Seplat appears well placed to exploit Nigerian oil opportunities as majors sell assets

With the takeover of Nigeria focused oil producer, Heritage Oil, announced last week by a vehicle controlled by Qatar’s former Prime Minister for £924 million, I’ve been taking a look at Seplat another Nigeria focused oil company which recently listed on the LSE.

Seplat is an independent oil and gas exploration and production company incorporated and operating in Nigeria with strategic focus on Nigeria. The company was founded in June 2009 by entities controlled by Dr A.B.C. Orjiako (the current Chairman) and Austin Avuru (the Managing Director and Chief Executive ).

In July 2010, it acquired a 45% participating interest in, and was appointed operator of, three on-shore producing oil and gas leases located in the western Niger Delta basin of Edo and Delta states (OMLs 4, 38 and 41) which include the Oben, Ovhor, Sapele, Okporhuru and Amukpe fields. The fields were previously owned by Shell, Total and ENI with the oil majors keen to divest onshore assets which have been prone to sabotage and oil theft. Shell lost around $1billion in 2013 because of theft and other disruption to its Nigerian operations and much of this has been linked to government controlled gangs with ties to the country’s political elite.

The company has increased production from its fields from a gross operated oil production of 14,000 barrels per day to around 60,000 barrel per day today. The total working interest production in 2013 was 8.4 MMbbls, representing a 56% increase from the 5.4 MMbbls achieved in 2012. On 1 June 2013, the company entered into an agreement with Pillar Oil to acquire a 40%, participating interest in the Umuseti/Igbuku Fields. The Umuseti Field is currently producing circa. 2,500bopd with net share to Seplat of 1,000bopd.

On the 14^th April 2014, Seplat raised $500 million in an initial public offering in London and Lagos (ticker SEPL), valuing the company at $1.9 billion with the largest public offering of an oil company since Ophir Energy in 2011. The IPO was the first ever company to be listed in both London and Lagos. 26.4% of its shares were offered at a price of 210p, towards the bottom of its target range of 195-255p with BNP Paribas, Standard Bank, Renaissance Securities, Citigroup and RBC acting as advisers.

The company paid down some of its $141 million of debts with a shareholder loan of $48 million being paid off and is bidding for additional licences in Nigeria using the proceeds.

The IPO is the largest for a sub-Saharan company since 2008 and the second largest for a Nigerian company behind the $550 million of Starcomm but the company will remain incorporated in Nigeria, so it would be ineligible to join the FTSE 250 index though it is listed on the London Stock Exchange. After the debacle of the Bumi and ENRC London Stock Exchange listings the UK Listing Authority has strengthened the rules to protect investors with minority interests. The company has a 25% freefloat but foreign companies must have a 50% freefloat to enter into the FTSE 100, 250 or 350.

The cash Seplat has raised in the IPO will put it in a stronger position to compete for the oil giants’ disposals because foreign companies must partner with Nigerian businesses to bid.

The company’s shares have rallied strongly since the mid-April IPO, currently sitting at 240p, quite a premium to the 210p listing price. The Heritage Oil deal has increased investor interest in Nigerian companies like Seplat with producing assets. Seplat is currently valued at £1.3 billion and given the company’s Nigerian leadership structure and financial firepower it seems well placed to side step any political hot potatoes in the African country and pick up undervalued assets from the larger producers. Assets like the Umuseti/Igbuku fields also have the opportunity to increase output. Shareholders in emerging markets focused companies which have listed on the LSE have not had a happy time and it was clear that the 210p listing price was valued to engage bruised institutional investors in the likes of Bumi. Nigeria has plenty of problems, but with current production already at 60,000 barrels per day and set to increase in 2014 the country’s reputation as a tough place to do business in should be more than priced in. As long as the management team deliver on their promises, and some decent deals materialise, the early signs of a change in sentiment in the battered oil and gas sector may mean that SEPL shareholders benefit handsomely during 2014.

Contrarian Investor UK

IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.