Interview with Roger Brown, CFO of seplat

Funding Environment
Seplat’s management team went on a global roadshow ahead of their IPO. The company has targeted a range of investors from emerging and frontier market funds, hedge funds, pension funds and high net worth individuals. Nigeria’s wealthy private investors were an area of particular focus, Brown says.

Emerging market and frontier funds, who are more comfortable with Nigeria-focused stocks, are likely to make up the bulk of the initial investors, but the company expects global resource investors to become involved as well.

There is also, Brown says, a building confidence and interest in Africa-focused stocks, particularly in the resources sector. While in the past, Africa was seen as a frontier location, even for the oil and gas sector, the success of businesses like Tullow and Heritage Oil—which have both played a major role in the discovery and development of oil assets in Ghana and Kenya—have sensitised investors to the continent’s opportunities.

“You’ve seen over the years a greater understanding of Africa, and a lot more capital flowing into the continent,” Brown says. “London does understand that pretty well.”

Nigeria, as the largest economy on the continent, is naturally part of that interest, but the perennial concerns over corporate governance and security have deterred some investors. The indigenisation of the industry—and the growth of local players who are better able to navigate the complex social context—is a big part of mitigating those risks.

“I think Nigeria has been on the radar of investors for quite a while, but lot of them have struggled to find vehicles to invest in that they’ll understand, and who can deal with the Nigerian operating environment, dealing with local communities, etcetera,” Brown says. “That really is, in our view, an indigenous play.”

Brown believes that indigenisation of national resources is a building trend across the continent. South Africa started the wave, and Nigeria is now riding it.

“I think the whole industry will go more indigenous. Whereas previously international companies owned most of the resources, that will transfer into indigenous hands over time. Investors have been looking around for the right indigenous vehicles to invest in. Therefore we had a lot of demand from the EM and frontier funds that understand that.”

Although oil for export will remain the major focus of Seplat’s business for the foreseeable future, the company is also able to participate in Nigeria’s domestic growth story through its access to natural gas. Nigeria’s high GDP growth rates have been curtailed by limited supplies of electricity, and the government has formulated a wide-ranging strategy to exploit its gas resources for power, domestic supply and industry. This has pushed up gas prices, and made the business look economically viable.

“The gas business is actually a very interesting business. It’s a business that when we took over in 2010 had virtually no value, the gas prices were very low. What we’re finding now is that, predominantly driven by the power sector, gas prices are coming up. In fact, our view is that the gas prices that you get into the local market are probably better than you get into [liquefied natural gas for export], in terms of the transfer price,” Brown says.

The company has signed long-term contracts to supply gas to power stations in Sapele and Geregu, and more are likely to follow. With domestic supplies and processing capacity constrained and demand rising, gas prices are likely to soar. Seplat is investing in two new processing facilities to drastically increase its capacity over the next three years.