Seplat Petroleum Development Company PLC is probably among London’s best remaining oil and gas investments says analyst
“There’s only a handful of companies in the oil and gas sector that are paying dividends.”
Trajkov, analyst at Alternative Resource Capital, has published a research note with a ‘buy’ rating and a 110p price target, suggesting some 100% upside to the current price of around 55p.
The Nigerian focussed energy company paid out around US$60mln per year in the past two years, and, at current levels the share would offer a yield of around 13.5%, Trajkov highlighted.
“Granted this year is different for everyone, nevertheless, in the current oil pricing Seplat still has the ability to pay at the very minimum the core dividend, which is 5 cents per share, and, potentially, we think they could continue to do what they’ve done for the past two years, which is 10 cents per share,” the analyst said on a call with Proactive.
“There’s only a handful of companies in the oil and gas sector that are paying dividends and more importantly this dividend is more comparable to some of the best dividend payers in the FTSE 100 and FTSE250.
“So, we think Seplat is one of the better positioned oil and gas companies in the sector.”
The ability to access free cash flow and make cash returns to shareholders moreover sets Seplat apart from many others in a sector that’s besieged in structural upheaval – not only in the context of longer-term energy transition and decarbonisation, but, more immediately due to COVID-19 and 2020’s crude price reset.
Increasingly, companies are being valued based on the barrels they are producing today rather than the deep inventories of reserves earmarked for development tomorrow.
An era of volatility favours companies with existing and/or particularly near-term growth opportunities, essentially those that can respond amidst prevailing market conditions.
Seplat is one such company, according to Trajkov.
“For a long time the oil and gas industry has had the thought that hydrocarbon resources will be more valuable with the passage of time, because there will be less available oil and there will be more demand,” the analyst said.
“In the last three years this has completely changed. It has gone the completely opposite way, where the value of hydrocarbon resources on a medium to long-term view is quite uncertain. Therefore, in our view, investors are looking more for companies that can develop their resources in a way that is very flexible, sustainable and cash profitable in the near-to-mid-term.
“That’s where our view on Seplat is. The company not only has the ability to generate free cash flow and be profitable at current oil prices, it has the flexibility to do it at the right time.”
He added: “In the current forward curve pricing of Brent we estimate that they can easily generate about US$300mln of free cash flow annually for probably a decade. That’s the main focus on our investment thesis.”
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