Earlier this week, Seplat Energy made headlines that it was caught in the middle of yet another court case, having only recently resolved the Cardinal Drilling case with Access Bank. This time around, the oil and gas producer finds itself entangled in a US$78mn debt case initiated by Zenith Bank against the debtor — Shebah Exploration and Production Company Limited — and the loan guarantors — Shebah Petroleum Development Company Limited and Dr Ambrosie Orjiako.
Orjiako holds substantial interest in the two companies. He is also is the co-founder and Chairman of Seplat with a 6.4% stake, while Shebah Petroleum Development Company Limited holds 2.6%. This makes the two companies and Orjiako related parties to Seplat.
As a result, Zenith Bank filed for an ex-parte Mareva injunction, which restricts Seplat from business dealings with the three defendants. Seplat is one of five companies with links to the defendants that are now part of this injunction.
Impact on Seplat's operations
Shebah Petroleum Development provides third party consulting services to Seplat. However, the injunction is not expected to have any significant impact on Seplat's operations, according to the company's management.
Liability for Seplat
As it stands, Seplat is not liable to Zenith Bank. Also, unlike the Access Bank case, none of Seplat's cash held by Zenith Bank has been seized yet. However, given the unexpected US$36mn settlement in the Cardinal Drilling case, we cannot completely rule out the likelihood of future liability obligations as the court case evolves, given that the three companies involved are related parties to Seplat.
We will continue to monitor developments in the case, but at this point, we do not think the case warrants a discounting to our valuation of the company. At 9M 21, Seplat held US$144mn in net operating cashflow and total unrestricted cash of US$220mn, showing a healthy cash position and a sturdy balance sheet. We also think the company's current management is well able to run the company's affairs.
Having said that, the reoccurring debt issues with the company's Chairman Orjiako is starting to raise corporate governance concerns. It will not be surprising if these concerns bring up discussions on a possible replacement and/or a reshuffling of the board to mitigate these risks. Even though the board made a resolution in March this year to eliminate all related-party transactions by the end of 2021 and adopt a strict definition of what "Related Parties" mean (per standards in Nigeria), we do not think this will be sufficient to completely shield the company from the credit risks in these related entities, especially when the court finds them liable.
We have a Buy recommendation on the stock with target price of GBP1.9 and NGN1,076. Since the news broke on Monday, the stock has lost 4% of its price in London, while it has been flat in Lagos.