London is home to lots of high-risk resources companies whose assets look too good to be true. But after a certain point – a premium listing, annual revenues on the way to $1bn (£0.7bn), and half a billion oil-equivalent barrels (boe) of independently assessed reserves, for example – shouldn’t investors be able to look at a big discount to book value, a forecast free-cash-flow yield of 14 per cent and a balance sheet forecast to swing to a net cash position by December, and conclude that there is a value on offer?
Improved balance sheet
Production growth
Discount to net assets
Low-cost output
Country risk
Commodity risk
If so, there’s a case for Seplat Petroleum (SEPL) to move onto investors’ radar. Following a superb set of full-year numbers, and with its shares up 70 per cent over the last 12 months, the Nigerian producer-explorer has tiptoed back toward investment-grade material. We believe there could be more to come in 2018 and beyond.
Of course, markets have memories, and recent memories of Seplat have not been fond. Low oil prices and escalating debts were compounded in 2016, when a spate of pipeline attacks forced Shell to declare force majeure at its Forcados terminal, a key export hub for Seplat’s product. But last June, Forcados restarted, oil prices started to climb, money owed by state-owned NPDC started to arrive in Seplat’s bank account, and average output rocketed to 37kboepd. Net debt dropped from $516m to $141m in the process.
By 2020, analysts at Investec reckon production should have doubled, as output from the core OML 4, 38 and 41 fields is supplemented by additional licences. And although this will require a big step-up in capital expenditure, the broker still expects Seplat to generate $634m of free cash from its operations over that time.
Despite this, the shareholder register suggests doubt. Even if Investec, Standard Life and Jupiter Asset Management occupy the list of largest non-insider owners, the proportion of Seplat shares in institutional hands (around 7.5 per cent) is a quarter that of Premier Oil (PMO) and Nostrum Oil & Gas (NOG). Both have a similar market capitalisation to Seplat and also pay no dividend. Unlike Premier and Nostrum, Seplat’s interest payments will not chew up a disproportionate amount of cash flow.
Of course, funds have rules for investments in companies that operate exclusively in high-risk jurisdictions. To quote the chief executive of fellow in-country operator Eland Oil & Gas (ELA), Nigeria is “always a tough environment” – reflected in the 9.25 per cent coupon attached to Seplat’s recent $350m bond issue. But it’s worth noting that the group can count most of the supermajors (Shell, ExxonMobil, Chevron, Eni and Total) as fellow investors and operators in the country. In other words, high risks can be worth the rewards.
| SEPLAT PETROLEUM (SEPL) | ||||
| ORD PRICE: | 131p | MARKET VALUE: | £771m | |
| TOUCH: | 131-134p | 12-MONTH HIGH: | 156p | LOW: 75p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 4 | |
| NET ASSET VALUE: | 255¢ | NET DEBT: | 9% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m)* | Earnings per share (¢)* | Dividend per share (¢) |
| 2015 | 571 | 87.1 | 12.0 | 12.8 |
| 2016 | 254 | -172 | -29.0 | 3.8 |
| 2017 | 452 | 44.0 | 46.0 | nil |
| 2018* | 696 | 196 | 28.8 | nil |
| 2019* | 900 | 367 | 47.3 | nil |
| % change | +29 | +87 | +64 | - |
| Normal market size: | 3,000 | |||
| Matched bargain rrading | ||||
| Beta: | 0.47 | |||
| £1=$1.40. *Investec forecasts, adjusted PTP and EPS figures | ||||
