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I've been looking fairly closely at North Sea operators for a long time, as there are many flagwavers out there for these stocks. While I don't deny that there is value around, I don't see the risk-reward stacking up any better than SEPL. I'm often told by fans of North Sea oil that SEPL is interesting but the Nigeria risk is a problem for them. I find that interesting, as from where I'm sitting I see quite the opposite.
My points would be:
- North Sea oil suffers from ongoing political risk - the windfall taxes imposed on operators have been phenominal, and we are about to enter a Labour government who are vocal about their hate for the fossil fuel industry. I only see risk of further taxation ahead, removing a big part of the Free Cash Flow argument for these stocks.
- The North sea and its producers have short lifespans - they have little by way of reserve life, and without incentives to grow reserves. The tax and political system is against them, the ESG lobby is hammering them, and investors are not interested either. These businesses are managing decline; by nature they are a shrinking business. They can only be valued by DCF; multiples don't work. Truth is, they are limited life businesses.
- North Sea oil production is deep water and, most, being late life resevoirs, are complex in geology and extraction - these are real operational risks. We have have seen North Sea producers wiped out overnight because a resevoir has dissappointed catastrophically during the twilight of their life.
Whereas.... Nigeria, and Seplat in particular, in my view, have a much more attractive risk profile:
- The government of Nigeria is deeply incentivised to support growth in production, as oil represents the vast majority of fiscal revenue, and that won't change, not in our lifetimes. Tax incentives are designed to encourage reinvestment of cash generation into growing production; the tax system is therefore in support of industry growth and industry profit. The political risks are minmal.
- The security issue around oil is one about corruption and state complicity in this - this unhappy balance may improve one day, but it will not destory the industry, as key players are reliant on the industry's survival to steal from it. Currently, efforts are underway to incentivise those militias that steal to instead protect. We will see. SEPL, for its part, has a track record in localising employment opportunities in the vicinity of its operations to bring communities and mafias onside. They have a track record of success, going back years and years. Moreover, their AEP (pipeline) is secure transit infrastructure underground, much reducing any risk of pipe damage and downtime.
- SEPL's onshore assets have 25 years+ of life, multiples of North Sea, and without the complexity. MPNU's shallow water assets are shorter in reserve life but not complex either. These assets offer growth in production, not managed decline. A low valuation multiple is much closer
A low valuation multiple is much closer to the truth, with SEPL. Actually it is truth. These production figures can be sustained.
Finally, SEPL's midstream gas business is an infrastructure business, de-linked from the price of oil. This business has decades of reserves and delivers to commercial customers on long term contracts at a negotiated yet fixed price levels. This business, as it grows, provides a stable income stream, which deserves to be valued at a much higher multiple than an oil E&P. The future upside of MPNU is taking MPNU's shallow water gas reserves and exporting them under long term contract at fixed prices as LNG. This business could be worth a fortune, if it materialises.
Hi SeaTank
I see Nigeria as far more investor friendly than the UKCS! For those reasons that you point out and sold UK oilies a long time ago in favour of SEPL and SAVE. I sold Save, fortunately after a multibag before the last suspension and put it all in here!
The biggest risk imo is the bandits/local mafias but these are being onboarded with community employment, investment and local security.
On the global stage everyone wants to be Nigeria’s friend with its youthful demographic and high growth economy! Russia, China, The West and India. Nigeria seem happy to play all sides and none at all!
A good SP rise today now through 140 as predicted!
Could well see a gradual 100p rise from here and a 100% increase in the dividend if that divestment lands.
99%! lol!
Usual caveats
Trek
Agree Trek. If Roger has his way, MPNU will be a sizeable exporter of LNG to the world on long term contract. So much to look forward to, meanwhile we are paid to sit on hands while picking up an 8.6% divdiend yield paid quarterly!
So is this it ? The spike upwards in Seplat's market capitalisation due to the acquisition we've all been waiting for, or a higher dividend being declared. We'll see.
Patting my own back tonight...
I've had one of those rare trading two days where the plan went well ! Sold all my stake in Seplat at 136 yesterday, bought Dec at 848, sold this morning gaining 8%, bought the original shares back and more in Seplat first thing this morning , along with more UKW and lowered my DEC average, now Seplat is up by over 4% on the day. A well needed bottle of wind with the Mrs tonight )) Cheers and GL all.