When Seplat made its debut on the London and Lagos Stock Exchange, it was a milestone in a remarkable journey for the Nigerian upstream oil and gas company.
In four years since it began operations, the business has grown from the ground up to an initial public offering that values the company at $2 billion. Much of this is attributable to its strong management team headed by Managing Director and CEO Austin Avuru.
Seplat’s first investments were in 2010, when it acquired a 45 per cent participating interest in three onshore oil and gas leases in the Niger Delta. Over the next few years, the company more than quadrupled production, from 14,000 barrels per day at the time of its acquisition to 60,000 barrels per day today. It is a considerable achievement how the company moved from its foundation to become one of the leading indigenous oil and gas producers in Nigeria.
The company’s managing director, Austin Avuru, a veteran in the oil and gas industry, attributes the rapid growth in part to a strict adherence to international management practices and corporate governance, which includes a detailed environmental and social policy.
“We set out from day one to create a Nigerian company with global standards of corporate governance,” Avuru says. “It is not as though it happened by chance.”
Seplat’s decision to go to market was in part motivated by a desire to prove its commitment to corporate governance and to be constantly measured against international standards, Avuru says – although the ability to access capital quickly will give the company considerable flexibility as it navigates the fast-moving Nigerian energy sector.
London has emerged as “the first choice” for emerging market businesses, combining liquidity with a strong and well-respected corporate governance regime. However, it is important that the business retains its heritage, Avuru says, which is why it jointly listed on the Lagos Stock Exchange. As Seplat develops, it wants to be seen as a Nigerian company, rather than a foreign one, he explains.
Seplat has raised around $500 million, $48 million of which is earmarked to pay off existing debt. The remainder will form a war chest for expansion of existing operations and opportunistic acquisitions, Avuru says.
The Nigerian oil industry is in a period of evolution, driven in part by a state-backed drive to indigenise both production and in part by a new wave of enthusiasm amongst Nigerian entrepreneurs about the potential of the oil industry. The slow passage of the Petroleum Industry Bill (PIB), which has been in the works since 2008, has slowed investment in the sector.
Avuru is less concerned about the regulatory uncertainty. “The macro level politics and policy has always been stable,” he says. He believes that the domestic industry is investible whether or not the PIB goes through, and regardless of the smaller details of domestic policy.
Seplat, he says, wants to be a company that thinks about the next 50 years, and over such long cycles the most important factor will be being a solid, well-run business. The industry is poised for growth, he explains, and although the PIB could throw up new opportunities, it will not change the direction of travel.
Organic growth will remain the immediate focus of the business’ expansion, Avuru says, and the company will look at increasing production and profit at its existing assets. However, by raising capital from international and domestic investors through its IPO, Seplat hopes to be able to participate in the rationalisation of the industry. When opportunities arise, he says “We need to be able to write a cheque”.
International oil companies have begun to divest themselves of onshore assets, preferring to focus on the offshore sector where they have a competitive advantage. Shell began its programme of auctioning off assets in 2009 and was followed by ENI, Total, Chevron and ConocoPhillips. Many of the fields that are up for sale have been under-producing or left fallow, meaning that there could be considerable upside for domestic players who are prepared to invest.
Local players will also be in prime position when 50 marginal fields – most of them onshore – come up for auction in 2014. These assets will become hugely significant over the next five years as the Nigerian government tries to reverse a trend of stagnant and falling production to hit 3 million barrels per day in 2020, up from the current figure of around 2.5 million.
Currently, local firms account for around 10 per cent of domestic oil output, a figure that is going to have to rise considerably if the national target is to be met, Avuru says. He expects that indigenous firms’ share of the industry will double over the next five years, and that they will take on an even larger share of the domestic gas business.
Gas, Avuru notes, is also a huge opportunity for Seplat. The privatisation of the domestic power industry, coupled with a massive government initiative to promote the use of natural gas, has driven investment in transport infrastructure and generation.
The Nigerian government’s “Gas Master Plan” is designed to utilise the country’s enormous gas reserves to push industrialisation and electrification. A gas industrial zone is being built in the country’s west, including a fertiliser plant and a petrochemical facility. Fifteen-year supply contracts for power plants will underpin the expansion of Seplat’s domestic gas business, Avuru says.
The company has signed a series of gas contracts designed to deliver 322 bcf of gas by 2017, and has agreements with the Sapele and Gergu power plants.With the Nigerian opportunity still enormous, Avuru says that he does not feel the need to look overseas for acquisitions “just to become an international company”. For the right opportunity, however, he admits he might change his mind.