It has been a while since the Nigerian Stock Exchange (NSE), had an initial public offering IPO that was as exciting and potentially rewarding for investors as the current SEPLAT offering to list its shares on the domestic bourse and London exchange.
Investors that buy into the indigenous oil exploration and production company have a chance to participate in the longer term secular growth trends that are emerging in the global oil industry as well as for Nigeria’s domestic oil companies.
The SEPLAT IPO – the largest since Dangote Cement – will raise $500 million (N82.5 billion) and we expect it to price at a range of N535 to N700 per share, potentially valuing the company at between $2 billion to $3 billion.
This will make SEPLAT the sixth largest listed company on the NSE and only upstream pure play on the exchange. SEPLAT says it intends to use $48 million of the IPO proceeds to repay outstanding amounts under its shareholder loan from MPI S.A.; and the remainder for acquiring and developing new acquisitions.
Book building for the offer goes from March 28th to April 8th, while pricing and allocations would be on April 9th and full unconditional trading on the NSE starts on April 14th (T+3 settlements).
Company Background
In July 2010, SEPLAT acquired a 45 per cent participating interest in, and was appointed operator of, a portfolio of three onshore producing oil mining leases (OMLs 4, 38 and 41) located in the Niger Delta.
In June 2013, via a wholly-owned subsidiary, the Company entered into an agreement for the acquisition of a 40 per cent participating interest in the Umuseti/Igbuku marginal field area located within OPL 283 in the Niger Delta.
In 2013 the average gross operated oil production from OML’s 4, 38 and 41 was 51.3 thousand barrels per day, having grown by 269 percent from 13.9 thousand bpd in August 2010.The average gross operated gas production in 2013 from OML’s 4, 38 and 41 was 99 million standard cubic feet per day (“MMscfd”); while SEPLAT is targeting gross operated oil production from its existing assets of 85 thousand bpd by the end of 2016.
Analysis of 2013 results
For the year ended December 2013, SEPLAT Petroleum Development Company Plc revenues increased by 40.93 percent year on year (y/y) to $880.22 million from $624.54 million in 2012.
We see the company on the right trajectory of growth because input costs were minimal as cost of sales margin in FY: 13 reduced to 37.60 percent from 40.10 in FY: 12, while gross profits were up 46.77 percent y/y to $549.28 million.
The company’s Profit before tax (PBT) in 2013 grew by 54.75 percent to N$457.52 million against $295 million in 2012.
The upside performance in PBT was as a result of expansion in gross margins by 240bps to 62.40 percent in FY: 13 which were more than enough to cover operating expenses of 8.17 percent in the same periods.
Finance cost which slid by 21.8 percent to $21.80 million in FY13 from $35.98 million also help spike profits.
Based on our analysis, the company has less financial risk as its debt ratio in FY13 reduced to 48.93 percent from 136.2 as at FY12.
Shareholders have been receiving increasingly impressive returns on investment as Return on equity (ROE) spiked to 71.33 percent in 2013 from 60 percent in 2012, while Return on assets (ROA) increased to 34.56 percent in 2013 as against 12 percent in 2012.
Based on our analysis, the company recorded improved efficiency as it was able to turn each $ of sales into profits as net margin a measure of profitability climbed to 76.74 percent in 2013 compared to 53.10 as at 2012.
Profit after tax (PAT) surged by 278.11 percent y/y to $452.77 in 2013 from $109.09 million in 2012, while earnings per share (EPS) soared by 318.51 percent to $1.13 in FY13 from $0.27 as at FY12.
The company’s liquidity position also improved as current ratio used to measure the ability of a firm to meet short term obligation jumped to 1.57x in Q4:13 from 1.08x in Q4:12, while sales turn over reduced to 1.38x in Q4:13 as against 3.43x in Q4:12.
Key takeaways
The oil and gas sector still makes up a huge chunk of Nigeria’s economic output, at around 20 percent of GDP, and about 65 percent of consolidated government revenues for 2013.
We think SEPLAT has uniquely positioned itself to benefit from the sector as more IOCs divest, gas gets increasingly priced at market rates, plus they can tap the political goodwill that comes with being the only listed Nigerian upstream company.
SEPLAT listing on the NSE and LSE, gives them access to both naira and foreign currency financing options which is very exciting.
We think that SEPLAT has the potential to become a $12 billion company by 2017, based on their oil, gas business, potential for further acquisitions as well as pristine balance sheet and favourable tax status.
Comparable peer Tullow oil is valued at $11.53 billion and had oil production for 2013 that averaged 84,200 bpd.
SEPLAT is also a good dividend play. The company paid a cash dividend of N16.5 per share in 2013 ($.10 a share at N165 per dollar).
PATRICK ATUANYA & BALA AUGIE
