Afren announced a few weeks back that it had given Seplat until January 19, to present an offer after it has discovered Seplat had been scooping its shares. The announcement helped Afren and Seplat shares rally after a bearish period of trade for the pair. Afren has been hit hard since its former founder and Chief Executive was involved in a bribery scandal. Seplat on the other hand has seen its share price dropped by over 50% following the fall in oil prices and the bearish out look for the oil industry as a whole. This deal and the potential and risks it provides for both parties is therefore one that needs to be viewed closely.
Details of the deal are currently sketchy as Seplat has only just been granted an extension to launch a bid. An important detail to look out for will be the price Seplat will be paying and what it hopes to get out of this deal. Currently, Afren has a market capitalization of £255million or roughly $385million. It’s Net assets per share as at September 2014 was $2billion suggesting a price to book ratio of 0.18x. Afren also posted an earnings per share of 15.4 cents and a flat growth when compared to 15.6 cents posted in the same period 2013. Afren also generates about $500m in net operating cash flows before changes in working capital though down by 57% from its 2013 figures. Afren’s current price earnings ratio is also 0.7x indicating that the market even prices the stock lower than its trailing earnings per share. Whilst all of these indices suggest Afren stock is massively undervalued, it does make one wonder what is it that investor see that make price the stock this low?
Why Afren Shares is down?
Afren share price started a free fall sometime in August 2014 after it announced that its CEO and two other top executives were suspected of collecting unauthorized payments. The company also then followed that up with lower future guidance giving investors some jitters with auditors qualifying their results sighting potential risk that financers will not provide them with liquidity and that potential partners may stall. These made investors worry as no one knew what else to expect. The rapid fall in oil prices during the year has also contributed to the bearish outlook for the stock. From a year high of £1.66 the share price has plummeted to about £0.20. Should this be a worry for Seplat? This actually should be an advantage to the Nigerian oil company as just a year ago, they probably will be buying this stock at over 150 pounds.
Is this a good deal for Seplat
It is unlikely that Seplat will be paying £0.2 for this stock following takeover rules which implies Seplat will have to launch at a price equal to the highest price it paid for Afren when it started scoping the shares. Nevertheless, I still think this is a good deal. In Afren, Seplat acquires average production of 47 boepd per annum in addition to the 65 boepd Seplat currently produces. Afren also owns assets in Nigeria, East and West Africa countries such as Ghana, Sào Tomé and Príncipe Côte d’Ivoire, Congo Brazzaville, Kenya Tanzania Seychelles Madagascar Ethiopia. It also has interests in Kurdistan region of Iraq. So by and large this suits Seplat ambition to be one of the biggest indigenous Upstream company in Nigeria.
Seplat recently also secured funding from foreign bankers as well as restructure its current loans giving it the financial muscle it needs to launch a successful bid.
Is this a good deal for Shareholders?
Just like Afren, Seplat share price has also been directly correlated to the drop in oil prices. Investors can now pick up Seplat shares for half the price it was 9 months ago. Whilst this deal, if successful, might bring temporary surge to Seplat’s share price, I doubt little will change on the long run. Mergers such as these can be long drawn and involve all sorts of regulatory shenanigans (Oando comes to mind) which will bring in some volatility to the stock. Also, Afren carries about $1billion in debts which when combined to Seplat’s $700million will take its external debts to over $1.7billion or N306billion. That will put its total debts above that of Dangote Cement and just N40 milion short of Oando’s debt as at September 2014. Seplat and Afren has a combined revenue of about N250billion as at September 2014 compared to Oando’s N338billion. Seplat and Afren also posted a combined net profit of N71billion (using N180 as exchange rates in all cases).
Whilst this merger may portend impressive value creation in the coming years, the effect on margins (due to interest cost) cannot be overlooked. The falling oil prices and its week outlook also remains a problem.
Finally
Whichever way you look at it, if Seplat was to ever launch a takeover or merger, then now is the time. This to me makes this deal appear like a steal. Afren prices are beat down and the company despite posting higher revenues than Seplat is grossly undervalued. Expectedly, conservative analysts will still look at Afren from a distance considering the inherent risks involved. But as a shareholder/retail investor one should hope the deal can unlock cash flows and eventually higher returns. Cash flows will ensure dividend payment continues in robust manner and higher returns should translate to value appreciation.
