research from Renaissance Capital analysts Nikolas Stefanou, Alexander Burgansky and Sergey Raskolov on Feb 16.

Decades of under-investment and poor infrastructure are limiting Nigeria’s ability to benefit from higher oil prices. The country’s output dropped to a multi-decade low of less than 1.5m barrels of oil per day (mmbopd) in December 2021, lower even than during attacks by militants in the Niger Delta in 2016. Though January saw a recovery to 1.68mmbopd, Rencap sees 2022 production in the 1.60-1.75mmbopd range.

The picture is still bright for some equities, the analysts write. Seplat has the best chance among Nigerian indigenous operators of closing a deal to buy Nigerian assets from Exxon or Shell, either of which would be “transformational” for the company, RenCap says.

  • Seplat is the only listed Nigerian exploration and production company with access to both equity and debt markets.
  • Still, a major asset purchase may leave credit metrics looking stretched at oil prices below $90 per barrel, Rencap says.

Shares in Africa Oil, which trade on the Toronto stock exchange and Nasdaq Stockholm, have doubled over the last month, but there is still more potential upside in 2022, the research says. The company has production and development assets in deep offshore Nigeria. It also has development assets in Kenya, and a range of African exploration assets.

  • An immediate catalyst could be the Venus well in Namibia, which is being drilled by TotalEnergies and where Africa Oil has an indirect stake of 6%, Rencap says. Drilling results are expected this month.
  • The analysts also expect the company to introduce shareholder distributions, either in the form of dividends or buy-backs, with its next results.

Decklar, listed on Canada’s TSX Venture Exchange, finances development of marginal fields in Nigeria and shares the cash flows with existing operators. It has agreements in place for the Oza, Asaramatoru and Emohua fields. “Commencing commercial production at Oza is a critical catalyst” for Decklar which will generate free cash flow assuming oil at $85, Rencap says.

  • Rencap initiated coverage of Decklar in October. Note, though, that Deckar paid Rencap to produce that piece of “sponsored research”.

The main reasons to favour these shares, then, seem to be a possible trigger in Namibia, rather than Nigeria, for Africa Oil, and an asset purchase which might leave the balance sheet looking stretched for Seplat. Decklar has paid to come to the party.

‘Just Transition’

The wider picture is of a global lack of new investment in fossil fuels. Supporters of a “just transition” argue that Africa should be allowed to develop its energy resources, and point to the continent’s tiny contribution to historical carbon emissions.

The practical problem with that is that international investors have to make forward-looking decisions, and few have an appetite to add new oil and coal exposure. That means the future of Nigerian oil will depend on indigenous investment capacity.

  • Plans by Shell and Exxon to exit Nigeria would return about 65% of 2021 production to indigenous control, putting the burden for investment squarely on the local sector.
  • Rencap says it will be “challenging” for small to medium-sized indigenous players to secure financing to close the transactions, “let alone investing further for production growth in ageing assets of undetermined asset integrity.”
  • The planned deals, Rencap says, could turn out to be “too big to chew” for any of the indigenous players – even Seplat.

Bottom line

It’s getting ever harder work to make an investment case for Nigerian oil.

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