Nigeria: Seplat’s Exxon asset purchase brings scale, execution risk

By David Whitehouse
Posted on Friday, 18 March 2022 12:15

Seplat CEO Roger Brown. (Twitter).

Seplat Energy’s purchase of Exxon Mobil’s shallow water assets offshore Nigeria has the potential to create a new major player in international exploration and production, subject to significant execution risks, analysts say.

The Nigerian company will add value “primarily through optimisation and development of undeveloped gas assets,” according to analysts at Chapel Hill Denham in Lagos. Increased production could mean dividend increases, their research adds.

Prospects for a long series of US interest-rate increases, which may mean further dollar appreciation, further increase the appeal of Seplat shares as the company pays dollar dividends, Chapel Hill Denham argues. The firm has a naira price target for Seplat of 1,881.59, versus the current 930, and adds that this disregards possible new exploration upside from the acquisition.

The purchase from Exxon of Mobil Producing Nigeria Unlimited (MPNU) announced in late February will cost $1.28b, with further contingent payments of  up to $300m dependent on the price of oil and average production. On a pro forma 2020 basis, Seplat says the transaction will mean a 186% increase in production to 146,000 barrels of oil equivalent per day, and a 170% increase in proven and probable liquids reserves.

  • Seplat expects the deal to be completed in the second half of this year, subject to ministerial approval.
  • Chapel Hill Denham points to the fact that the transaction effective date is January 1, 2021, implying that all the cash flow since then will accrue to Seplat. “The impact of this should considerably reduce the total cash requirement,” the note argues.

The transaction is “transformational” for Seplat, according to a note from Renaissance Capital analysts led by Nikolas Stefanou. Renaissance Capital has a share price target of 145p on the shares, versus the current level of 99p, and rates Seplat as a buy.

MPNU has a 40% stake in four shallow offshore blocks (67, 68, 70 and 104), which contain more than 90 platforms and 300 producing wells. It also owns the Qua Iboe export terminal,  and a 51% stake in the Bonny River terminal. Debt funding is at the level of the assets being purchased, without recourse to Seplat Energy Plc.

  • So the transaction will leave Seplat’s balance sheet in a healthy position and won’t endanger existing dividends, Stefanou writes.

Execution Risk

Seplat trades on the London and Nigerian stock markets. Chapel Hill Denham sees Seplat as cheaper than most African peers on 4.2 times enterprise value (EV) to earnings before interest, taxes, depreciation and amortisation (EBITDA). That compares with 5.7x for Tullow Oil,  6.0x for Gulf Keystone Petroleum and 6.3x for Savannah Energy.

Still, deals that transform scale in any industry have greater than average execution risk. Add to that an extremely  volatile oil price, and new investors in Seplat could easily be disappointed. The purchase involves high integration and operational risks, Stefanou writes. Some of the assets and infrastructure were installed over 50 years ago. Though Exxon may be expected to have kept them in reasonably good condition, ”asset integrity could be a concern.”

  • Seplat has “no experience in offshore production and considering the level of future investment required to develop these reserves, we believe there is high execution and operational risk,” Stefanou writes.
  • More documentation from Seplat is needed for an informed view on asset valuation, production and cashflows, he adds.

Bottom Line

Investors must weigh whether Seplat’s discount to peers is enough to compensate for offshore new-player execution risk.

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