Decarbonization And EV Trends Will Undermine Nigerian Oil Demand

Key Takeaways

• Global decarbonization and rising ESG scrutiny threaten Seplat's revenue streams, access to capital, and earnings prospects, especially due to reliance on oil over gas.
  
• Security and fiscal instability in the Niger Delta, coupled with limited asset diversification, heighten operational risks and expose the company to unpredictable regulatory changes.
  
• Strategic expansion into gas and sustained cost discipline are positioning Seplat Energy for resilient, diversified growth with improved margins and reduced reliance on oil.

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.

• Intensifying global decarbonization efforts and stricter international emissions regulations are expected to reduce long-term demand for oil, directly threatening Seplat Energy's core revenue streams and accelerating the risk of stranded assets and declining cash flows in both its oil and gas segments.
  
• The rapid adoption of electric vehicles and alternative energy solutions across key export markets will further erode future oil demand, driving lower realized prices for Seplat and ultimately squeezing earnings and net margins, particularly given the company's current high exposure to oil over gas.
  
• Increasing ESG scrutiny from institutional investors is likely to constrain Seplat's access to international capital markets, elevating its cost of capital and limiting its ability to finance essential exploration, expansion, and refinancing activities; this risk is compounded by potential exclusion from major investment indices and higher borrowing costs for debt maturities after 2027 and 2030.
  
• Persistent security, operational, and fiscal instability in the Niger Delta region exposes Seplat to interruptions in production and elevated operating costs, with any delay or failure to diversify beyond Nigerian upstream assets making its revenue base vulnerable to unpredictable regulatory shifts or adverse fiscal terms.
  
• Declining long-term global investment in upstream oil and gas-amplified by divestment trends and carbon pricing-will limit Seplat's ability to execute major gas expansion and infrastructure projects like the ANOH Gas Processing Plant, damaging the company's prospects for future earnings diversification and making projected EBITDA growth increasingly uncertain over the coming decade.

Seplat Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Seplat Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Seplat Energy's revenue will grow by 9.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 6.5% today to 4.5% in 3 years time.
• The bearish analysts expect earnings to reach $123.4 million (and earnings per share of $0.21) by about August 2028, down from $136.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, up from 15.2x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 11.7x.
• 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 16.03%, as per the Simply Wall St company report.

Seplat Energy Future Earnings Per Share Growth

Risks

• Seplat Energy's successful integration of large offshore asset acquisitions and ongoing ramp-up in both oil and gas production, supported by extensive idle well restoration programs with sustainable production profiles, puts the company in a strong position to increase revenues and cash flows in coming years.
  
• Strategic expansion into midstream gas, the commissioning of the Sapele Integrated Gas Plant modules, and progress toward first gas from the ANOH gas plant in a structurally undersupplied and rapidly growing Nigerian gas market may significantly diversify and boost long-term earnings and reduce reliance on oil.
  
• Strong deleveraging, disciplined cost management, and improved procurement efficiencies, together with successful cost optimization from business integration, are enhancing net margins and providing flexibility for shareholder returns, which may help sustain or increase share price.
  
• Improved credit ratings that exceed Nigeria's sovereign rating and strong cash generation from operations, including robust free cash flow and a fully undrawn revolving credit facility, provide resilience through commodity cycles, supporting future dividend growth and investment capacity.
  
• Ongoing energy demand growth in Africa driven by population and industrialization trends, continued global reliance on oil and (especially) gas, and favorable local policies toward gas monetization underpin a long-term supportive environment for Seplat Energy's revenue and profit growth.

Valuation

• The assumed bearish price target for Seplat Energy is £1.94, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Seplat Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $123.4 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 16.0%.
• Given the current share price of £2.54, the bearish analyst price target of £1.94 is 31.0% lower.
• 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.