taking the high road 30 seplat - united capital plc...oil and gas production, braced by a more...

Seplat Petroleum Development Company Plc

Taking the high road

Investment case

We are initiating coverage on SEPLAT with a ₦867.7 ($2.4) target price

(TP), implying a 17.7% upside from its current price. We are

constructive on strengths steaming from a more consistent outlook on

oil and gas production, braced by a more stable security

environment in the Niger Delta, and a less-volatile oil price

environment. With SEPLAT trading at a 2018 P/E of 6.5x (vs.

comparable peers 11.0x), we believe the stock offers significant share

price upside potential.

Core drivers of growth

We forecast FY17-FY20E revenue CAGR +26.2%, EBITDA +23.0%. Key

drivers include: (1) strengthened cash position considering its

extended debt maturity profile, unrecognized capital allowance and

receipts from OML 55; (2) pay-offs from the installation of gas

processing facilities and the drilling of gas production wells; (3)

relatively stable commodity prices and production.

Risks to the investment case

(+) >$70/bbl oil price. (-) <$40/bbl oil price. (-) Upcoming Nigerian

election may trigger agitations from Niger Delta militants.

Valuation

Our TP of ₦867.7 ($2.4) is derived using the Net Asset Value (NAV)

Methodology. Our NAV uses 10.0% WACC and assumes an average

oil and gas price of $55.0 and $3.0 respectively. Stressed for an oil

price of up to $70, SEPLAT’s bull case price stands at ₦1025.6 ($2.8).

24th April, 2018

Research Analyst:

Olayinka Odedeyi

+234-(0)708-5068-802

[email protected]

Risk Rating: High

Key Data

Price Performance Chart

Stock Rating

BUY

Target Price

N867.7

Expected Return*

20.8%

Equity Research|Coverage Initiation

Last Price (₦) 737.1

Last Price ($) 2.1

52 week High/Low (₦) 785/ 336

1M Price Change (%) +2.1



YTD Change (%) +17.7

Beta 0.4

Market Capitalization (₦’m) 433,742.5

Market Capitalization ($’m) 1,204.8

Shares Outstanding. (Units’m) 588.4

Float (%) 50.9

Dividend Yield (%) 0.0

Note: Refer to appendix for complete description of risk rating

Valuation Statistics

*Note: Including dividend yield

0

1

2

3

4

5

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Seplat Oil & Gas NGSE

2017 2018 2019

P/E (x) 3.7 6.5 6.1

EV/EBITDAX (x) 6.3 6.5 4.7

Net Debt/EBITDA (x) 0.7 1.7 1.4

Dividend Yield (%) 0.0 3.1 3.3

SEPLAT

0

5

10

15

20

25

30

0 5 10 15 20 25 30

Ea

rnin

gs V

ola

tilit

y (%

)

Price Volatility (%)

Sources: Bloomberg, United Capital Research Sources: Capital IQTM, United Capital Research

Seplat Petroleum Development Company Plc (Bloomberg: SEPLAT NL, Reuters: SEPLAT.LG, NSE: SEPLAT)

2

Seplat Petroleum Development Company Plc: Summary Financials

Sources: Company Filings, United Capital Research

Income Statement ($'m) 2016 2017 2018F 2019F Balance Sheet ($'m) 2016 2017 2018F 2019F

Oil Revenue 148,757 328,206 377,643 524,604 Assets

Gas Revenue 105,460 123,973 135,723 125,768 Non-current Assets

Total Revenue 254,217 452,179 513,366 650,372 Oil & Gas PPE 1,224,400 1,286,387 1,472,054 1,648,164

Cost of Goods Sold -182,424 -240,059 -248,077 -297,029 Other PPE 7,967 5,078 8,216 8,216

Gross Profit 71,793 212,120 265,289 353,343 Other assets 250,090 440,762 381,237 345,443

Selling, General & Administra-

tive -108,288 -77,675 -118,610 -135,486 Total Non-current Assets 1,482,457 1,732,227 1,861,507 2,001,822

Depreciation & Amortization -5,544 -4,195 -4,823 -4,823 Current Assets

Other Income/Expenses -115,844 -17,836 -24,009 -29,083 Inventories 106,213 100,336 91,805 90,464

Operating Profit -157,883 112,414 117,847 183,950 Prepaid expenses 40,288 34,510 38,648 41,843

Finance Income 59,017 4,335 9,711 9,711 Trade and other receivables 390,694 310,345 352,340 446,371

Finance Costs -73,900 -72,752 -76,747 -76,747 Cash and other equivalents 159,621 437,212 470,031 347,376

Profit before taxation -172,766 43,997 50,811 116,915 Total Current Asset 696,816 882,403 952,823 926,055

Taxation* 6,672 221,233 164,199 113,057 Total Assets 2,179,273 2,614,630 2,814,330 2,927,877

Profit for the year -166,094 265,230 215,010 229,972

Ratios 2016 2017 2018F 2019F Liabilities

EPS -0.3 0.5 0.4 0.4 Non-current liabilities

BVPS 2.2 2.7 2.8 3.1 Long-term debt 446,098 304,677 546,667 496,000

P/E (x) -3.6 3.7 6.6 6.2 Contingent consideration 12,040 13,900 13,092 13,092

P/BV 0.5 0.7 0.9 0.8 Provision for decommissioning

obligation 597 106,312 8,083 8,083

Dividend Payout (%) 0.0% 0.0% 20.0% 20.0% Defined benefit plan 5,112 6,518 6,185 5,938

Dividend Yield (%) 0.0% 0.0% 3.0% 3.2% Total Non-current Liabilities 463,847 431,407 574,027 523,114

ROAE (%) -13.5% 17.6% 13.0% 12.5% Current Liabilities

ROAA (%) -7.6% 10.1% 7.6% 7.9% Short-term debt 217,998 265,400 240,957 237,439

Net debt/equity (%) 40.9% 8.8% 19.2% 21.0% Trade and other payables 261,528 410,593 338,010 322,856

Net Debt/EBITDA (x) -5.1 0.7 1.7 1.5 Current taxation 1,885 4,133 4,133 4,133

Total Debt/EBITDA (x) -6.8 2.9 4.3 2.8 Total Current Liabilities 481,411 680,126 583,100 564,428

Total Debt/Total Assets (%) 30.5% 21.8% 28.0% 25.1% Total Liabilities 945,258 1,111,533 1,157,128 1,087,542

Growth & Margins (%) 2016 2017 2018F 2019F

Sales growth (%) -55.4% 77.9% 13.5% 26.7% Equity

EBITDA growth (%) -142.3% -302.7% -7.3% 40.6% Share capital 1,826 1,826 1,826 1,826

EBIT growth (%) -200.0% -171.2% 4.8% 56.1% Share premium 497,457 497,457 497,457 497,457

Net income growth (%) -353.2% -259.7% -18.9% 7.0% Retained earnings 678,922 944,108 1,116,116 1,300,094

Gross Margin 28.2% 46.9% 51.7% 54.3% Capital contribution 40,000 40,000 40,000 40,000

EBITDA Margin -38.6% 43.9% 35.9% 39.8% Other 15,810 19,706 1,803 958

EBIT Margin -62.1% 24.9% 23.0% 28.3% Total Equity 1,234,015 1,503,097 1,657,202 1,840,335

Net Income Margin -65.3% 58.7% 41.9% 35.4% Total Equity and Liabilities 2,179,273 2,614,630 2,814,330 2,927,877

*Note: Taxation includes tax credit


3

Table of Content

Industry Overview ····································································································· 4

World Oil and Gas Market ············································································································· 4

The Nigerian Oil market: A state of fragile stability ············································································ 5

The Nigerian Gas Market: Is Gas the New Oil? ··················································································· 7

Strategy, Profile & Outlook ························································································· 8

Company Background ·················································································································· 8

Oil Business: Rosy outlook amid finalized evacuation plans ································································· 8

Gas Business: Sea of opportunity exists ····························································································· 9

Strategy and Plans ······················································································································· 11

Financials ··············································································································· 12

Revenue ···································································································································· 12

Production Expense ····················································································································· 12

EBITDAX ······································································································································ 12

Taxation ····································································································································· 12

Commodity prices ······················································································································· 13

Production ·································································································································· 13

Net Debt/EBITDA ························································································································· 14

Free Cash Flow Per Barrel ············································································································· 14

Dividend ····································································································································· 14

Valuation ················································································································ 15

Price Target and Recommendation ······························································································ 15

NAV Methodology ······················································································································ 15

Sensitivity Analysis ······················································································································· 16

Peer-Group Analysis ···················································································································· 16

Key Risks ················································································································· 18

#1 - Logistical and Operational Risk ······························································································· 18

#2 - Market Risk ··························································································································· 18

#3 - Reserve Replacement Risk ····································································································· 18

#4 - Regulatory Risk ······················································································································ 18

#5 - Global/National/Regional Political and Social Instability Risk ······················································ 18

#6 - Exchange Rate Risk ··············································································································· 18

Appendix ················································································································ 19

Disclosure Appendix ································································································ 22


4

Industry Overview

World Oil & Gas Market

The Oil & Gas Industry is a global powerhouse, accounting for 57.4% of total energy

consumption.

Oil Demand: Are we nearing a disruption?

Oil demand is primarily driven by global increases in urban population – especially in

emerging markets. This growth drives household incomes and translates to higher

consumption of the commodity through the use of cars, airplanes, ships, among others.

Nevertheless, the growth of energy demand is capped by accelerating energy efficiency

initiatives. Regulatory authorities are pushing for higher fuel efficiency standards as the

opportunities to substitute oil with other energy sources continue to increase amid a

gradual emergence of electric vehicles. These forces have the potential to disrupt the

demand dynamics of the industry and would begin to significantly set in ahead of 2030.

Oil Supply: Who would win the oil war?

The bottom line for the oil market is that the Organization of the Petroleum Exporting

Countries’ (OPEC) production cut is providing a floor for oil price at c. $40/bbl, while rising

U.S. shale output remains a downside risk that would cap oil prices at c. $70/bbl. The heart

of the outlook for this market is hinged on how far the OPEC pact can deplete the rest of

the overhang in the market, without activating new floods of American shale. However,

the U.S. shale industry appears to be reaching its limits; the shale boom is slowing,

productivity and cost-cutting strategies are tapering, and shareholders want to see less

investments and more profits. On the other hand, after one cut in 2016 and two cut

extensions - amid curtailing Nigeria and Libya’s output, it is arguable that OPEC has

exhausted its options. The recent uptrend in prices to over $70/bbl has been largely driven

by geopolitical tensions and we expect this factor to remain an upside risk in the market.

Exhibit 1: Oil is the most important source of energy in the world, meeting 33.3% of global energy needs. Natural gas comes in as the third largest source of energy at 24.1% World Primary Energy Consumption by fuel in 2017, World oil demand growth

Sources: BP Statistical review 2017, United Capital Research Sources: World Bank, United Capital Research

OPEC and U.S. shale

producers may be

losing their bite

-2

-1

0

1

2

3

4

2010Q1 2012Q1 2014Q1 2016Q1 2018Q1

OECD China Other Non-OECD Series5

mb/d, quarterly change y/y

Oil, 33.3%

Coal, 28.1%

Natural Gas, 24.1%

Hydro-electricity,

6.9%

Nuclear Energy,

4.5%

Renewables, 3.2%

Oil

Coal

Natural Gas

Hydro-electricity

Nuclear Energy

Renewables


5

The Nigerian Oil Market

A state of fragile stability

The Nigerian Oil & Gas Industry is heavily state-influenced with the Nigerian National

Petroleum Corporation (NNPC) primarily responsible for upstream production through joint

ventures and production sharing contracts. High operational risks, coupled with regulatory

bottlenecks have slowed the exploration and production scene, keeping investors on the

sideline. Even though we believe exploration activities may pick-up in the medium term

on existing offshore assets due to improving oil prices and NNPC activities, we still think the

industry remains at the mercy of policy reforms that can incentivize International Oil

Companies (IOC) and catalyze more investments into the sector.

Operational Risks: High operational risk mars opportunities

Thanks to a peace deal that was spearheaded by the Federal Government of Nigeria, no

incident of supply disruption has been witnessed in the Niger Delta region since January

2017. This relatively stable environment is bringing consistency to oil and gas production in

Nigeria. Also looking ahead of the refining facilities that are expected to roll out

completely by 2020, the outlook for the sector is stable. Nevertheless, a dearth of

infrastructure; thin project pipeline facilities, operational risks spanning oil theft, vandalism

and sabotage, as well as downtime and repair costs that have added to the burdens of

the players, means that there is a cap on any potential upside for the sector.

The industry remains at

the mercy of policy

reforms that can

catalyse more

investments into the

sector.

Exhibit 2: Fundamental drivers and trends show that the growth of global demand for crude oil will continue Possible triggers of oil price movement

Sources: United Capital Research

Given the global reach

of the oil market, price

movement reflects a

plethora of factors from

economics to politics.

Impact Projected Timing

Demand

Population increase 2018 - 2040

Emergence of electric vehicles 2020s

Positive global economic prospects 2018 - 2040

Increase in fuel efficiency 2020s

Increase in renewables 2020s

Supply

OPEC production cut 2018

Shale projects 2018

Increase in independent producers 2018

Reduction in production cost 2018 - 2020

Other Factors

Supply interruptions Spontaneous

Financial Markets Periodically


6

Regulatory Risks: There is power in the bill

At 37.1bn barrels, Nigeria has the 2nd largest proved oil reserves in Africa (after Libya), and

the 11th largest in the world (after Venezuela, Saudi Arabia, Canada, Iran, Iraq, Russia,

Kuwait, United Arab Emirates, Libya and U.S.). These assets remain significantly unexplored

with over 1,000 undeveloped discovered oil fields. The Petroleum Industry Bill (PIB) is yet to

be fully passed into law since its introduction in 2000. The PIB remains key to addressing

the regulatory and fiscal uncertainties that can support oil and gas projects. If these

uncertainties continue, we believe IOC’s would continue to channel investments to less

risky markets or wait for the situation to evolve before committing finances.

In 2017, the first part of the PIB (namely the Petroleum Industry Governance Bill, PIGB) was

passed. The PIGB was purported to tackle the governance aspect of the PIB. Yet, the

PIGB still has to go through the House of Representatives and the President to be law.

Meanwhile, three bills are outstanding; Petroleum Industry Administration Bill (PIAB),

Petroleum Industry Fiscal Bill (PIFB) and the Petroleum Host Community Bill (PHCB), all of

which have still not passed the Senate’s third reading. The PIB is meant to address the

issues surrounding the integration of local communities into the oil and gas business, an

unfavorable fiscal regime (as claimed by IOC’s) and the enormous amount of power

vested in the Minister. With these issues left unaddressed, investors will remain on the

sideline. Well over 850,000b/d of pre-FID (Final Investment Decision) projects could be

launched if these issues are addressed.

Well over 850,000b/d of

pre-FID projects could

be launched if

operational issues are

addressed

Exhibit 3: The Unpassed PIB remains the elephant in the room Nigeria Oil Industry – SWOT Analysis


STRENGTHS WEAKNESSES

• Discovered but unexplored resource base • Poor and incompatible fiscal terms

• Quality crude • Corruption through state owned companies

• Diversified hydrocarbon exports (Oil, Gas & LNG) • Poor inclusion of local communities

• Oil theft and illegal refining and trading

• Inactive refining sector

• Fiscal and regulatory uncertainties (PIB)

OPPORTUNITIES THREATS

Transformation of the refining sector • Resurgence of Niger Delta Militants

Implementation of the PIB • U.S. Shale producers

• Relapses in reform policies

• Disruption from electric & low carbon vehicles


7

The Nigerian Gas Market: Is gas the new oil?

The 2014 oil price slump was a wake-up call for Sub-Saharan African countries –

particularly oil producers. In a bid to reduce the negative impact of oil on their

economies, many have turned to natural gas. With a proven natural gas reserve of about

186.6trn cf., (which ranks Nigeria 1st in Africa and 9th in the world after Iran, Russia, Qatar,

Turkmenistan, Saudi Arabia, UAE, Venezuela and China), IOC’s operating in Nigeria have

increasingly turned their focus to gas production amid improving infrastructure, tougher

regulations against gas flaring, rising domestic demand and better export opportunities.

The Nigerian power sector is gas-centric with about 70.0% of electricity generation from

gas-fired power plants. This indicates that a solid base for gas demand exists.

Unfortunately, limited gas infrastructure has contributed to the high flaring rate (c. 12.0%)

and underinvestment in the sector. Given that major gas reserves are associated with oil,

the gas sector is susceptible to the vagaries of the oil sector. This indicates that an

improvement in the business environment in the oil sector would also trickle down to the

gas sector. Another major challenge limiting gas production is the artificially low gas

price. On the one hand, this structure makes the sector unattractive considering the high

operational costs involved with capacity upgrades and processing costs. On the other

hand, the domestic price is lower than what is obtainable internationally, and higher

margin-seeking investors continue to find this unattractive.

Operating structures

remain relatively

accommodative to gas

players

Exhibit 4: Regulatory activities serve the biggest risks Nigeria Gas Industry – SWOT Analysis



Power sector relies heavily on gas Major gas reserves are associated with oil

Significant gas reserves Limited gas infrastructure

Increasing local gas demand Relatively low gas price

More favourable fiscal terms for gas Dependence on power sector for growth


Passage of PIB; Improved operational terms Gas flaring

Efficient monetization of associated gas Security challenges

Regulation against gas flaring Regulatory uncertainties

Relatively low electricity production per capita


8

SEPLAT: Strategy, Profile & Outlook

Company Background

Seplat Petroleum Development Company (SEPLAT) is an independent indigenous

upstream oil and gas exploration and production company with a focus on Nigeria.

Founded in 2009 through the partnership of Shebah Petroleum Development Company

Limited and Platform Petroleum Joint Ventures Limited, it has since increased oil and gas

production and grown reserves in each year of operation. SEPLAT is widely recognized as

a leading Nigerian independent oil and gas operator. The company listed on both the

London Stock Exchange and the Nigerian Stock Exchange in April 2014.

Oil Business: Rosy outlook amid finalized evacuation plans

SEPLAT has interests in 6 onshore oil and gas assets in the Niger Delta area; a financial

interest in OML 55, as well as 5 working interests in OMLs 4, 38, 41, 53 and OPL 283. In 2015,

SEPLAT concluded negotiations to purchase 56.3% of BelemaOil Producing Limited

(BelemaOil) – a Nigerian Special Purpose Vehicle that had purchased a 40% interest in

OML 55. In 2016, SEPLAT agreed to a new commercial arrangement with BelemaOil, in

which SEPLAT is to relinquish all control over the entity in return for a discharge sum of

$330m to be paid to SEPLAT effective 2017, through the allocation of crude oil reserves

from OML 55.

SEPLAT has established

itself as a leading

indigenous player in

the Oil & Gas industry

Exhibit 5 : SEPLAT has a 45% working interest in OML 4, 38 and 41; a 40% working interest in OML 53; and a 40% non-operating working interest in OPL 283 Marginal field Area (Pillar). In terms of OML 55, SEPLAT and BelemaOil are joint operators of the block on behalf of the NPDC/Seplat/BelemaOil Joint Venture SEPLAT - Asset Overview

Gulf of Guinea

Ohaji

South

Jisike

OdinmaEmeabiam

Alaoma

Ow u

Omerelu

Orogho

Okporhuru

Oben

Okoporo

Okw efe

Mosogar

Amukpe

Ovhor

W arri

OML 4

Escravos(Terminal point)

Umuset i (Pillar)

Igbuku (Pillar)

Forcados(Terminal point)

Port Harcourt

Nembe

Bonny

Inda

Ke

Belema

Idama

Robert KiriAkaso

Krakama

Onitsha1

3 OML 41Sapele

Ubaleme 2

OML 38

384 OPL 283

5

OML 53Ow erri

Heoma

6 OML 55Soku



9

Parsing through key performance indices, SEPLAT has been able to grow its working

interest production of crude oil & liquids from an average of 20,832 boepd in 2012 to

30,366 boepd pre-Forcados shut-down in 2016.

SEPLAT exports its oil through a third-party infrastructure, which makes the Company

vulnerable to downtimes. Nevertheless, the company is working on diversifying its

evacuation options. Following the Forcados terminal force majeure on February 2016,

SEPLAT has been able to export a total of approximately 3 MMbbls (working interest)

through barging. While this route provides the benefit of exports being less exposed to

interruptions, it is relatively costly ($11/bbl vs an estimated $4/bbl through the Forcados

terminal - excluding historic reconciliation losses and downtime). Furthermore, based on

management guidance, an additional export pipeline alternative (Escravos) is expected

to be fully operational by Q3-18, which should help SEPLAT hedge constraints that may

arise from disruptions in a single export route.

Gas Business: A sea of opportunity exists

SEPLAT has established itself as a leading gas supplier in the Nigerian market through

committed investments in the development and monetization of its gas reserves. SEPLAT

has seen marked increase in its working interest production from an average of 45 MMcf/

d. in 2012 to 157 MMcf in 2017, reflecting a 3.5x increase. Additionally, SEPLAT has been

able to grow its organic reserves, through drilling and development activities in its core

producing assets, as well as strategic acquisitions of interests in OMLs 53 and OPL 283.

Thus, total working interest based on 2P reserves have grown from 281 MMboe in 2010 to

477 MMboe as at January 1, 2018.

SEPLAT is working on de

-risking its business

from vagaries

associated with relying

on just one export route

SEPL,AT has been able

to grow its gas business

by taking strategic

positions

Exhibit 6: SEPLAT is working on branching out its export routes to minimize the impact of downtime associated with any specific route SEPLAT – Crude oil evacuation options

Sources: Company Notes, United Capital Research

*Total capacity **Estimated

2016 2017 2018f Seplat's Access Cost ($/bbl)

Forcados Forcados Forcados 80,000 bpd $4.0

Warri refinery Warri refinery 30,000 bpd $11.0

Escravos 160,000 bpd* $4.0**


10

Overtime, SEPLAT has been able to increase its gas processing capacity to 465 MMcf/d in

its Oben gas processing plant – its most productive gas asset, together with a 60 MMcf/d

processing capacity at the Sapele gas processing plant, bringing its total operated gross

processing capacity to 525 MMcf/d. This establishes SEPLAT as a swing indigenous player

in the gas business, with headroom for increasing production in its operated assets as well

capacity to process third party gas volumes. Given that all of the gas SEPLAT produces is

sold in Nigeria, SEPLAT’s Oben facility is strategically positioned with access to major

demand centers – Lagos and Abuja. SEPLAT also has the ability to export gas to

neighboring markets through access to the West African Gas Pipeline. SEPLAT is also

working on developing more processing capacity through the Assa North-Ohaji South

(ANOH) gas project - described as one of the largest greenfield gas/condensate

development projects in Nigeria, executed to meet the 285% domestic gas supply growth

projection by NNPC and its partners.

SEPLAT is involved in

one of the largest

greenfield gas/

condensate

development projects

in Nigeria

SEPLAT enjoys a

strategic positioning of

its assets to major

demand hubs

Exhibit 7: SEPLAT has established itself as a swing player in the gas business SEPLAT’s position in the Oil & Gas industry, Working interest 2P gas and liquid reserve growth

0.9%of Nigerian crude oil and

condensate production

2.0%of Nigerian gas production

Sources: Company notes, Global data, United Capital Research

Exhibit 8: SEPLAT is strategically well positioned to capitalize on opportunities in the Gas sector SEPLAT – Gas assets and related infrastructure

Sources: Company notes, United Capital Research

0

100

200

300

400

500

5

105

205

305

2013 2014 2015 2016 2017

Proved (2P) hydrocarbon reserves

(MMboe)

Gas reserves Liquid reserves Total


11

Strategy and Plans

SEPLAT has four clear strategies over the next few years: (1) to maximize production and

cash flows from its existing assets; (2) to Increase its reserve base and develop and

commercialize its 2C resources into 2P reserves; (3) to Commercialize gas reserves and

production to grow market share in Nigeria’s growing gas market; and (4) to pursue a

focused acquisition strategy to selectively acquire interests in assets with potential for

strong return on investment.

Exhibit 9: SEPLAT has been able to scale up its gas business, despite unprecedented periods of downtime in the oil space SEPLAT – Trajectory of crude oil, gas sales, and price

0

200

400

600

800

2013 2014 2015 2016 2017

Oil and gas sales movement ($'mn)

Gas sales Crude oil sales

50.4

3.0

2

3

4

35

55

75

95

115

135

2013 2014 2015 2016 2017

Oil and gas price movement

Oil Price ($/Bbl) Gas Price ($/MMcf)

$/Bbl $/MMcf

Sources: Company notes, United Capital Research Sources: Company notes, United Capital Research

Exhibit 10: Sea of opportunities exist in the gas business SEPLAT’s SWOT Analysis



Attractive portfolio of asset Limited prospects outside of OML's 4, 38 and 41

Strategic positioning (assets and supplier-wise) Ongoing high-risk capital commitment

Thriving gas business

Credible operating expertise

Long term sales agreements

Involvement in gas export projects/infrastructure


Significant undeveloped resources Exposure to troubled Niger Delta region

Gas supply deficit in thermal power generation No change in fiscal and regulatory terms

Considerable untapped gas export potential Changes in national energy policy

Extensive state involvement and intervention

Inadequate pipeline capacity


12

Financial performance

In our view, SEPLAT has a very strong track record of growth, regardless of the evacuation

challenges of 2016 – 2017 that are currently being addressed. We expect:

Revenue: FY17-FY20E CAGR of +25.4%, driven by: (1) strengthened cash position

considering its extended debt maturity profile, unrecognized capital allowance and

receipts from OML 55; (2) the establishment of a well-diversified export route that will

address storage constraints and support gas deliveries to the domestic market; (3) pay-

offs from the installation of gas processing facilities and the drilling of gas production wells;

(4) relatively stable commodity prices;

Production expense: SEPLAT has seen marked reduction in its production expense on the

backdrop of a decrease in crude handling charges (reflecting lesser levels of evacuation

through the Forcados terminal) - which more than offset increases in the costs associated

with barging. Additionally, decreases in its operation and maintenance expenses

(following reduced levels of field investments) contributed to the decreases in production

costs in 2017. We forecast a FY17-FY20E CAGR of +22.8%, driven by: (1) higher evacuation

through Forcados; (2) a pick-up in field investments;

EBITDAX: FY17-FY20E CAGR of +21.6% as SEPLAT recovers from its recent earnings slump

amid a less volatile oil market, relative stability in the Niger Delta region and increasing

gas volumes.

Taxation: Following the expiration of SEPLAT’s pioneer and new entrant tax status, SEPLAT’s

effective tax rate is 85%. However, SEPLAT has quite sizable capital allowance - in excess

of $1 billion, predominantly from qualifying capital expenditure, which the company is

permitted to offset against its future taxes over a five-year period. We have factored this

into our effective tax forecasts.

Fundamentally

speaking, SEPLAT has

promising prospects

that points to a run-up

in its shares If all falls in

place

Financials

Exhibit 11: We forecast strong FY-18 growth, driven both from a rebound in production following the lifting of force majeure and from an expanding gas business SEPLAT- Revenue profile, Production OPEX per barrel


0

200

400

600

800

1,000

2014 2015 2016 2017 2018f 2019f 2020f

Revenue by product ($'mn)

Oil Revenue Gas Revenue Total Revenue

$9.7

$8.8

$6.0

$6.7$6.4 $6.4

5

6

7

8

9

10

2015 2016 2017 2018f 2019f 2020f

Production opex per barrel ($/boe)


13

Commodity Prices: We maintained an oil price of $55.0/bbl, which represents a balance

between the $40/bbl price floor that OPEC’s production cut is inducing, and the $70/bbl

price cap that rising U.S. shale output is instigating. On the gas side, given that SEPLAT

typically has long term contracts with prices locked in, we have maintained gas prices at

$3.0/MMcf.

Production: We forecast a total average daily production of 39,470 boe/d. We are not

quick to adjust our estimates to pre-forcados shut-down levels, recognizing the downside

risks from uncertainty with the Trans-Forcados pipeline availability as well as the

upcoming Nigerian election, which may trigger agitations from Niger Delta militants.

Exhibit 12: We have a relatively stable outlook for oil and gas prices in the near term. Oil prices are forecasted to hover around $55/bbl while gas prices are forecasted to remain stable at $3/MMcf

Sources: Company notes, United Capital Research

Exhibit 15: We do not envisage any production slow-down in the near term, as SEPLAT prioritizes diversifying its evacuation options SEPLAT’s Working interest production history and forecast

Sources: Company notes, Global data, United Capital Research

Actual Forecast

SEPLAT 2015 2016 2017 2018 2019 2020

Crude oil & liquids (boe/d)

OMLs 4,38 & 41 25,461 7,452 15,777 16,230 23,517 32,206

OPL 283 1,114 612 1,001 1,860 1,767 1,722

OML 53 686 1,182 1,075 952 848 752

OML 55 3,106 1,502

Total Crude Oils 30,366 10,748 17,853 19,042 26,132 34,679

Natural gas (MMcf/d)

OMLs 4,38 & 41 86 94 114 124 114 175

OPL 283 - - - - - -

OML 53 - - - - - -

OML 55 - - - - - -

Total natural gas 86 94 114 124 114 175

TOTAL (boe/d) - SEPLAT 44,735 26,497 36,924 39,470 45,085 63,910

We have a relatively

stable outlook for oil

and gas prices in the

near term

Uncertainty with the

Trans-Forcados

pipeline availability as

and the upcoming

Nigerian election, are

downside risks to

production

Actual Forecast

2015 2016 2017 2018 2019 2020

Oil Benchmarks

Bull case 80.0 107.1 107.1

Base case 55.0 55.0 55.0

Bear case 27.2 29.5 29.5

Realised Oil Price ($/Bbl) 51.2 40.4 50.4 55.0 55.0 55.0

Gas Benchmarks

Bull case 3.5 3.5 3.5

Base case 3.0 3.0 3.1

Bear case 1.5 1.5 1.5

Realised Natural Gas Price ($/MMcf) 2.6 3.0 3.0 3.0 3.0 3.1


14

Balance sheet and cash flow

Net Debt/EBITDA: SEPLAT successfully issued a $350mn senior note due 2023, to be used to

re-finance its existing bank debt. The company also had a one-year extension of its

Revolving Credit Facility (RCF). Accordingly, SEPLAT is armed with a more optimal capital

structure and we expect net debt/EBITDA to average 1.3x in FY18 – FY20E considering

significant improvements in its cashflow and greater flexibility in its credit terms

Free cash flow per barrel: Free cash flow per barrel - excluding tax credits, is expected to

improve significantly to $16.1 in FY18E, spurred by improved cash flow generation, greater

loan flexibility, unrecognized capital allowance from qualified capital expenditure and

receipts from crude lifted from OML 55.

Dividend: we expect SEPLAT to resume dividend payment in 2018 in view of a 95%

historical correlation between its paid dividend and generated free cash flow. Although,

SEPLAT has no clear-cut dividend policy, we assume an average dividend payout ratio of

20% in 2018 - conservative relative to past payout ratios because there is still more

development campaign to which the company requires the use of its retained earnings

SEPLAT has a stronger

cash position in light of

its extended debt

maturity profile,

unrecognised capital

allowance and receipts

from OML 55

Exhibit 16: We believe SEPLAT is in a strong financial position considering its more flexible credit terms and a favorable cash generating outlook SEPLAT – Financial stability



2.5

-5.1

0.7

1.7 1.40.8

-6

-5

-4

-3

-2

-1

0

1

2

3

2015 2016 2017 2018f 2019f 2020f

Net Debt/EBITDA (x)

$20.5

-$9.0

-$2.7

$16.1

$12.1

$5.8

-15

-10

-5

0

5

10

15

20

25

2015 2016 2017 2018f 2019f 2020f

Free cash flow per barrel ($/boe) -

ex. forecasted tax credits

-200

-100

0

100

200

300

400

2015 2016 2017 2018f 2019f 2020f

Free cash flow and dividends ($'mn)

Free cash flow Dividend

40.6% 40.9%

8.8%

19.2% 20.9%

13.6%

0%

10%

20%

30%

40%

50%

2015 2016 2017 2018f 2019f 2020f

Net Debt/Equity (%)


15

We initiate with a target price of ₦867.7 ($2.4)

We believe SEPLAT’s business lends itself well to a NAV valuation because it normalizes

for variations in asset quality, reserve life, future capex, and growth rates. We supplement

our NAV analysis with trading multiples.

Our NAV approach for valuing SEPLAT

Our NAV based valuation gives us a target price of ₦867.7 ($2.4), which presents a 17.7%

upside on the stock's current price of N737.1 ($2.1). Thus, we rate the stock a BUY as

SEPLAT provides a good entry point into Nigeria’s attractive exploration and production

sector. We did not model SEPLAT’s 2C reserves, even though these reserves hold

considerable conversion upsides, because the company would likely require either

additional debt, farm out or equity financing to develop it in the timescale we have

assumed.

We modelled SEPLAT’s 2P reserves (using figures provided in the company’s filings) over a

forecast period of 51 years (up until 2068) – our estimated life of SEPLAT’s producing

assets, given the assumption that no additional development or acquisition of new assets

would occur. Our decline rate estimate and commodity price assumptions drove the

annual cash flow from these reserves, from which we deducted operating and

development costs. We then applied a 10% discount rate - as is the industry best practice,

to our cash flow stream to arrive at a present value for the reserves. Finally, we made

balance sheet adjustments for debt and cash to derive SEPLAT’s NAV.

Valuation

We initiate with a

target price of ₦867.7

($2.4), based on our

NAV analysis

Exhibit 17: We initiate with a target price of ₦867.7 ($2.4).

Source: United Capital Research

We place a BUY

rating on SEPLAT NAV Methodology

Total E&P Enterprise Value 1,551,208

Short-term debt -265,400

Long-term debt -304,677

Cash & Investments 437,212

Net Debt -132,865

Equity Value 1,418,343

Shares outstanding 588,445

Target price ($) $2.41

Target price (N) ₦867.7


16

Sensitivity Analysis

Exhibit 18 highlights how our target price would change with changes in our forecasted

2018 or long-term commodity prices, ceteris paribus. Stressed for an oil price of up to $70,

SEPLAT’s bull case price stands at ₦1025.6 ($2.8), however, continued price volatility could

negatively impact corporate-level cash flow, which could cause the stock to

underperform our expectation.

Peer Analysis

The peer set we have compiled for SEPLAT consists of publicly listed companies with major

business interests in exploration and production. We also selected these companies

based on their 2P reserves and production profile. Using this peer set, we believe that

SEPLAT is trading at the sharpest discount to its peers. For instance, in 2017 the Company

traded at 2.6x EV/2P, against an average of 15.5x.

We believe SEPLAT deserves a higher multiple, due to the stability of its activities

compared to the past. Furthermore, SEPLAT’s improved cash position and expanding gas

business paves the way for potential accretion in its trading multiples.


Stressed for an oil price

of up to $70, SEPLAT’s

bull case price stands

at ₦1025.6 ($2.8)

Exhibit 18: Target price sensitivity to commodity prices

Long-term oil price forecast

$30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.0

TP $2.4 $1.6 $1.9 $2.3 $2.6 $2.8 $3.1 $3.4 $3.7

₦867.7 ₦563.7 ₦694.5 ₦812.2 ₦921.6 ₦1,025.6 ₦1,125.8 ₦1,223.1 ₦1,318.4

2018 oil price forecast

$30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.0

TP $2.4 $2.3 $2.4 $2.4 $2.4 $2.5 $2.5 $2.5 $2.5

₦867.7 ₦835.8 ₦849.8 ₦862.0 ₦873.1 ₦883.4 ₦893.1 ₦902.3 ₦911.1

Long term gas price forecast

$1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 $5.0

TP $2.4 $1.5 $1.8 $2.1 $2.4 $2.7 $3.0 $3.3 $3.6

₦867.7 ₦556.2 ₦657.5 ₦761.4 ₦867.7 ₦976.1 ₦1,086.2 ₦1,197.9 ₦1,311.0

2018 gas price forecasts

$1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 $5.0

TP $2.4 $2.3 $2.3 $2.4 $2.4 $2.4 $2.5 $2.5 $2.6

₦867.7 ₦828.6 ₦840.9 ₦854.0 ₦867.7 ₦881.9 ₦896.6 ₦911.6 ₦926.9


17

SEPLAT is trading at the

sharpest discount

relative to its peers

Exhibit 19: Peer group analysis

Sources: Capital IQ, United Capital Research

E&P Trading Comparable Ticker Price ($) Sho (m) Net dbt ($m)

Eqt Value

($m)

Ent Value

($m)

DNO ASA OB:DNO 1.7 1048.8 -39.8 1824.9 1781.3

EnQuest Plc LSE:ENQ 0.4 1130.1 2778.1 485.9 3405.5

Gran Tierra Energy Inc AMEX:GTE 2.9 391.3 219.2 1146.5 1365.7

Lundin Petroleum OM:LUPE 27.3 339.2 3808.6 9243.2 12988.1

Premier Oil Plc LSE:PMO 1.1 767.2 2602.6 859.3 3594.2

Tullow Oil Plc LSE:TLW 3.1 1388.8 4868.0 4319.2 9439.9

Seplat NGSE:SEPLAT 2.0 588.4 132.9 1170.9 1249.3

Mean 6.1 844.2 2,372.8 2,979.8 5,429.1

Median 2.3 908.0 2,690.4 1,485.7 3,499.9

Proved Re-

serves

(Mmboe)

Daily Pro-

duction

EBITDAX ($m) Revenue

E&P Trading Comparable LTM NTM LTM NTM

DNO ASA 384 73,678 734.1 437.9 347.4 615.8

EnQuest Plc 210 37,405 277.2 676.5 627.5 1222.3

Gran Tierra Energy Inc 137 26,785 246.5 397.0 421.7 585.3

Lundin Petroleum 726 86,100 1487.7 1560.2 1997.0 1819.4

Premier Oil Plc 302 75,000 502.5 870.4 1043.1 1433.8

Tullow Oil Plc 291 87,300 1090.0 1291.3 1722.5 1743.7

Seplat 477 36,924 198.7 184.2 452.2 513.4

Mean 342 64,378 723 872 1,027 1,237

Median 296 74,339 618 773 835 1,328

N. dbt/EV

(%)

N. dbt/

EBITDA EV/2P

EV/boepd

($) EV/EBITDA EV/Revenue E&P Trading Comparable

DNO ASA -2.2% -0.1 4.6 0.02 2.4 5.1

EnQuest Plc 81.6% 10.0 16.2 0.09 12.3 5.4

Gran Tierra Energy Inc 16.1% 0.9 10.0 0.05 5.5 3.2

Lundin Petroleum 29.3% 2.6 17.9 0.15 8.7 6.5

Premier Oil Plc 72.4% 5.2 11.9 0.05 7.2 3.4

Tullow Oil Plc 51.6% 4.5 32.5 0.11 8.7 5.5

Seplat 10.6% 0.7 2.6 0.03 6.3 2.8

Mean 41.4% 3.8 15.5 0.08 7.5 4.9

Median 40.4% 3.5 14.1 0.07 7.9 5.3

Forward P/E

EV/Forward

EBITDA

EV/Forward

Revenue

LTM Gross

Margin %

LTM EBITDA

Margin %

LTM EBIT

Margin % E&P Trading Comparable

DNO ASA 7.4 4.1 2.9 41.8% 211.3% 149.6%

EnQuest Plc 2.9 5.0 2.8 9.2% 44.2% 6.1%

Gran Tierra Energy Inc 8.1 3.4 2.3 68.0% 58.5% 27.3%

Lundin Petroleum 25.8 8.3 7.1 76.6% 74.5% 40.7%

Premier Oil Plc 6.4 4.1 2.5 56.3% 48.2% 7.3%

Tullow Oil Plc 15.3 7.3 5.4 35.0% 63.3% -12.0%

Seplat 6.6 6.8 2.4 53.1% 43.9% 24.9%

Mean 11.0 5.4 3.8 47.8% 83.3% 36.5%

Median 7.7 4.6 2.8 49.1% 60.9% 17.3%


18

#1. Logistical and operational risks: SEPLAT is susceptible to vagaries surrounding the

availability and capacity of production facilities, processing facilities and pipelines—most

of which are owned and operated by third parties and are vulnerable to militant and

unlawful activities, violence and civic disturbances. These challenges can adversely

impact its business through delays in production, higher export costs and the use of export

routes that are unable to support its desired production volumes. Although SEPLAT is

working on developing alternative export routes, subsequent delays may occur due to

the nature of the business environment or an equipment break-down.

#2. Market risk: SEPLAT’s business is highly dependent on the demand and supply

dynamics of oil and gas. On the oil side, prices are marked by extreme volatility and have

witnessed marked declines over the past few years. On the gas side, SEPLAT’s gas

production is contracted with agreements that include fixed prices that may be subject

to inflationary-adjustments. SEPLAT may be disserviced If the market price for gas

increases above the price in its contracted sales agreement or if increases in cost is not

offset by inflationary adjustments to the contracted gas price.

#3. Reserve replacement risk: As SEPLAT’S existing reserves get depleted by production,

SEPLAT’s future cash flow is highly dependent on how well it can develop its current

reserves and resources efficiently, as well as its ability to find or acquire additional

recoverable reserves and resources in a cost-efficient manner. While these replacement

activities are high-risk and subject to significant capital expenditures, an inability to

replace its reserves and resources could lead to an inability of the business to sustain its

cashflow.

#4. Regulatory risk: Because the Nigerian Oil & Gas Industry is heavily state-influenced,

SEPLAT is subject to uncertainties around the proposed Petroleum Bills, as well as changes

in the regulatory environment. Furthermore, SEPLAT’s rights under OMLs 4, 38 & 41—its most

productive asset, expire in June 2019 and is subject to approval from the Nigerian

government, which may instigate more stringent terms and conditions, if at all SEPLAT is

able to renew its license.

#5. Global/national/regional political and social instability risks: SEPLAT is exposed to

additional risks such as: (1) political change and social and civil unrest, bearing in mind

Nigeria’s next presidential election that is scheduled to take place in February 2019 which

traditionally sparks agitations from Niger Delta militants; (2) OPEC-impelled risks

#6. Exchange rate risk: SEPLAT holds cash and cash equivalents in both U.S. dollars and

naira, and as such is exposed to exchange rate volatility that may cause fluctuations in its

cashflow.

SEPLAT’s business is

highly dependent on

the demand and

supply dynamics of oil

and gas

The upcoming election

may trigger agitations

from Niger Delta

militants—just as we

saw during the last

Key Risks


19

Appendix

Glossary of terms

Company Overview

Company Type: Public Company

Company Status: Operating Subsidiary

Website: seplatpetroleum.com

Primary Industry Classification: Oil and Gas Exploration and Production

Ticker: SEPLAT (NSE), SEPL (LSE)

Year Founded: 2009

Stock Quote and Chart (Currency: NGN)

Last Price 737.1 Market Cap (mm) 433,742.5

52 wk High/Low 785/336 Shares Out. (mm) 588.4

YTD Change % 17.71 Float % 50.9

Beta 0.4 Dividend Yield % 0.0%

Last Updated on Apr-23-2018 NGSE:SEPLAT, LSE:SEPL - Common Stock

Board of Directors

Name Title

Orjiako, Ambrosie Bryant Chukwueloka Chairman

Avuru, Ojunekwu Augustine Chief Executive Officer

Brown, Roger Thompson Chief Financial Officer and Executive Director

Alexander, Michael Richard Senior Independent Non-Executive Director

Malloch-Brown, George Mark Independent Non-Executive Director

Okeahalam, Charles C. Independent Non-Executive Director

Omiyi, Basil Efoise Independent Non-Executive Director

Dodo, Damian Dinshiya Independent Non-Executive Director

Hochard, Michel Non-Executive Director

Ofurhie, Macaulay Agbada Non-Executive Director

Omoigui-Okauru, Ifueko Marina Independent Non-Executive Director

“2C” best estimate scenario of contingent resources

“2P” proved reserves plus probable reserves

“barrel” or “b” or “bbl” a standard measure of volume for oil

“MMscf” millions of cubic feet

“boepd” barrels of oil equivalent per day

“bopd” barrels of oil per day

“Brent” Brent is a benchmark for oil

“FID” Final Investment decision

“IOC” International Oil Company

“LTM” Last Twelve Months

“NNPC” Nigerian National Petroleum Commission

“NTM” Next Twelve Months

“OPEC” Organization of the Petroleum Exporting Countries


20

Current and Pending Subsidiaries / Investments

Company Name Business Description Geography Primary Industry

Belemaoil Produc-

ing Ltd Belemaoil Producing Ltd. engages

in the exploration and production

of oil and gas. The company is

based in Port Harcourt, Nigeria. As

of February 5, 2015, Belemaoil Pro-

ducing Ltd operates as a subsidiary

of Seplat Petroleum Development

Company Plc.

Africa /

Middle East Oil and Gas Ex-

ploration and

Production

Gas Rich Oil Min-

ing Lease (OML)

53 in Eastern On-

shore Niger Delta

Basin

Gas Rich Oil Mining Lease (OML) 53

in Eastern Onshore Niger Delta Ba-

sin comprises oil and gas reserves.

The reserves are located in Nigeria.

Africa /


ploration and

Production

Nerine Support

Services Limited Africa /

Middle East -

Newton Energy

Ltd Africa /

Middle East -

OML 4, 38 and 41 OML 4, 38 and 41 comprises oil and

gas reserves and are located in

Nigeria.

Africa /


ploration and

Production

Seplat East

Swamp Company

Limited

Seplat East Swamp Company Lim-

ited provides oil and gas explora-

tion and production services. The

company was incorporated in 2014

and is based in Nigeria. Seplat East

Swamp Company Limited operates

as a subsidiary of Seplat Petroleum

Development Company Plc.

Africa /


ploration and

Production

Seplat Petroleum

Development

Company Uk Lim-

ited

Crude Petroleum And Natural Gas,

Nsk

Europe Oil and Gas Ex-

ploration and

Production

Senior Management

Name Title

Okon, Effiong Executive Operations Director

Eyewuoma, Taiye Chief Accountant

Dymond, Andrew Head of Investor Relations

Odeleye, Isaiah Adesola General Manager of Legal

Nwachuku, Chioma General Manager of External Affairs and Communications

Amedu, Jonah Head of Petroleum Engineering

Audu, Yusuf Head of Department, Drilling and Completion

Bolaji, Ganiyu Head of Production and Field Operations

Ogunbanwo, Olubusola Head of Asset Development

Kachikwu, Mirian Kene General Counsel and Company Secretary


21

Investment Rating Criteria and Disclosure

United Capital Research adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. These generic ratings are defined below;

Buy: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is greater than our estimated cost of equity.

Hold: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is less than the cost of equity, however, the expected total return on the

stock is greater than or equal to the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR – 500bps; i.e 10%). We consider this as the minimum return

that may deserve our holding of a risk asset, like equity.

Sell: Based on our valuation and subjective view (if any), the total return upside on the stock’s current price is less than the Standing Deposit Facility rate of the Central Bank of Nigeria

(which is currently MPR – 200bps; i.e. 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity, especially as we consider the average

4.5% total transaction cost for an average retail investor.

NR*: Please note that in addition to our three rating heads, we indicate stocks that we do not rate with NR; meaning Not-Rated. We may not rate a stock due to investment banking

relationships, other sources of conflict of interests and other reasons which may from time to time prevent us from issuing a rating on the shares (or other instruments) of a company.

Please note that we sometimes give concessional rating on stocks, which may be informed by technical factors and market sentiments.

Conflict of Interest: It is the policy of United Capital Plc and all its subsidiaries/affiliates (thereafter collectively referred to as “UCAP”) that research analysts may not be involved in

activities that suggest that they are representing the interests of UCAP in a way likely to appear to be inconsistent with providing independent investment research. In addition,

research analysts’ reporting lines are structured so as to avoid any conflict of interests. Precisely, research analysts are not subject to the supervision or control of anyone in UCAP’s

Investment Banking or Sales and Trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published

research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests as clients. Overall, the Group protects clients from probable

conflicts of interest that may arise in the course of its business relationships.

Risk Rating

Our Risk rating assesses the likelihood of market price deviating significantly from valuation fair prices. Risk factors limit gravitation of market prices towards target prices or result in

significant decline in current price and thus swing buy/sell rating from positive to negative or vice versa. Risk factors are broadly grouped into systematic and unsystematic risk.

Systematic risk (also called market risk or un-diversifiable risk) captures uncertainties or volatilities inherent to the entire market. This also includes macroeconomic shocks emanating from

government actions or inactions, unanticipated policy pronouncements, external shocks and socio-political tensions which may swing market prices significantly away from targets.

Unsystematic risk (specific risk, diversifiable risk or residual risk) on the other hand captures company or sector specific uncertainties which can mostly be reduced by diversification.

These include labour union/industrial actions, corporate governance/management inefficiency, litigation, possible liquidation/winding-down of operation, internal labour unrest,

government action, policy missteps as well as disruptions resulting from innovation, technology and technical progress etc.

United Capital Research adopts a 3-tier risk rating for assets under our coverage: High, Medium and Low. The rating scale is ordinal and captures the diverse risks that we deem

applicable the company of focus. The ratings are defined below;

High: High probability of an imminent systematic risk or/and unsystematic risk

Medium: Slightly high (but lower compared to ‘High’) probability of an imminent systematic risk or/and unsystematic risk

Low: Low probability of an imminent systematic risk or/and unsystematic risk

Analyst Certification

The research analysts who prepared this report certify as follows:

1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this

report.

2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in

this report.

Other Disclosures

United Capital Plc or any of its affiliates (thereafter collectively referred to as “UCAP”) may have financial or beneficial interest in securities or related investments discussed in this report,

potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which UCAP may have in companies or securities discussed in this report

are disclosed:

• UCAP may own shares of the company/subject covered in this research report. • UCAP does or may seek to do business with the company/subject of this research report • UCAP may be or may seek to be a market maker for the company which is the subject of this research report • UCAP or any of its officers may be or may seek to be a director in the company(ies) covered in this research report • UCAP may be likely recipient of financial or other material benefits from the company/subject of this research report

Disclosure keys

a. The analyst holds personal positions (directly or indirectly) in one or more of the stocks covered in this report

b. The analyst(s) responsible for this report (whose name(s) appear(s) on the front page of this report is a Board member, Officer or Director of the Company or has influence

on the company’s operating decision directly or through proxy arrangements

c. UCAP is a market maker in the publicly traded equities of the Company

d. UCAP has been lead arranger or co-lead arranger over the past 12 months of any offer of securities of the Company

e. UCAP beneficially own 1% or more of the equity securities of the Company

f. UCAP holds a major interest in the debt of the Company

g. UCAP has received compensation for investment banking activities from the Company within the last 12 months

h. UCAP intends to seek, or anticipates compensation for investment banking services from the Company in the next 6 months

i. The content of this research report has been communicated with the Company, following which this research report has been materially amended before its distribution

j. The Company is a client of UCAP

k. The Company owns more than 5% of the issued share capital of UCAP

Disclaimer

United Capital Plc Research (UCR) notes are prepared with due care and diligence based on publicly available information as well as analysts’ knowledge and opinion on the markets

and companies covered; albeit UCR neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither United Capital (UCAP)

nor any of its associates or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell

securities herein discussed. Please note this report is a proprietary work of UCR and should not be reproduced (in any form) without the prior written consent of Management. UCAP is

registered with the Securities and Exchange Commission and its subsidiary, UBA Securities Limited is a dealing member of the Nigerian Stock Exchange. For enquiries, contact United

Capital Plc, 12th Floor, UBA House, 57 Marina, Lagos. ©United Capital Plc 2016.*

Company Disclosure Dangote Cement Plc h Dangote Flour Plc h Dangote Sugar Plc h Diamond Bank Plc h FirstBank Holdings Nigeria Plc h Guaranty Trust Bank Plc h Guinness Nigeria Plc h PZ Nigeria Plc h Transnational Corporation of Nigeria Plc g, h United Bank for Africa Plc h

Disclosure Appendix

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