Seplat well-placed to pursue acquisitions post COVID-19 and oil market storm – CFO

31 March 2020

West Africa-focused independent oil and gas company Seplat Petroleum is well placed to pursue further acquisitions once there is a return to oil and capital market stability, Chief Financial Officer and Executive Director Roger Brown said.

West Africa-focused independent oil and gas company Seplat Petroleum is well placed to pursue further acquisitions once there is a return to oil and capital market stability, Chief Financial Officer and Executive Director Roger Brown said.


In December, Seplat completed the acquisition of its smaller peer Eland Oil and Gas for 166p per share, or GBP 392m. The Seplat and Eland teams had known one another since their inception, and the acquisition of Eland was the next logical step for Seplat, Brown said.


Eland had success developing and drilling prospects, with an excellent technical team in Aberdeen, and the transaction is economically viable at USD 30/bbl, he said.


The acquisition provides a number of synergies for Seplat, especially on OML 40, and with Eland’s access to the Escravos pipeline, he said.


The company is now in the process of integrating teams, as well as cutting the capex programme across the combined group to maintain financial discipline given the oil price crash and the COVID-19 crisis, he said.


Through 2019, Seplat drilled five wells and saw average production of over 45kboepd, Brown noted.


However, while the company set out its 2020 budget in October, it has now cut back its planned exploration well programme from 16 wells to three.


In the week beginning 9 March, oil prices fell from around USD 45/barrel to around USD 35/barrel following failed production-curbing agreements between OPEC and Russia and a slowdown in demand due to coronavirus, with Brent crude today trading at below USD 30/barrel.


Nigeria, the country of chief focus to Seplat, has reacted proactively in regard to coronavirus, with widespread lockdowns, having learned lessons from the Ebola crisis, he said. Seplat itself is resilient, with cash at year-end of USD 333m and low cost of production of USD 6.20/boe, he said. The company has maintained its dividend.


Acquisitions remain a key part of Seplat’s strategy as it develops, however, the bottom of this market and the eventual supply and demand balance, are still unclear, Brown said. Current market volatility hampers deal making, but at some point the oil price will recover, he said.


Seplat has always sought to pursue potential divestments by oil majors in the region, and these may become more critical now for such vendors, he said.


When the oil price and market stability returns, Seplat would look at West African, mainly Nigerian, onshore or shallow water targets, he said.


These could be corporate or asset acquisitions. Seplat would prefer, but is not limited to, acquiring operated positions, he said.


The company would look at production and development assets, but exploration is less relevant at this point in the cycle, he said.


Seplat needs to be able to create value from any acquisition, either through the target being undervalued, or through the capacity to convert contingent resources into reserves, he said.


The export route is also a key consideration, he said. This needs to be commercially viable and cost effective.


If the company were to pursue a production acquisition, it would look at sensible lines of debt funding, and assess how quickly it can replace that debt, he said.


The company is receptive to acquisition target pitches, though it is usually familiar with most opportunities in its region of focus, Brown said.


Gas hubs and clubs


Seplat is looking to build itself into a regional domestic gas play and is particularly well positioned for such acquisitions in Nigeria, given its success with monetising long-term contracted gas, which is de-linked from the price of oil, Brown said.


Gas supply is critical in Nigeria for economic and environmental reasons, however, many upstream assets have not been developed from a domestic gas perspective, he said.


Earlier this month, Mergermarket reported that Seplat was among a number of parties participating in the sale by Chevron [NYSE:CVX] of its 40% stakes in gas-heavy OMLs 86 and 88. Brown declined to comment on any specific transactions.


Gas acquisitions are very interesting for Seplat, he said, which looks to consolidate the space and create hubs, such as its Oben hub that supplies Abuja and Lagos.


The equity component on any acquisitions could be around USD 300m, he said. It would look to leverage a deal typically at a ratio of between 50/50 to 25/50 equity-to-debt, therefore allowing a total EV of deals of between USD 600m-USD 800m.


However, Seplat is also very keen to partner in consortium with others to pursue larger deals, he said.


If a target is in Nigeria, Seplat brings its local experience of approvals and operating excellence to the table to complement any partners unfamiliar with the country, he said.


In 2018, a consortium of Seplat, Glencore and Maurel and Prom vied with Africa OilVitol and Delonex to acquire a 50% stake, worth USD 1.5bn, in the Petrobras Oil and Gas BV joint venture, as reported by Mergermarket.


The sub-surface asset quality in Nigeria is high, but the above-ground risk is more difficult, Brown said, so partnering with a local company creates a lot of value.


Nigeria remains globally competitive in terms of opex/barrel amid a lower oil price environment, he said. It is not as cheap as the Middle East, but cheaper than US shale and the North Sea.


Seplat shares this morning (31 March) were trading at 57.50p, giving it a market capitalisation of GBP 338.36m.

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