Seplat: CardinalStone initiates coverage on stock with ‘buy’ rating

Early mover advantage

Seplat Petroleum Development Company (SEPLAT) is an oil and gas exploration and production company with strategic focus on Nigeria. Seplat has 45 percent working interest in three onshore blocs (Oil Mining Leases 4, 38 and 41), in which the company is the operator and an indirect 40 percent interest in an onshore license (Oil Prospecting Lease 283) in partnership with Pillar Oil Limited.

The assets were secured in 2010, at the peak of the Niger Delta insurgency, well before the recent unprecedented level of divestments of oil and gas blocs in Nigeria by international oil companies (IOCs).

Thus, Seplat was the first indigenous operator to take-over the oil blocs that were sold by the oil majors to indigenous operators and as such the company was able to secure an agreement that gave it the operatorship of the three leases.

Other indigenous operators such as Neconde, Elcrest, ND Western, Afren and Heritage Oil that began operations after Seplat, were not as fortunate, as operatorship was transferred to Nigerian Petroleum Development Company (NPDC). As such, by holding on to the operatorship of the three OMLs, Seplat has been able to build and strengthen its technical expertise.

Consequently, the company was able to ramp up its oil output from 14,000 barrels of oil per day (bopd) in August 2010, to 60,000bopd as of 2013.

Building an indigenous upstream company

Seplat is a leading indigenous upstream energy company in Nigeria, with crude oil production of 60,000bopd as of 2013. Based on management’s guidance, we expect production to grow significantly over the next two years from the current production level to 72,000bopd, 80,000bopd and 85,000bopd in 2014, 2015 and 2016, respectively, and to at least remain sustained at this level through 2020.

The company’s management team possesses considerable technical and operating expertise across the full spectrum of the oil and gas industry, while its pioneer tax status suggests that the company’s earnings will be well supported in the near to medium term.

Given its operating track record and funds derived from its global offering, Seplat is in a good position to make further acquisitions as IOCs divest their onshore assets in the Niger Delta. These divestments represent the single largest opportunity for indigenous Nigerian firms with the requisite expertise, partnerships and capital to ascend into the league of major upstream players in Nigeria.

Valuation

Based on a weighted average of the Net Asset Value and Peer Multiple (EV/2P) valuation methodology, we arrive at a fair value of N830.10, which presents a 24 percent upside to Seplat’s current share price of N671.00.

Thus, we initiate coverage on the stock with a BUY rating. We believe that at current levels Seplat appears undervalued as we have only included the current 2P reserves in our valuation and have not included any impact from the ongoing exploratory efforts, which can strongly uplift the company’s resource base.