Member Info for SeaTank8300

I read that FTSE requires 25% free float for non-UK incorporated companies to be eligibile for inclusion. Without data on the split of free float between London and Nigeria, we can only guess what it currently is, but my guess is likely around 20%, so we might be a few percent off. It may be creeping up slowly, however, as Nigerian owners are buying local and converting their stock to the London line to circumvent currency controls, but how long will that take. We might require a small share issue in London to get it over the line, but that would be dilutive.

Anyway, still, even if FTSE inclusion is a waiting game, this doesn't materially alter the investment case, in my view. Active investors alone can move this.

damofarl, you're taking research seriously, uncovering intrinsic value so far unrecognised by the market, and I certainly concur. I have been invested in SEPL since middle of 2020, but raised my position in SEPL substantially in mid 2021 when I realised that several company-specific near-term catalysts were aligning, alongside my view that the oil market is structurally underinvested so the price of oil should remain supported for decent period of time. I had a target price of 150p+ with oil at $70. Prospects have risen considerably since, first with oil entering what I believe will be an elevated trading band for the medium term, and this spectacular deal with Exxon, which transforms the company. Liquids production will shift up from 30k bopd to something like 120k bopd – quadrupling, overnight, with no share dilution. It’s extraordinary. At current oil prices, $150m EBITDA quarterly will rise to what, $500m quarterly? That’s $2.0bn a year. Frankly, it’s mind boggling. We obviously won’t know until we get to see more detailed financials when the prospectus is published, but it’s not unlikely. Consensus earnings estimates haven’t budged of course, and generally for the oil sector continue to assume $70-80 oil over the longer term; but how likely is that, actually? We could see a sustained period of >$100 oil, quite possibly. Frankly we don’t know, but even at $80 oil the SEPL/Exxon combination is likely to be churning out around $400m quarterly, or $1.6bn a year, against an EV of perhaps $2bn come end of this year. This will surely make SEPL the largest independent oil company in the FTSE, with the lowest valuation multiple by far.

About the share ownership structure, of the 40% or so "free float", hazarding a guess, around half is likely held by Nigerian pension funds and private investors in Nigeria, which can also be discounted as free float from the perspective of the LSE. The Nigerian pension fund system holds around $2.4bn in Nigerian equities, and assuming 5% of that is in SEPL (it’s probably more), this amounts to >$100m value locked in Nigeria, which is >10% of SEPL’s float. That’s just the pension funds - locally owned SEPL stock is significantly more than this, not least because it is one of the few options to local investors to protect their wealth from inflation and FX devaluation. I guess there is no more than 20% or $200m of tradeable stock in London. With liquidity as it is, it will be hard for UK institutions to build a stake unless they are willing to “pay up” for volume/blocks, which I think they will ultimately have to do, because value like this can’t be ignored indefinitely. Presumably SEPL will also enter the FTSE 250 at some point, so passive funds will have to enter. I don’t know if the free float threshold calculation may be an issue, I hope not. In any case – there is a scarcity of stock available and when serious buyers enter, the share price will have to start making progress towards its intrinsic value.

I agree with you that once the market wakes up to this it will move fast. For some context, around 60% of the stock is held by long term holders; the founders and Maurel & Prom hold almost half of the stock. Allay Gray and Sustainable Capital have another 13%. The remaining 40% of the stock is heavily owned by Nigerian pension funds, as Seplat is one of the only true blue chips in Nigeria. So the share is closely owned. Retail trade in the UK alone could move this. Liquidity has seen a steady improvement in recent months on a rising share price, which is a good sign. We have several big catalysts ahead that will drive further value realisation in my opinion.

May 2019, Q1 EBITDA $56m, share price 128p.
May 2022, Q1 EBITDA $147m, share price 128p.

So what's changed since 2019? A proper CEO, much improved corporate governance, a major gas to liquids facility almost complete (ANOH), a high capacity underground pipeline about to be fully operational that will improve yield and improve the reliability of export routes, organic growth opportunities with drilling (not least OML 40), and oh, least we forget, the Exxon acquisition, which will triple EBITDA with no dilution.

128p...!

Agree, the Exxon assets are likely churning out >$1m/day in free cash flow at the current oil price, so the final price paid will reduce by at least this amount daily, hazarding a guess.

There are different definitions of FCF, for example I think most definitions would exclude growth capex and interest payments for example, but if you want to look at the run-rate of cash left over for shareholders after growth capex and interest costs and taxes: quarterly operating cash flow of $179m (as per Q1 figure) minus working capital improvement of $30m, minus $40m quarterly capex (as per management's stated target), minus $15m cost of debt, comes to $94m. Taxes in Nigeria are complicated so to be conservative minus $50m, which leaves $44m, i.e. around $180m annually. If SEPL paid all that out, it would be a 25% yielding stock without compromising any growth from production expansion. Anyhow I think the market usually looks at the less penalising FCF definition, which would place it on more like 40-50% FCF yield. That said, EV/EBITDA is the multiple the market takes most note of, which for SEPL is currently $1,390m/$588m (annualising Q1 EBITDA) = 2.4x, which is a v low multiple for a company that has organic growth drivers. More pertinently still, post acquisition EBITDA will be at least $2,000m at the current oil price presumably (entirely guesswork), which relative to an EV of around $2,400m (assuming an acquisition cost minus profits since 1 Jan 2021 of around $1bn), takes the multiple down to around 1.2x. If one assumes the combined entity trades at a conservative 2.0x EV/EBITDA, that implies 70% upside. Taking it a step further, one year from now presumably debt will have been significantly paid down – that value will all flow to the equity. For instance, if $500m of debt has been repaid, assuming the EV/EBITDA multiple remains the same then the market cap will rise by the corresponding amount (i.e. another 50% upside for the equity at the current market cap). SEPL is cheap, has growth drivers, and pays a solid dividend. The main risk, as ever, is the oil price, but that’s looking a good bet too, currently. As I see it, even if oil prices fall to $70, the current share price level is more than underpinned by operations as they currently stand.

Indeed, the acquisition deposit was a significant cash outflow as per the cash flow statement, otherwise there would have been a significant reduction of net debt

Worth also noting that two dividends are being paid within a relatively short space of time: the Q4 dividend whose ex-date was Friday last, followed by the Q1 dividend which whose ex-date is around end May or first week of June.

Make that Tuesday, obviously!

Total Seeks to Join Exodus of Oil Majors From Onshore Nigeria https://www.bloomberg.com/news/articles/2022-04-28/total-seeks-to-join-exodus-of-oil-majors-from-onshore-nigeria

Underscores that the majors all want to leave Nigeria and Seplat remains in the running for additional assets at fire sale prices

Trading update on Monday I believe - indications suggest no negative surprise awaiting and revenue momentum should show decent progress...

Time for the stock to grind higher in my view. Valuation is attractive, more so given the business model should be largely recession and inflation proof.

Agree Seav

Not a lot of "new" news, but Q1 confirms SEPL's substantial cash generation at $97 oil

Cash generated from operations: $178.7m

Put that in context, after capex but excluding acquisitions, that's around $140m per quarter, $560m annual. That's the market cap of the company equivalent every 620 days :)

The acquisition is 3x the size in liquids production, with NO DILUTION and current high oil prices are reducing the acquisition price every day. In my view the market hasn't grasped this whatsoever.

Also it's really good to hear: Ampuke Escravos pipeline commissioning is imminent, and full year production guidance remains 50k+ bopd. The remainder of the year should see a significant improvement in cash generation from these two all else remaining equal, perhaps 15%+ more of quarterly cash generation.

Negative for me is that old Hedges are being rolled over, but it doesn't really matter - just moves forward the timing of the one-off hit to cash flow (assuming oil stays high)

Anything under £2 is deep value in my view. £4 is a v realistic price target incorporating the acquisition, IMHO.

https://m.marketscreener.com/quote/stock/SEPLAT-ENERGY-PLC-16256802/news/SEPLAT-ENERGY-NOTICES-OF-BOARD-MEETING-BM-NOTICE-39901759/

Results are usually released following the board's meeting/sign-off, slated for Wednesday 27 April

I'm looking for strong cash flow and production improvement.

I doubt they'll raise the dividend, yet, given the acquisition in train.

I'd like to hear formal commissioning of the Ampuke Escravos piepleine, not another delay.

I'd also like to hear about who's going to be the new Chairman, but that announcement will likely come later in May.

Exciting times for SEPL.

I own SAVE too. Been looking at relative valuations between the two. SAVE is trading closer to 2x EV/EBITDA post acquisition, back of fag packet, versus Seplat closer to 1x, I think. A lot of moving parts, so my numbers are sketchy. Anyway, SEPL is a fraction of the valuation for what will be a much bigger and more diversified business. As I said before somewhere, SEPL is an epic trade right now - prodigious cash generation, solid dividend, and half a dozen near term catalysts. Anything under £2 is deep value in my view. A fairer market cap is closer to $3 billion.

There's no political risk here, unless you are referring to delta militants, which is more like hooligan risk. Maybe corporate governance risk, having a dodgy chairman/Founder, but he's about to step off the board, sooner the better.

IMHO poor liquidity is due to institutions who don't trade, either Nigerian holders who have nothing else to buy so are somewhat permanent holders, or others who know how absurdly cheap the stock is. I expect traded volume to improve as the share price rises to something normal, which is in my view £2+.

I've had a look at it. At $70-80 oil the project will generate around $600m annually in revenue I reckon, half of which will be driven by gas (300mmscfd) and half condensate (10,000 kbpd net of government take), and assuming 30% EBITDA margin we might be looking at $180m EBITDA, split between Seplat and NGC, so maybe $90m to Seplat. Maintenence and drilling capex will be not inconsequential but I don't know how much, but assuming $30m annually, and $35m in financing payments, cash generation after taxes may be around $80m, split between the JV partners is around $40m to Seplat. Assuming this is paid out in dividend, it's another 5% to the yield. It's not a game-changer like Exxon, but a nice to have.

I forgot to mention another important catalyst - namely hedges rolling off.

Significant hedges still remain at the $55 level for this current quarter and Q3, but then they're gone - or otherwise replaced by hedges at a much much higher level.

There are so many things to like about this stock and the coming 12 months

For me, the fact that this stock pays a rock solid dividend of 7.7p per share, equivalent to a 6% yield at 130p, safe at even $50 oil, underpinned by a diverse portfolio of oil blocks, just underscores the attractiveness of this stock. But come next year, I fully expect that dividend to be double or triple or even quadruple if the acquisition of ExxonMobil assets receives government approval.

Any views?

Agree, inevitable given oil price, massively accretive acquisition, dead cheap valuation. This is still the London O&G market's best kept secret, but not for much longer.

Great to see momentum ticking up here