Niger Delta Exploration & Production Plc

NIGER DELTA EXPLORATION & PRODUCTION PLC

Company Overview
NDEP is an integrated oil and gas company established on 25th March 1992 as Midas Drilling Fund. It became Niger Delta Exploration & Production Plc in November 1996.  It operates small to medium sized fields in Nigeria. Niger Delta Petroleum Resources Limited (NDPR), the flagship subsidiary of NDEP, has interest in OML 53, OML 54, OML 34 and OPL 227. The company was admitted to trade on NASD OTC Securities Exchange on 1st August, 2013.

Mr. Oloruntoba Akinmoladun replaced Dr. Layi Fatona as chief executive officer on 9th May 2019. Mr. Ladi Jadesimi, appointed chairman in June 2016, retained his position in the year under review.

Investment Thesis
The company suspended drilling activities in 2015 against the backdrop of dwindling crude oil prices.  However, the recommencement of drilling activities in 2018 has increased its reserves and afforded it the opportunity to bolster revenue as crude oil prices pick up. Crude oil sales have more than doubled between 2015 and 2018. Crude oil sales jumped to NGN29.4 billion in 2018 from NGN12.5 billion recorded in 2015 translating to  33% compound annual growth rate in the past three years.

NDEP has been expanding its refinery to increase diesel processing capacity. In addition, it is spending to increase gas processing capacity from 100MMscf/day to 400MMscf/day. Being an integrated oil and gas company, NDEP uses diesel and gas sales to soften the shock caused by unpredictability of crude oil prices. Crude oil accounts for over 70% of total revenue while gas and diesel sales produce less than 30%. Diesel and gas sales have increased at 24.8% and 31.6% respectively on three-year Compound Annual Growth Rate (CAGR) basis.

Capital spending has increased but total debt has diminished by NGN19.5 billion. Consequently, debt ratio reduced to 6.1% from 19.6%. This is attributable to the conversion of the NGN23.1 billion loan (2017:NGN26 billion) from African Capital Alliance to equity.      But this would lead to dilution of shareholding.

Operating profit margin improved from -11.2% in 2015 to 50.1% in 2018. In the same vein, Profit Before Tax (PBT) margin moved from -9.5% to 75.1%. NDEP pays dividends to investors regularly; and the company has, on the average,   produced Return on Equity (RoE) and Return on Assets (RoA) of 22.2% and 11% respectively. We anticipate minimal disruption to operations because of the relative peace in the Niger Delta.

Valuation
NDEP has adjusted Earnings Power Value (EPV) of NGN453.3 per share. Average Earnings Per Share (EPS) and Book Value Per Share (BVPS) were NGN68 and NGN301.8 respectively. We are of the opinion that a share of NDEP is worth between NGN372.1 and NGN412.6.

Financial Overview
Rising prices of products in 2018 stimulated 15.6% revenue improvement from NGN33.8 billion to NGN39.1 billion. Operating profit shrank to NGN19.6 billion from NGN21.6 billion owing to cost increase. There was a 33.6% hike in operating costs from NGN17.4 billion to NGN23.3 billion.   Operating costs as percentage of revenue rose from 51.6% in 2017 to 59.6% in 2018. Nevertheless, share of profit of ND Western Limited, an associated company, resulted in NGN3.5 billion increase in PBT to NGN29.3 billion. Profit After Tax (PAT) leapt 52.8% to NGN37.4 billion because of NGN8.1 billion tax credit. In 2017, PAT was NGN24.5 billion. Accordingly, EPS rose to NGN206.3 from NGN135.

Gross profit margin of 58.4% was worse than what it was a year ago; operating profit margin dropped to 50.1% from 63.8%. However, PAT margin moved to 95.8%, up from 72.5% of the prior year, 2017. RoE was more or less flat at 23%. RoA was 18.7%, up from 15.2%.

Both shareholdersꞌ fund and total assets grew by 50.5% and 23.6% respectively. Working capital was NGN4 billion, continuing the improvement of 2017. Borrowings reduced by NGN19.5 billion to close the year at NGN12.1 billion. Despite a 9.2% dip, operating profit can still pay off borrowing costs 26.7 times. Also, operating cash flow can cover it 34.3 times. Total debts to shareholdersꞌ fund fell from 29.8% to 7.6% while debt ratio stood at 6.1%. Current assets can meet all current liabilities and long-term solvency is not impaired.

Business Risk
Oil prices swing up and down; therefore, earnings of NDEP are susceptible. Though gas and diesel sales provide some succour, the company cannot arbitrarily increase prices to widen profit margins owing to regulation. The Niger Delta Region of Nigeria is volatile as such; eruption of hostilities could disrupt operations or destroy facilities.

Recommendation: Buy