Seplat and ExxonMobil Deal Positive for Nigerian Economy, Says Wood Mackenzie

Wood Mackenzie, a trusted intelligence provider that provides unique insights on the world’s natural resources, has praised ExxonMobil’s recent acquisition of the entire share capital of Mobil Producing Nigeria Unlimited (MPNU).

According to a recent report, both ExxonMobil and Seplat will be pleased with the deal in the energy transition era, and the deal offers huge upside for both oil and gas.

Seplat Energy Plc announced on February 25 that it had reached an agreement to purchase the entire share capital of ExxonMobil subsidiary Mobil Producing Nigeria Unlimited (MPNU).

Because this is a corporate acquisition, the Nigerian National Petroleum Corporation (NNPC) has no rights to pre-empt a deal under the Joint Operating Agreement (JOA) that governs the JV, according to Wood Mackenzie. Instead, ministerial consent would be the only remaining hurdle, “although nothing can be taken for granted.”

“MPNU has a 40% operated interest in a Joint Venture with NNPC,” it continued (60 per cent). The OMLs 67, 68, 70, 104, as well as the Qua Iboe oil export terminal, are part of the JV. In addition, MPNU owns a 51 percent stake in the Bonny River NGL Recovery project. Seplat has agreed to pay $1,283 million plus a $300 million contingent consideration. The new law will take effect on January 1, 2021, and will be completed in H2 2022, pending ministerial approval. A syndicate of Nigerian and African banks, as well as energy and commodity traders, have fully committed to Seplat’s debt financing of $825 million.

“Implications: If the deal goes through, it will be a game-changer for Seplat Energy. It is already Nigeria’s largest indigenous company, but this will increase working interest production to more than 140,000 boe/d. Seplat will be in charge of 15% of Nigeria’s oil production.

“Most importantly, the deal expands the company’s operations into shallow water, which is largely free of the thefts that plague its onshore operations. Despite the fact that this is Seplat’s first overseas acquisition, it will take on all of MPNU’s Nigerian employees, assuaging any concerns about the company’s operational capabilities.”

“Our equity-based valuation of MPNU – excluding the Qua Iboe terminal – is $870 million (discounted 10%, January 2021, $50/bbl long-term),” the company continued. We value the company at $1.678 billion at $70 per barrel. ExxonMobil will be pleased with this deal in the energy transition era. But Seplat will benefit as well, because the deal has significant oil and gas potential.

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“The portfolio includes 1.3 billion boe of contingent resources, with gas accounting for 75% of the total. Only about half of the country’s 70 fields have been developed. Despite the fact that the JV has been producing since the early 1970s, its maturity is due to the extensive infrastructure rather than the reservoirs themselves. Many fields are in decline, but they have also been under-invested for more than two decades.

“Seplat has built a business repurposing the Majors’ unwanted assets, which it began doing in 2010.” As a result of the acquisition, the company’s portfolio is now heavily weighted toward oil. ExxonMobil had no exposure to NLNG because it refused to be drawn into the high-risk domestic gas market. As a result, the acreage has the country’s highest concentration of gas flaring. Seplat, as a publicly traded company, will have to deal with this right away.”

“In the long run, it will seek to develop access to the domestic market in accordance with government policy, while LNG is also a possibility.” Before the deal, an FLNG project at Yoho on OML 104 was already in the works. This could now accelerate, with NLNG as a long-term supply option.

“The fiscal terms of the Petroleum Industry Act (PIA) may also provide an upside.” If Seplat converts, the JV portfolio’s value would more than double, according to our calculations. This, however, is far from certain, as it would have to give up up to 60% of its land and much of the resource it has recently acquired. A thorough review of its now-extensive portfolio will be a top priority in order to identify the most advantageous barrels. February 2023 is the deadline for converting to the new fiscal terms.

“There are risks involved in the deal as well. In the long run, Seplat will need to find billions of dollars to transform its portfolio, and some rationalization may be necessary. “Of course, NNPC will be Seplat’s JV partner, and its ability to fund its 60% equity over the long term as it transitions to a limited liability company will be just as important to the deal’s success,” it stated.

“ExxonMobil has been planning to sell its joint venture business for years, and the time has finally come to do so. The shallow water JV assets have long been considered non-core, and they are among the most expensive barrels in the company’s global portfolio.

Although emissions were not a major factor in the sale, the agreement will aid the company in meeting its recently announced net-zero emissions targets for scope 1 and 2. The portfolio emits 48 kgCO2e/boe, which is more than double the global average.

“It can now concentrate on renegotiating reasonable fiscal terms for its Nigerian deepwater assets, such as Erha and Usan.” Given its deepwater options in Guyana and Brazil, a country exit could be on the cards if that doesn’t work out.

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“Because this is a corporate acquisition, NNPC has no rights under the Joint Operating Agreement (JOA) that governs the JV to pre-empt a deal.” This means that the only remaining hurdle would be ministerial approval, though nothing can be taken for granted.

“Pre-emption is also ruled out by Shell’s ongoing divestment of its subsidiary SPDC. If NNPC wants to buy that portfolio, it will have to outbid the other companies. “If Afrexim Bank is successful in raising up to $5 billion, it will have the firepower to do just that, bolstering its position in the onshore delta massively,” Mackenzie said.