Implications of a favourable Supreme Court ruling for Seplat in relation to OMLs 53 & 55

Proshare

Monday, February 01, 2016 09:30 AM / FBNQuest Research

Event: Supreme Court of Nigeria passes judgment in favour of Seplat Petroleum Development Company (Seplat) over OMLs 53 & 55

Implications: Chevron Nigeria Limited (Chevron) hands over assets to Seplat Consortium

Late on Friday of last week, the Supreme Court ruled in favour of Seplat and brought to an end protracted legal proceedings instituted by Brittania-U. Brittania-U had challenged the validity of the sale of Chevron’s OMLs 52, 53 & 55 to the Seplat Consortium following an unsuccessful bid.

Following the court’s ruling, Chevron formally handed over OMLs 53 and 55 to Seplat and Belemaoil Producing Limited (Belemaoil) respectively. A similar handover and induction exercise was conducted at the Jisike Flow Station (OML 53), near Owerri, Imo State.

These events bring to a close the asset sale transaction between Chevron and Seplat for OML 53, and between Chevron and Belemaoil for OML 55 following the signing of a Sales and Purchase Agreement in November 2013. Seplat acquired 40% and 22.5% working interests in OML 53 and OML 55 respectively.

We had opined in our Initiation of Coverage on Seplat (The indigenous gold standard, Dec 17, 2015) that an unfavourable judgement was unlikely given the strength of both Seplat’s and Chevron’s arguments.

Nonetheless, we noted the possibility of downside risks to Seplat’s long term growth ambitions in the event that the apex court had ruled against the firm. Given that the Supreme Court has given the go-ahead on the transaction, we expect Seplat to now proceed on the development and optimisation of these assets. Seplat’s combined production from both assets is currently a little above 2,000 barrels of oil equivalent per day (boepd).

For now, we expect near term development work to focus on the OML 53 block given that it is gas rich, with net recoverable hydrocarbon volumes attributable to the firm of around 611 billion standard cubic feet (bscf) and Seplat’s focus on domestication of its gas production. In our view, this is likely to strengthen Seplat’s overall gas strategy as it opens up a new route to the east of the country.

The block contains the large undeveloped Ohaji South gas and condensate field, the development of which will be co-ordinated with the Shell Petroleum Development Company of Nigeria (SPDC) operated Assa North field on the adjacent OML 21, together referred to as the ANOS project.

We expect a positive reaction by the market on the back of this news. However, our estimates remain unchanged as we would prefer to wait for Seplat to provide the market with guidance on strategy and timelines given where oil prices are at the moment. We await the federal government’s (FG) decision on the extension of Seplat’s pioneer tax status.

In our view, this is likely to have more of an impact on Seplat’s near term performance. We continue to expect that the FG will grant Seplat’s request for an extension. We estimate an EPS growth of around 50% y/y over the 2016-18E period on average, boosted primarily by a strong rise in oil & gas production during the corresponding period.

The shares are trading on a 2015E P/E multiple of 6.6x for average EPS growth of 33.1% y/y over the 2015-17E period. At current levels, our N368.3 price target implies a potential upside of 89.6%. We retain our Outperform rating on the stock.

Brief description of OML 53 & 55 

OML 53
OML 53 covers an area of approximately 1,585km2 and is located onshore in the north eastern Niger Delta. The block contains the large undeveloped Ohaji South gas and condensate field, the development of which will be co-ordinated with the Shell Petroleum Development Company of Nigeria ("SPDC") operated Assa North field on adjacent OML 21, together referred to as the ANOS project. 

The expectation is that future gas production from the ANOS project will supply the domestic market, for which significant work on commercialisation terms and development concepts has already been undertaken. The block also holds the Jisike oil field, located in the north western area of the block, which is currently the only producing field on OML 53.  

Gross production from Jisike in 2015 averaged 1,715 bopd (686 bopd on a 40.00% working interest basis). Existing infrastructure Jisike comprises flow-lines, phase one separation facilities and a flow station with a design capacity of 12,000 bopd and 8 MMscfd. Oil production is then sent for further processing at the nearby Izombe facilities on OML 124 from where it is exported via pipeline to the Brass oil terminal. 

There is also shallow oil development potential at Ohaji South that could be pursued as a separate standalone project in the near term.

The Company estimates net recoverable hydrocarbon volumes attributable to its 40.00% working interest to be approximately 51 million barrels (mbbls) of oil and condensate and 611 bscf of gas (total 151 mboe). 

OML 55
OML 55 covers an area of approximately 840km2 and is located in the swamp to shallow water offshore areas in the south eastern Niger Delta. The block contains five producing fields (Robertkiri, Inda, Belema North, Idama and Jokka). The majority of production on the block is from the Robertkiri, Idama and Inda fields. The Robertkiri field is located in swamp at a water depth of five metres and has a production platform and utility platform installed. 

Production capacity at the Robertkiri facilities is 20,000 bpd and 10 MMscfd.  Production facilities at the Idama field comprise a jack-up mobile offshore production unit ("MOPU") and riser platform that have a capacity of 30,000 bpd of total fluids and 34 MMscfd. The Jokka field is produced through a manifold tied-back to the Idama facilities. Production facilities at the Inda field comprise a MOPU with a capacity of 30,000 bpd of total liquids and 34 MMscfd.

Overall, the infrastructure on OML 55 comprises four flow-stations, a network of flow-lines and two eight-inch pipelines that connect to third party operated infrastructure. The Belema field is unitised with OML 25 and is produced via a flow-station on that block.  All produced liquids from OML 55 are delivered via third party infrastructure to the Bonny terminal for processing and shipping. 

In addition to the oil potential on the block there is also an opportunity to develop the significant gas resources that have also been identified. Gross production from OML 55 in 2015 averaged 7,746 bopd (1,743 bopd on a 22.50% effective working interest basis).

The Company estimates net recoverable hydrocarbon volumes attributable to its 22.50% effective working interest to be approximately 20 mbbls of oil and condensate and 156 Bscf of gas (total 46 mboe). 

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