Increasing Nigerian Gas Production Will Spur Demand Amid Challenges

Key Takeaways

• Expansion in gas production and integration of new assets positions Seplat to capture growing demand and increase market share in Nigeria's cleaner energy sector.
  
• Operational efficiencies, low leverage, and strong liquidity enable Seplat to pursue acquisitions and maintain sustainable earnings growth.
  
• Heavy oil dependence, cost pressures, tax risks, challenging operating environment, and ESG-driven headwinds threaten earnings stability, financial flexibility, and long-term growth prospects.

Catalysts

An independent energy company, engages in the oil and gas exploration and production, and gas processing activities in Nigeria, Bahamas, Italy, Switzerland, England, and Singapore.

• Substantial ramp-up in gas production due to the imminent commissioning of the ANOH gas plant and Sapele Gas Integrated Project will allow Seplat to capture rising demand for domestic gas as a cleaner energy source in Nigeria, supporting long-term revenue growth and improved net margins.
  
• Sustained population growth, urbanization, and infrastructure development in Nigeria and broader Africa will continue to drive energy demand; Seplat's increased production capacity, asset integration, and successful well restoration programs position the company to capture incremental market share, benefiting top-line growth.
  
• Ongoing investments in operational efficiency-including cost optimization in supply chain, procurement, and asset synergies from the recent offshore acquisition-are expected to reduce operating and G&A costs, driving stronger EBITDA margins and earnings.
  
• The company's low leverage profile, strong cash flow generation, and undrawn liquidity facilities provide flexibility to capitalize on upstream underinvestment in the region through additional asset acquisitions at attractive valuations, supporting reserve growth and long-term sustainability of earnings.
  
• Integration of newly acquired offshore assets and updated CPR (Competent Persons Report) are likely to upgrade reserves and reduce future DD&A and effective tax rates, further supporting future profitability and net income.

Seplat Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Seplat Energy's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.5% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $151.7 million (and earnings per share of $0.26) by about August 2028, up from $136.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $193 million in earnings, and the most bearish expecting $115.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.4x on those 2028 earnings, up from 15.3x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 11.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.01%, as per the Simply Wall St company report.

Seplat Energy Future Earnings Per Share Growth

Risks

• Seplat's revenue mix remains heavily concentrated in oil (93% oil/NGLs vs. 7% gas), indicating limited diversification and heightened vulnerability to global long-term declines in oil demand and potential downward pressure on oil prices, which threaten revenue and earnings stability over time.
  
• The company's elevated cost of sales and rising G&A expenses associated with the offshore integration could reduce net margins, especially if anticipated efficiency synergies do not materialize or if cost optimization lags, weighing on long-term profitability.
  
• Persistently high effective tax rates, driven by initially low offshore investment levels, expose Seplat to a material risk of sustained high tax burdens if its aggressive CapEx and reserve upgrade plans encounter delays or underperform, directly impacting net earnings and free cash flow.
  
• Seplat's ongoing dependence on Nigeria's challenging operating environment-exemplified by historical issues such as regulatory hurdles, upstream industry underinvestment, and JV partner (NNPC) receivables risk-may result in production volatility and unpredictable cash flows, undermining long-term financial projections.
  
• Accelerating global decarbonization, ESG pressures, and regulatory tightening targeting fossil fuels could raise Seplat's costs (e.g., emissions reduction, compliance) and restrict access to international financing, thereby increasing funding costs or impairing future capital access, impacting long-term earnings and capital allocation flexibility.

Valuation

• The analysts have a consensus price target of £3.278 for Seplat Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.65, and the most bearish reporting a price target of just £1.94.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $151.7 million, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 16.0%.
• Given the current share price of £2.56, the analyst price target of £3.28 is 21.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.