Equity Analysis /

Seplat: Initiation – Gas production and export-route diversification to drive growth

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    4 September 2019
    Published by

    We initiate coverage on Seplat with a Buy rating, a TP of NGN1,347 and an ETR of 250%. Our bullish view on the Nigerian oil and gas entity is based on: 

    1. The company’s balance sheet strength, characterised by a robust net cash position and a sizeable capital allowance (US$426mn on balance sheet at the end of H1 19), which should support organic and inorganic production growth. 
    2. Its growing gas business, with the Assa North/Ohaji South (ANOH) development that should continue to diversify the company’s revenue and cash flow generation. 
    3. Its recent efforts to diversify its oil export routes, which will increase the resilience of its operations. The company currently trades at a forward EV/EBITDA of 1.5x, representing a 28% discount to its 5-year historical average.

    Balance sheet strength should support medium-term production growth. We believe the significant improvement in Seplat’s debt profile should enable the company to capitalise on inorganic growth opportunities as they arise, while also allowing it to maximise production and cash flow from operated assets. Management has guided to the drilling activities in H2 19 contributing to the 2019f exit production of 62,000 boepd, from 48,004 boepd at the end of H1 19. 

    ANOH – Seplat’s next growth phase. We believe the next growth phrase in Seplat’s gas business will be the ANOH gas and condensate development, which should allow the company to monetise its 0.73 Tscf 2P working interest gas reserve at OML 53. Based on management projections, we expect the ANOH project to boost the contribution of the gas business to 23% of total revenues in 2021f, from an average of 19% over 2018-20f. Also, Seplat’s share of profits from the joint venture could contribute as much as 200bps to ROE from 2021f onwards, while there will be gains to cash flow from potential dividend payout.

    Diversified export route key to operational strength. Seplat aims to have three possible routes for the evacuation and exportation of its oil production by the end of 2019. The Amukpe to Escravos export route is expected to come on stream in Q4 19, and will become the company’s primary export route for liquid production from OMLs 4, 38 and 41. The Forcados pipeline and barging through the Warri Refinery will also remain options. This diversification should minimise the company’s reliance on a sole third-party’s infrastructure and improve its operational resilience by reducing production downtime. Furthermore, the Amukpe to Escravos pipeline will have lower reconciliation losses (estimated at 6% against 10-12% at the Forcados terminal), which could increase revenue growth by as much as 80bps over the medium term while also adding 30bps to EBITDA margin and 60bps to ROE based on our estimates. It should also be a safer mode of transportation given that it will be 15km underground, making it more difficult to be breached.

    Key risks to our outlook and valuation include: 1) volatility in crude oil prices; 2) a resurgence of insecurity and sabotage in the Niger Delta; 3) sustained liquidity constraints in the power sector, which limits gas demand; and 4) execution risk relating to the timely completion and cost of the ANOH project.