The oil and gas sector remains a cornerstone of the Nigerian economy, influenced by global crude oil price trends, policy shifts, and macroeconomic factors.
Within this sector, Seplat and Aradel Holdings stand out as key players, offering unique value propositions to both income-focused and growth-seeking investors.
For those considering an investment in either company, assessing their performance and growth prospects is essential.
Both companies also pay dividends, making them particularly attractive to income-focused investors.
Seplat’s share price has seen impressive growth, surging by 144.13% YtD to N5,639.50, reflecting strong market confidence.
On the other hand, Aradel’s share price has faced challenges, dropping 32% since its IPO in October 2024 to close at N525.80.
Let us take a closer look at the drivers and growth prospects.
Revenue performance: Scale vs growth
Both companies have demonstrated resilience in growing their revenues, as reflected in their financial reports.
- The combined revenue of the two companies in 2023 stood at N918.009 billion, marking a significant 95.31% year-on-year growth.
- This upward trend continued into the first nine months of 2024, with an impressive 141% surge in aggregate revenue, reaching N1.449 trillion. Remarkably, this nine-month figure already accounts for 158% of the total revenue recorded in 2023, underscoring the sector’s robust growth momentum.
- Seplat led in revenue for 2023, reporting N696.867 billion out of the total N918.009 billion, marking an impressive 72.53% year-on-year growth.
- This trend continued into the first nine months of 2024, with revenue surging by 124% YoY to N1.071 trillion, accounting for approximately 74% of the combined revenue of the two companies during this period. This underscores Seplat’s continued market dominance.
- The growth in Seplat’s revenue can be largely attributed to the depreciation of the Naira, which significantly boosted the local currency value of revenues despite a decline in performance when measured in constant currency (USD).
- This currency effect, combined with premium price realizations above Brent and favorable gas pricing, drove robust Naira-based revenue.
However, in constant currency (USD) for the nine months, revenue declined. According to the company’s nine-month 2024 financial highlights:
“Revenues of $715.3 million, down 11.7% compared to 9M 2023 ($810.4 million), largely due to an over-lift reported in 9M 2023. Adjusting for over-lift/under-lift, 9M 2024 revenue stands at $724 million, reflecting a 6% increase compared to 9M 2023 of $683 million.”
Aradel Holdings Plc has recorded impressive top-line growth, with a compound annual growth rate (CAGR) of 48.11% between 2019 and 2023, outpacing Seplat’s five-year CAGR of 34.31%.
Although it experienced a slight dip in 2020 due to the economic slowdown caused by the COVID-19 pandemic, Aradel’s revenue rebounded robustly, increasing by 58.53% year-over-year (YoY) in 2021 and achieving a remarkable 234.51% growth in 2023, outperforming Seplat’s 73% YoY growth in the same year.
The substantial revenue growth in 2023 was driven by a combination of elevated global crude oil prices (averaging USD 82.49 per barrel) and increased production across key segments: crude oil production rose by 146.82% YoY to 9,737 bblpd, gas output increased by 48.6% YoY to 26.5 mmscfpd, and refined products surged by 74.62% YoY to 267.70 million liters.
This growth momentum extended into 2024, with Aradel achieving an impressive 207% YoY revenue growth in the first nine months of the year, reaching N377.581 billion.
Profitability and Margins
In 2023, aggregate pre-tax profit for both companies grew by 98% to N237.704 billion, with a further 457% increase to N558.168 billion in the first nine months of 2024.
This robust growth was primarily driven by strong topline performance, which effectively offset the higher growth in cost of sales relative to revenue, operating expenses, and finance costs.
Seplat: In 2023, Seplat reported a 45% YoY growth in pre-tax profit, reaching N125.540 billion. However, the pre-tax margin declined by 16%, dropping to 18%, which can be attributed to higher operating expenses and foreign exchange revaluation losses.
In the first nine months of 2024, while the pre-tax profit margin showed significant improvement, growing by 161% to 34%, the net profit margin declined by 49.8% to 4.93%. This was due to a modest 12.46% growth in post-tax profit to N52.776 billion, which was impacted by increased tax liabilities.
Aradel: Aradel has consistently outperformed Seplat in terms of margins. Over the past five years, Aradel has maintained an average net margin of 39.66%, significantly surpassing Seplat’s average of 12.08%.
This trend continued into the first nine months of 2024, where Aradel recorded a net margin of 29.29%, compared to Seplat’s 4.93%.
This highlights Aradel’s superior efficiency in converting revenue into profit, despite Seplat’s higher revenue. For example, in the first nine months of 2024, Seplat posted revenue of N1.071 trillion; more than double Aradel’s N377.581 billion for the same period.
Comparing assets and efficiency
Seplat is a much larger company, with total assets of N5.2 trillion, while Aradel’s assets stand at N1.75 trillion.
- Despite being smaller, Aradel uses its assets more efficiently to generate revenue, as shown by its asset turnover ratio of 0.22 for the nine months of 2024.
- This means for every naira of assets, Aradel generates more revenue compared to Seplat, whose turnover ratio is slightly lower at 0.20.
- For investors, this efficiency metric highlights Aradel’s ability to squeeze more revenue from its asset base, which could be an advantage for sustained growth and profitability.
Debt and financial strength
- Seplat has much more debt than Aradel; N1.1 trillion compared to Aradel’s N78 billion.
- However, Seplat has managed its debts well, balancing them with its equity (the owners’ share of the company).
- Its equity multiplier of 1.87 shows it is using debt to grow while keeping risks manageable.
- Aradel, on the other hand, is more cautious, with a lower equity multiplier of 1.29, meaning it relies less on borrowed money and more on its funds.
Ability to pay interest and make profits
Both companies demonstrate strong financial health when it comes to covering their loan interest obligations. This is evident in their interest coverage ratios, which measure how many times their earnings can cover interest expenses.
- But Aradel is much better, as it earns enough to cover its interest payments 15 times over, compared to Seplat’s 8.17 times.
- When it comes to the profit margin, Aradel is far ahead. Given the nine months of 2024 performance for every naira of revenue, Aradel makes N29.29 in profit, while Seplat only makes N4.93. This high profitability helps Aradel deliver more returns to its shareholders, with a return on equity (ROE) of 8.16%, compared to Seplat’s 1.89%.
- While it outperforms Seplat, it’s still modest. Ideally, investors would look for an ROE closer to or exceeding 15%, which signals a company is generating strong returns on shareholders’ investments. This still suggests room for improvement in generating higher returns relative to the equity it holds.
- Overall, both Seplat and Aradel Holdings have distinct strengths, making them suitable for different investment strategies.
- While Seplat offers stability and consistent dividend payouts, Aradel presents a compelling case for growth-oriented investors, given its impressive margins and efficiency.
Analysts currently have a consensus Buy recommendation for Aradel, with an average 12-month price target of N637.39, indicating a potential upside of 21.22%.
