Capital Bancorp Plc (Member of The Nigerian Stock Exchange)

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1 Capital Bancorp Plc (Member of The Nigerian Stock Exchange) EQUITY RESEARCH REPORT SEPLAT PETROLEUM DEVELOPMENT COMPANY PLC December 4, 2014 Recommendation BUY Target Price (N) N453.95/$2.70 Current Price N380.00/$2.26 Upside/(Downside) 19.46% CBN Rate: N Company Statistics Date of Incorporation June 17 th, 2009 Date of Listing April 14 th, 2014 Year End December Sub-Sector Exploration & Production Market Cap.(Bn) N210.26/$1.25 Outstanding Shares 553,310,313 Outstanding Shares 492,778,000 (Weighted) 52 Week High/Low(N) / Week High/Low($) 4.29/2.26 Trailing EPS ($) 1.38 Trailing P/E(x) 2.25 PBV(x) 1.69 NAPS N286.19/$1.70 ROA (%) ROE (%) Dividend Yield 4.21% HIGHLIGHTS SEPLAT is an independent oil and gas company incorporated on June 17, 2009 in Nigeria, with a strategic focus on Nigeria. In July 2010, it acquired a 45 percent. participating interest in, and was appointed operator of, a portfolio of three onshore producing oil and gas leases located in the Niger Delta (OMLs 4, 38, and 41). It was re-registered as a public limited company on October 3, The Company was granted the pioneer tax status incentive by the Nigerian Investment Promotion effective from January 1 st, 2013, for a five-year period. For the period the incentive applies, the Company would be exempted from petroleum profits tax on crude oil profits, corporate income tax on natural gas profits and education tax. On November 29 th, 2013, SEPLAT (together with the other members of a consortium) entered into a sale and purchase agreement with Chevron Nigeria Limited to acquire a 40 percent - participating interest in OMLs 52, 53 and 55 for a total cash consideration of US$800 million. Historical performance analysis shows that SEPLAT has consistently registered a modest Year-on-Year top line growth averaging % on a 4-Year Compounded Annual Growth Rate (CAGR). The Company s PBT and PAT also increased by % and % over a 4-Year period. However, the recently released unaudited 3rd Quarter result for the period ending September 30, 2014 shows that Turnover went down by 7.85% to $592.47mn (N92.01mn). PBT came down by 34.78% to $227.94mn (N35.40mn) while PAT depreciated by 48.46% to $227.94mn (N35.40mn). For the year ending 31 December 2014, the Company has established a core dividend which is expected not to be less than US$0.10 per share. SEPLAT had already paid US$0.06 as an interim dividend, which forms part of the core dividend. We arrived at a fair value for the shares using the Peer Multiples Approach. We arrived at a Fair Price of N453.95/$2.70. We therefore place a BUY recommendation on the shares. Valuation was done in USD and translated to Naira at N to a dollar Financial Highlights Q3, 2014 $ 2013 $ 2012 $ 2011 $ 2010 $ Turnover ('000) 592, , , ,320 83,935 PBT ('000) 227, , , ,458 9,466 Net Income ('000) 227, , ,099 53,424 13,018 EPS DPS N/A NAPS Shareholders Funds ( 000) 1,418, , , ,774 53,350 Contact: research@capitalbancorpng.com +234(1) CBP Equity Research Page 1

2 SEPLAT s exploration strategy includes pursuing identified exploration prospects on existing properties and the acquisition of seismic data where necessary for prospect identification and evaluation. BACKGROUND INFORMATION SEPLAT PDC PLC is an indigenous, independent oil and gas Company incorporated on June 17 th, 2009 to take advantage of the opportunities created within the oil and gas industry in Nigeria, particularly the divestments of the International Oil Companies (IOC) assets. In July 2010, it acquired a 45% participating interest in three producing assets (OMLs 4, 38 and 41) from Shell and was appointed operator of these portfolio of three on-shore producing oil and gas leases located in the prolific western Niger Delta basin of Edo and Delta states. Since its acquisition of a 45 percent participating interest in OMLs 4, 38, and 41, the Company s management team has achieved a consistent increase in production from approximately 13.9 Mbbl/d gross operated oil production in August 2010 to 61.7 Mbbl/d at 31 December On 1 June 2013, Newton Energy, a wholly owned subsidiary of SEPLAT reached an agreement with Pillar Oil to acquire (subject to the consent of the Minister of Petroleum and receipt of any other necessary government approvals a 40% participating interest in the Umuseti/Igbuku Fields (OPL 283) (a nonoperated asset). The Company has continued to deliver growth holistically since inception in line with our strategy. Operated crude oil production has grown significantly over a 3-Year period ( ), from 11.5 million barrels in 2011 to 18.8 million barrels in 2013, with an exit gross production rate at 31 December 2013 of 61.7 thousand barrels per day. In the short term, the Company is targeting gross production from its current producing fields to grow to approximately 73 Mbbl/d by the end of 2014and approximately85 Mbbl/d by the end of 2016 The Company, through successful bids, acquired a 405 participating interest in the Umuseti/Igbuku fields (located within OPl283) with Mbbl of working interest 2P Reserves and a 40% participating interest in OML 53, which is yet to be completed due to legal proceedings brought by an unsuccessful bidder. The Company is also working on a number of other acquisitions targets to grow its reserves on an ongoing basis. SEPLAT has grown to be one of the leading indigenous E&P operators in Nigeria with gross operated oil production from OMLs 4, 38 and 41 of 11.5 MMbbl for the year ended 31 December 2011, 12.1 MMbbl for the year ended 31 December 2012 and 18.8 MMbbl for the year ended 31 December 2013, equivalent to an average daily production of 31.4 Mbpd for 2011, 33.1 Mbpd CBP Equity Research Page 2

3 On June 1 st, 2013, Newton Energy limited (Newton Energy), a wholly owned subsidiary of SEPLAT, acquired from Pillar Oil Limited (Pillar oil), a 40 percent participant interest in producing assets, the Umuseti and Igbuku marginal field area located in OML 56. for 2012 and 51.4 Mbpd for 2013, of which its 45 percent, working interest share was 5.2 MMbbl for 2011, 5.4 MMbbl for 2012 and 8.4 MMbbl for Gross gas production from OMLs 4, 38, and 41 was 41.9 bcf for the year ended 31 December 2011, 36.3 bcf for the year ended 31 December 2012 and 36.2 bcf for the year ended 31 December 2013, equivalent to an average daily production of MMscfd for 2011, 99.3 MMscfd for 2012 and 99.0 MMscfd for 2013, of which SEPLAT s working interest share was 18.9 bcf for 2011, 16.3 bcf for 2012 and 16.3 bcf for SEPLAT GROUP STRUCTURE During 2013, the Company incorporated four new subsidiaries that are wholly owned subsidiaries of SEPLAT. 100% Ownership SEPLAT Petroleum Development Company UK Limited (Seplat UK) 100% Ownership 100% Ownership SEPLAT Petroleum Development Company Plc 100% Ownership SEPLAT intends to continue development of its existing properties by improving operational efficiencies, investing in facilities and infrastructure to increase oil production and positioning itself to further monetize natural gas resources. SEPLAT Gas Company Limited(Seplat Gas) SWOT ANALYSIS Strengths: SEPLAT East Onshore Limited (Seplat East) SEPLAT East Swamp Company Limited (Seplat Swamp) - Experienced management team with extensive experience of working in Nigeria in recognized E & P companies - Well Diversified business structure - Well capitalized as a result of the just concluded issue - Increased production beyond the 51.4 thousand bpd threshold - Growth Prospect in both Oil and Gas businesses - Exemption from taxes over the next five years will further enhance its profitability and dividend payment CBP Equity Research Page 3

4 Weaknesses: - Pricing of assets has seen the Company lose out on acquisitions Opportunities: - Actively pursuing a number of new venture opportunities that offers near term production, cash flow and reserve replacement potential - SEPLAT plans to invest approximately $ mn over the next four years to increase its gross capacity to deliver approximately 300 MMscfd of sales gas to the domestic market by the end of The acquisition of a new build gas plant located in Abu Dhabi, UAE, with a phase one capacity of 150 MMscfd ( which can also be increased in two further phases by the addition of a 150 and a 75 MMscfd capacity modules) will be put into use by Q1, Targets to increase its oil gross production in the short term from its current producing fields to approximately 73 MMbbl/d by the end of 2014 and approximately 85 MMbbl /d by the end of Unbundling of power assets should stimulate demand for Gas and bring about efficient gas pricing structure - SEPLAT plans further acquisitions of additional upstream assets whether by acquiring new OMLs or entering into farm in agreements so as to grow its reserves in an on-going basis. Threats: - Drop in Global Crude Oil price. - Oil vandalism, kidnapping and crude oil theft. - Advancement of shale oil and gas in the United States and the development of non-conventional oil have created significant additional supply in the global market - Non-passage of PIB is creating much uncertainty in the industry. - Exchange rate risk exposure - Continuous depreciation of the Nigerian currency - The Company is faced with stiff competition from both indigenous and foreign E & P Companies. DIRECTORS INTERESTS IN SHARES Directors interests in the share capital of the Company as at September 30th, 2014 were as follows: Director Position Holdings Mr. A.B.C.Orjiako Chairman 84,736,913 Mr. Austin Avuru CEO 73,297,011 Mr. Michel Hochard Non-Executive Director NIL Mr. M.Agbada Ofurhie Non-Executive Director 4,806,373 Mr. M Richard Alexander Senior Independent Non-Executive NIL Director Mr. W.Stuart Connal COO 1 Lord M.Malloch-Brown Independent Non-Executive Director NIL Dr. Charles Okeahalam Independent Non-Executive Director 400,000 CBP Equity Research Page 4

5 Mr. Roger T. Brown CFO 1 Mr. Basil Omiyi Independent Non-Executive Director 400,000 Mrs. I.Omoigui Okauru Independent Non-Executive Director NIL Mr. Damian Dodo(SAN) Independent Non-Executive Director NIL ANALYSIS OF FINANCIALS Trends in Turnover and Earnings Growths SEPLAT has maintained a good positive turnover growth momentum in the last four years. The Company grew its top line from $83.94mn in 2010 to $880.23mn in 2013, representing a % Compounded Annual Growth Rate (CAGR). Though Cost of Sales (CS) increased by 91.57% over a 4-Year period, the Company s Gross Profit still went up from $37.78mn in 2010 to $549.28mn in The Company s bottom line growth was also in the Northern region as Profit Before Tax (PBT) went up by 54.75% in 2013 to $457.52mn from $295.66mn in Profit after Tax (PAT) went up by % over the four years and up by % from $109.10mn in 2012 to $550.27mn in However, the unaudited Q3, 2014 results recently released by the Company shows that Turnover went down by 7.85% to $592.47mn in Q3, 2014 from $642.94mn in the corresponding period. PBT and PAT for the quarter also came down by 34.78% and 48.46% respectively. The drop in the bottom line figures could be attributable to the increase in Operating Expenses (OE), without corresponding increase in the topline, and Finance Charges (FC). OE increased by % from $44.28mn in Q3, 2013 to $112.24mn in the corresponding period of Year-on-Year, Return on Equity (ROE) has been impressive. ROE went up from 24.40% in 2010 to 75.15% in 2013, representing 40.14% CAGR. However, ROE dropped by 77.32% in the Q3, 14 to 16.07% as against 70.86% recorded in the corresponding period of 2013.Return on Assets (ROA) went up from 12.12% in 2012 to 41.76% in However, ROA dropped from 39.86% in Q3, 13 to 9.66% in the corresponding period of CBP Equity Research Page 5

6 Liquidity and Solvency The Company s liquidity trend has been impressive in the last four years. The level of current assets maintained in 2010 could only cover 36.16% of its current obligations. This however, went up to % in Without taking the inventories into consideration, SEPLAT s current assets were % of its current liabilities in The Company has continued to maintain high cash and short term deposits balances, inching up from $154.33mn in 2012 to $169.46mn in 2013.As a corollary, the Company could pay off only 38.42% of its current liabilities with its most liquid asset. An analysis of the cash flow statement shows that the Company has a positive net cash flow from operating activities. From $50.97mn in 2012, the net cash flow went up to $291.21mn in Capital Structure SEPLAT s Shareholders funds grew from $53.35mn in 2010 to $732.20mn in 2013, representing a CAGR of %. Total Assets also grew by 35.09% from $529.56mn in 2010 to $1,317.56mn in The Company s level of efficiency in its asset utilization has been impressive. Total Assets Turnover ratio went up from 0.16x in 2010 to 0.69x in 2012 before declining marginally to 0.67x in Similarly, Current Assets Turnover ratio improved from 0.59x in 2010 to 1.41x in This implies that the Company has been fairly efficient in its use of its assets. Moreover, SEPLAT s operational costs CBP Equity Research Page 6

7 thread a growth path of % CAGR, as Opex-to-Sales ratio averaged 9.56% from 2010 to The Total Assets of the Company were financed by a mix of Equities and Liabilities in the proportion of 55.57% and 44.43% respectively. The Total Debt Ratio, which is a proportion of the Company s total assets financed by long and short term liabilities went down to 44.43% in 2013 from 79.80% in The Company recently raised $535 million through IPO and part of the proceeds was used to pay down debts. The Company has a good working capital position over the years except for the negative position of $252.30mn recorded in In 2011, the working position stood at $60.32mn and this went up to $181.91mn. Besides, the current ratio and quick ratio as at December 31 st, 2013 stood at 1.41x and 1.31x respectively. The Short- Term Liabilities stood at $441.09mn, accounting for 75.35% of the total liabilities, while long term liabilities stood at $144.27mn, representing 24.65% of the total liabilities. VALUATION, ASSUMPTIONS AND RATINGS We valued SEPLAT s shares using the Composite of Peer Multiple approach (P/E, EV/EBITDA and Maintainable Earnings Approach Peer Multiples P/E Multiple We computed the P/E ratio of the appropriate peer set for SEPLAT, with the peers arrived at using a number of criteria. The peer set consists of publicly listed exploration and production Oil & Gas Companies, obtained from Bloomberg. Using this peer set, we arrive at an average P/E Multiple of 6.72x. Company Name Mkt. Turnover Enterprise Price Cap ($ mn) Value Earnings ($ mn) ($ mn) Ratio (x) Dragon Oil Plc. 4, , , Enquest Plc. 1, , Premier Oil Plc. 2, , , Afren Oil 3, ,927 1, Ultra Petroleum Corporation 3, , Source: Bloomberg CBP Equity Research Page 7

8 Using a Projected 2014 EPS of $0.38, we arrived at a value per share of N429.00/$2.55. Applying Enterprise Value EV/EBITDA multiple of 1.71x, a Market Capitalization of $1,522.26mn., a long-term debt of $120.85mn and Cash & Cash equivalent of $169.46mn, we arrived at N482.52/$2.87 per share using EV/EBITDA multiple. The Maintainable Earnings Approach generated N500.25/$2.98after discounting the earnings over four years by adjusting for inflation and applying weights to the earnings... We arrived at a Fair Price of N453.95/$2.70. We therefore place a BUY recommendation on the shares. Premised on the above analysis, coupled with appropriate consideration of comparable pricings and attached weights, our Fair Value for SEPLAT gives N453.95/$2.70. This implies that the current price is at 16.29% discount to valuation. We therefore place a BUY recommendation on SEPLAT Petroleum Development Company Plc. Ratings Specification BUY: Fair value of the stock is above the current market price by at least 15 percent HOLD: Fair value of the stock ranges between -15 percent and 15 percent from the current market price. SELL: Fair value of the stock is more than 15 percent below the current market price. CBP Equity Research Page 8

9 SEPLAT PETROLEUM DEVELOPMENT COMPANY PLC S KEY RATIOS RATIO ANALYSIS Growth Performance Turnover Growth % 38.38% 40.94% Operating Profit Growth % 83.94% 45.12% Pre-tax Growth 1,531.71% 91.41% 54.75% Post-tax Growth % % % Total Assets Growth 26.74% 34.12% 46.37% Shareholders' Funds Growth % 70.33% % Profitability Operating Margin 39.73% 52.81% 54.38% Pre-Tax Margin 34.22% 47.34% 51.98% Net Profit Margin 11.84% 17.47% 62.51% Return on Equity (RoE) 50.03% 59.99% 75.15% Return on Asset (RoA) 7.96% 12.12% 41.76% Operating Efficiency Cost-Income Ratio N/A Asset Utilization Rate Current Assets/Turnover Liquidity Current Ratio Acid Test Ratio Operating Cashflow/EBIT Debtors Collection Period (in days) Inventory Holding Period (in days) Long-term Stability Debt-Equity Ratio (0.56) CBP Equity Research Page 9

10 Disclaimer & Disclosure The value of any investment is subject to fluctuations, i.e. may arise and fall. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of investment to increase or decrease. Hence investors may not get back the full value of their original investment. This document is not an offer to buy or sell any security. This document does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment will depend on an investor s individual circumstances and objectives. The investments and shares referred to in this document may not be suitable for all investors. This document is based on information Capital Bancorp Plc received from publicly available reports and industry sources. Capital Bancorp Plc may not have verified all of this information with third parties. Neither Capital Bancorp Plc nor its advisors, shareholders, directors or employees can guarantee the accuracy, reasonableness or completeness of the information received from any sources consulted for this publication, and neither Capital Bancorp Plc nor its advisors, shareholders, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document. This document is not to be relied upon and should not be a substitute for the exercise of independent judgment. This document includes certain statements, estimates and projections with respect to the anticipated future performance of securities listed on the Nigerian Stock Exchange and as to the market for these shares. Such statements, estimates and projections are based on information that we consider reliable and may reflect various assumptions made concerning anticipated economic developments, which have not been independently verified and may or may not prove correct. No representation or warranty is made as to the accuracy of such statements, estimates and projections or as to their appropriateness for the purpose intended and it should not be relied upon such. Opinions expressed are current opinions as of the date appearing on this material only and may change without notice. Other third parties may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysis who prepared them. CBP Equity Research Page 10