The decision by Seplat Petroleum Development plc to acquire London-listed independent exploration company Eland Oil & Gas for $484 million is expected to show other local players how to take advantage of current wave of investment opportunities as International Oil Companies (IOCs) divest from onshore to offshore assets.
The deal will give the combined business greater scale in production and reserves, with the combined oil production set to increase to 38,000 barrels of oil per day (boepd) for the enlarged group. Factoring in Seplat’s gas production, total production is expected to grow to 64,000 boepd.
The acquisition is scheduled for completion at the end of 2019.
The two entities will continue to run separately in 2020 (but with consolidated financials) and then a full integration of the entities in 2021 as the deal is being wholly funded through a combination of existing cash resources of Seplat and a new loan facility available to Seplat.
The deal underscores the viability of Nigeria’s growing indigenous onshore oil industry as most of the majors have been rapidly divesting their assets in the volatile Niger Delta region in favour of bigger – and more secure – offshore blocks, a development which Seplat Petroleum has taken advantage of.
According to sources, this is due mainly to a combination of reasons ranging from ageing Joint Ventures (JV) assets to crude oil theft, insecurity, hostility from host communities, increasing costs of oil and gas projects and unfavourable government policies.
Adeoluwa Eweje, an international oil and gas expert with an understanding of Nigeria’s oil and gas sector said the only way for other indigenous players to pull this kind of Seplat’s deal is to improve on their internal governance structures while embracing operational best practices.
“Its dual listing on London Stock Exchange (LSE) and Nigeria Stock Exchange (NSE) among several other factors put Seplat in a favourable position, which is why they are trying to consolidate on their assets,” Eweje said.
Eweje noted that due to recent stability in the Niger Delta region, Nigeria will continue to see renewed interest from investors while local companies with better internal structures will be able to take advantage of this opportunity.
“If local players can fix their internal structures right and be more transparent they would seal likewise deals like Seplat,” Charles Akinbobola, an energy analyst with Sofidam Capital said. International Oil Companies (IOCs) account for more than 70 percent of the nation’s daily crude production.
Seplat’s CEO Austin Avuru said that the acquisition is in line with a key part of Seplat’s established strategy to pursue opportunities in the onshore and offshore areas of Nigeria that offers near-term production with cash flow and reserves potential.
“This acquisition signals the next step in our journey that will underpin Seplat’s ambition to be the leading independent E&P in Nigeria,” Bryant Orjiako, chairman of Seplat, said.
According to the transaction timetable and conditions, the deal will be tabled before shareholders of Eland at the court-ordered meeting and at the general meeting and must be approved by a majority in number of the shareholders voting at the Court meeting, either in person or by proxy, representing at least 75 percent in value of the Eland shares voted.
The deal is expected to see Seplat gain Eland’s 45percent operating stake in licence OML 40 onshore asset in the Niger Delta where continuous drilling on both Opuama and Gbetiokun has led to OML 40’s average net production increasing for five consecutive half-year periods with average net production of 9,948bopd seen during the first half of 2019.
“It’s more profitable for IOC to sell onshore assets to smaller companies rather than keeping it and paying heavily for them,” Abayomi Fawehinmi an oil expert in a Lagos based oil firm said.
Eland also has had plans to drill an exploration well at the Amobe prospect in the licence later this year, as well as an appraisal at the Abiala discovery, a development which is expected to favour its new owner Seplat.
In addition, Seplat is expected to takeover Eland’s 40percenty interest in the Ubima licence that is now estimated to hold 9.3 million barrels of proven and probable reserves after a resource upgrade earlier this year.
ARM Securities Limited also estimates Seplat’s 2P liquids reserves to increase by 41 million barrels to 268million barrels, with its 2P Oil Reserves and 2C Oil Reserves expected to increase by approximately 65 million barrels to 330 million barrels, bringing total oil and gas reserves to 626 million barrels of oil equivalent.
“We see this playing out positively for Seplat’s shareholders, given potential boost to Earning per Share (EPS) on the long term. This, in addition to upcoming ANOH gas project further boosts the upside on our fair value estimates FVE on Seplat of N828.90 which is a 69 percent upside from current pricing,” ARM Securities Limited said.
However, ARM Securities Limited acknowledges that the acquisition is likely to place a strain on Seplat’s 2019E cashflows and dampens forecast dividend of $0.14 and dividend yield of 10 percent.
Eland reported an operating profit of $40m on record revenues of $106m, up from $67.4m in the previous year. Founded in 2009, the company is focused in the Niger Delta region. Seplat currently supplies about a third of Nigeria’s power generation gas, while the combined entity will be mainly focused on the West Delta.
Seplat’s new acquisition serves as a reminder that between 2010 and 2018, a number of indigenous companies including Starcrest Energy, Aiteo, Oando, Seplat, Eroton, First E&P, Neconde, Midwestern, Notore Lekoil, PanOcean, Newcross and Shoreline wrote billion-dollar cheques in their scramble for assets divested by major multinational oil firms which have recorded mixed performance.
DIPO OLADEHINDE
