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If oil and gas giant Seplat Energies Plc were put up for sale today, investors would have to buy the company at an enterprise value of N1.36 trillion, according to MoneyCentral calculations.
But the buyer(s) will take up the debt of an organisation that has a steady cash flow and healthy balance-sheet.
Enterprise value (EV) shows a company’s total valuation. EV is used as a better alternative to market capitalisation because it is calculated by adding more vital components to the value of market capitalisation.
Seplat Energies has a market capitalisation of N1.08 trillion as at September 1- a milestone valuation given a strong stock rally- which is added to total debt of N573.07 billion and subtracted from cash and cash equivalent, gives an enterprise value of N1.36 trillion.
Put in another way, if a company were to purchase Seplat’s outstanding shares for N1.08 trillion billion, it would also have to settle the company’s N573.07 billion in outstanding debts.
Some analysts and investors prefer the EV as a valuation metric because it takes into consideration a company’s financial obligation and cash position.
The shares of upstream oil and gas giant have been rallying on the back of an uptick in crude oil price, thanks to the war between Russia and Ukraine and output cut by OPEC+.
Brent Crude oil was up 1.08 percent to land at $87.91 a barrel while West Texas Intermediate rose 1.07 percent to touch down at $84.7o.
The company shares have a year to date (YTD) of 166.20 percent, which outperforms the NGXASI index’s 29.85 percent.
However, the company shares are overvalued, trading at a price to earnings multiple of 34.25, while enterprise value (EV/EBITDA) stood at 20.50.
Financial Strength of Seplat
Investing in a company with a weak financial strength is susceptible to loss of capital in the form of dividend and share appreciation. Hence, it is germane or pertinent to take a look at the financial strength of Seplat Energies.
The oil and gas giant’s debt-to equity ratio of 42.30 percent is better than 65 percent of 40 companies on the NGXASI index.
Of course, one of the strengths of an oil firm is the amount of cash that it sits on as it needs stable cash flow to invest in development of new rigs or acquisition of other entities, settle its debt, and pay dividends.
It has an adjusted free cash flow of N144.15 billion as at June 2023.