Brighter Prospects for Seplat

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Based on analysts’ assessment, Seplat Petroleum Development Company Plc’s planned acquisition of Eland Oil & Gas Plc holds brighter prospects for the company, writes Goddy Egene

Seplat Petroleum Development Company Plc last week sent positive signals to the capital market community and other stakeholders indicating the company’s determination to be a leading player in the oil and gas industry.

The indigenous company, which listed on the Nigerian Stock Exchange (NSE) and London Stock Exchange (LSE) in 2014, said its board had reached an agreement with the board of Eland Oil & Gas Plc to acquire the entire issued ordinary share capital of Eland by Seplat.
According to Seplat, it would pay about £382 million (N178.56 billion) for the acquisition. Eland is an LSE listed upstream oil company headquartered in Scotland and production assets in Nigeria.

Through its joint venture company, Elcrest, Eland holds its core asset, a 45 per cent interest in OML 40 which is in the Northwest Niger Delta. Elcrest completed its acquisition of the 45 per cent equity stake in OML 40 in September 2012 and has been producing oil from Opuama since 2014. Gbetiokun was discovered in 1987 and further appraised in the early 1990s. Following a field development plan approved in early 2019, Gbetiokun came on stream in July 2019. In addition, Eland has a 40 per cent interest in Ubima, onshore Niger Delta, in the northern part of Rivers State.

OML 40 holds gross 2P Reserves of 82.2MMbbls, gross 2C Resources of 50.7MMbbls and a best estimate of 252.1MMbblsof gross un-risked prospective resources. Ubima holds gross 2P Reserves of 9.3MMbblsof oil and gross 2C Resources estimates of 4.2MMbbls.
Under the terms of the acquisition, Eland shareholders are entitled to receive a cash consideration of 166 pence (N775.95) for each share in their portfolio.

Commenting on the acquisition, Chief Executive Officer of Eland, George Maxwell, said: “This recommended offer from Seplat represents the culmination of a very successful journey by Eland, the management team and all of its stakeholders. Since founding Eland, we have, jointly with our partners in Elcrest, acquired our interests in OML 40, a non-producing asset, achieved an all-time record production on this asset and become a significant independent producer in Nigeria’s E&P landscape and one of the biggest oil producers on London’s AIM market. Eland has, in a period which has seen a significant cyclical downturn in our industry, outperformed most of its peers and the AIM Oil & Gas Index. This transaction represents a record share price for Eland and crystallises Eland’s stated goal to maximise shareholder value.”

Also commenting, Chairman of Eland, Russell Harvey, said: “We are pleased to announce this recommended acquisition by Seplat. Eland’s management team has done an excellent job executing our strategy. We have demonstrated a strong track record of operational delivery and value creation in Nigeria from our high-quality assets. This offer allows Eland shareholders to benefit from an accelerated and enhanced realisation of this value through a cash offer at a significant premium to the current market value. In addition, the business will benefit from the opportunity to become part of a more significant player in the Nigerian oil and gas market. For these reasons, the Eland board unanimously intends to recommend the offer to Eland shareholders.

On his part, the Chairman of Seplat, Dr. Bryant Orjiako, said:“Since Seplat acquired its first blocks and commenced production in 2010, we have increased oil and gas production and grown reserves in each year of operation, delivering significant growth and value for our shareholders. We firmly believe that Eland is a complementary fit with Seplat and that there will be enhanced scale and a wider range of capabilities made available to the enlarged group through the combination. This acquisition signals the next step in our journey that will underpin Seplat’s ambition to be the leading independent E&P in Nigeria.”

Similarly, CEO of Seplat, Austin Avuru, said: “We are pleased to have reached an agreement to acquire Eland and its portfolio of assets that will enhance our existing operations. Eland is an excellent fit with Seplat and the combination should achieve for us growth and increased profitability, creating value for our shareholders, employees and other stakeholders while offering an attractive upfront premium to Eland shareholders. The acquisition, made possible by our robust operational platform and headroom in our capital structure, is in line with a key part of our established strategy which is to pursue opportunities in the onshore and offshore areas of Nigeria that offer near term production with cash flow and reserves potential. The acquisition reinforces Seplat’s status as one of Nigeria’s leading indigenous, independent E&Ps and will create a Nigerian E&P champion with the footprint and technical capabilities to further grow and consolidate in Nigeria.”

Boost to Seplat’s Production Potential
Analysts at Meristem Securities Limited said the acquisition of Eland will boost the liquids production of Seplat potential. According to the analysts, in half year(H1) Seplat’s average Working Interest (WI) production was 22,974 bopd of liquids and 145MMscfd of gas, figures which ran off at a tangent to its production guidance of 24,000bopd – 27,000bopd for liquids and 146 – 164MMsfcd for gas. During the same period, Eland pitched in with total production of 1.59MMbbls (average daily production: 9,948bopd).

“Seplat has maintained its 2019 full year (FY) production guidance, as the company is set to ramp up production in second half (H2) by drilling up to seven new production wells at Ovhor, Sapele, Oben and Ohaji South, in addition to one new gas well and a rig-based re-entry of an existing oil well. There are also series of development preparation work at Igbuku and Ohaji South.

Eland, on the other hand, has set production guidance (WI) within the range of 14,000bpd and 17,000bpd. The company has successfully flow-tested two development wells at Gbetiokun (5,400bopd WI), plans two additional wells at Gbetiokun before year end, and intends to sustain production levels at Opuama, while exploring other prospects. We however highlight that YtD average production rate is only 9,948bopd,” they said.

Meristem explained that their base case estimate for combined liquids production is 36,500bopd for 2019FY (on a Working Interest basis), which is 35.19 per cent above the upper limit of Seplat’s FY guidance, and points to some prolific times ahead, even while oil prices are expected to remain subdued into 2020.

New Productive Assets Enhance Reserves
The analysts noted that while Seplat is making substantial investments in gas processing (currently 30 per cent of gross revenues) to diversify its revenue mix and stabilize topline (gas prices are far less volatile, compared to oil), they believe this purchase is still a win for the company and is in tandem with its well-stated objectives of capitalizing on opportunities to increase reserve base.

“It also appears that Seplat is pivoting to an inorganic growth strategy, after years of consistent internally-driven growth. On the back of this acquisition, we expect an uptick in WI 2P (Proven + Probable) reserves to 267.69MMbbls (+18.08 per cent), while we can also count on increases in 3P (Proven + Probable + Possible) and 2C reserves – elongating the overall life of existing oil & gas assets,” they said.

Favourable Pricing for Eland Shareholders
Meristem said in what appears to be an effort at sweetening the deal for Eland shareholders, Seplat incorporated a significant premium into its pricing. They said relative to various benchmarks (including the pre-announcement price cum 3-month and 6-month average prices), acquisition at 166 pence per share was a shrewd bargain for Eland.

“Based on simple fundamentals, we believe that this pricing is justified. Eland’s oil producing assets currently have a Reserve: Production ratio of 12.15. Applying H1:2019 revenue and earnings run rate as a reference point, this amounts to N908.69 billion in revenue and N594.81 billion over the life of the assets, without discounting. By any metrics, this is a decent bargain for Seplat. When we factor in the fact that Eland achieved a Reserve Replacement Rate (RRR) of 188 per cent in 2018FY, the business case becomes even more compelling,” they said.

Strong fundamentals but room for caution
Although there are solid fundamentals and strong potential, the analysts said there should be room for caution. According to them, in H1 2019, both companies recorded modest expansion to their fundamentals.

They said: “Seplat’s overall revenue came in atN108.97 billion, 3.98 per cent higher than the corresponding previous financial period, albeit propped by an auspicious gas tolling revenue of N20.53 billion recognized in the period. Operating income, however, moderated by 11.89 per cent to N42.86 billion on the back of a N12.32 billionn write-off on receivables owed by Nigerian Petroleum Development Company (NPDC) to Seplat , which the company had recognized in previous periods. After-tax earnings for the period was bolstered by a lower effective tax rate of 1.18 per cent to N37.5 billion.

“Eland also showed significant promise – revenue surged by 57.24 per cent N38.15 billion as the company ramped up crude production to 1.60MMbbls. Operating profit was maintained at N14.40 billion. However, bottom-line was pressured by significantly higher finance costs (+193.08 per cent) caused by a considerable fair value loss on derivatives (N1.35 billion) and higher interest & fees (N1.28 billion) on its reserve-based lending facility of N23.40 billion for financing oil and gas assets. Otherwise, the company has only N11.11 billion in net debt. Eland’s net income therefore pitched in at N11.76 billion, lower by 26.89 per cent but constituting 31.36 per cent of Seplat’s H1:2019 net income.”

They added that their outlook on bottom-line growth is however tempered by the fact that Eland exited pioneer status on May 31, 2019.
“After full utilisation of available tax losses, the company would be subject to tax (after deducting losses and capital allowance from adjusted profit) at 65.75 per cent for five years and 85 per cent thereafter, because the company’s operations are carried out via a Joint Venture with the NPDC We also recall that the company declared its first full-year profit in 2018,” they said.

Combined Company Stock to See a Price Rally
According to the analysts, cursory look at the share price history of Seplat and Eland reveals contrasting fortunes. They explained that year-to-date (YtD), Seplat has only lost 3.93 per cent on the LSE but has taken a thrashing on the NSE with YtD losses of 19.22 per cent due in part to the pervasive bullish sentiment on the NSE, and oil price shocks.

“We, however, hold the view that the company’s fundamentals support a much higher pricing. Conversely, Eland was up 19.08 per cent ) as at 14 October. With the announcement, the stock soared to an all-time high of 164.60pence on 15 October (YtD return: 51.71 per cent). On the back of the value-positive expectations of this acquisition, we expect a decent uptick in the share price of the combined company, post-acquisition,” they said.