Where Are the Billions Aradel (ARADEL)?

The Energy Industry’s child (second to SEPLAT based on years founded) seems to surprise us with moderate debt figures, great margins and adequate PPE’s contribution to operating earnings.

The Story

General drop in crude oil prices in 2014. Despite the small cash available, it’s still managed to carry out a drilling campaign for the year.

It commercialized the Ogbele field gas resources, as total gas produced was 8.3 billion of cubic feet which was down 16% from 2013.

But the Ogbele Mini Refinery helped in the adequate supply of diesel and with much security, it reduced the chances of crude oil theft.

Much positive results came up in 2014, as diesel production increased from 5.3 million litres to 15.7 million litres in 2014 and revenue for 2014 went up by 6.7 times compared to 2013 (from 2.3 billion to 15.3 billion, talking about the company specifically other than the group).

Operating income in 2014 settled at N7 billion after a cutthroat loss of N4.7 billion in 2013, as revenues weren’t high enough to cover expenses.

Aradel was formerly known as Niger Delta Exploration & Production (NDEP) plc in 1996 but later changed its name to Aradel Holdings in 2023. And it basically produces oil and gas which possesses several by-products such as asphalt, road oil, feedstocks, diesel fuels, heating oil, jet fuel, gasoline and more.

In 2015, it achieved its 10-years of consecutive oil production, but oil prices dropped, and it absorbed huge losses. 2015 saw a retraction in operating results due to generally reduced prices, slowdown in the economy of China, and the hikening of rates in the U.S.

I could tell that Aradel’s got a lot of fields for its mining operations and that is crucial to its intrinsic value.

Oil sales in 2015 dropped by 23% relative to 2014’s time. An incremental amount of N19 billion was paid for running cost as consultancy fees, high depreciation on assets, and the NDDC levy shot it up to that range.

Other income saw a 66% rise as net provisions saved for royalty, decommissioning liabilities, and grants summed up to N3.6 billion.

ARADEL invested in ND Western Limited and got a N3.2 billion as share in profits. It owns 42% of the associate firm.

For its inventories, it has N3.2 billion worth of crude oil, N5 billion in refined products, and materials worth N7.7 billion. But receivables have increased drastically, from N17.6 billion to N51.5 billion, with expected credit loss of N39.2 million.

Nile Delta Company Limited in South Sudan owed ARADEL N3.99 billion for which 47.5% of that sum was paid up last year. It currently has about N195 billion in total cash and its equivalents. (actual cash and bank balances 42%, short term deposit at 52%, and restricted cash at 6%)

Fast forward to 2018 till 2023, there’s been a walk up on current assets by 2 times its value in 2022 propped up by its increments on oil and gas properties. Total current assets almost tripled in 2023, as working capital remained positively inclined towards the 522% increased range from 2022. Aradel’s cards on liquidity checks are still green, a N174 billion in net current assets for 2023.

By far and large, ARADEL has posted to be the most margin worthy across these vibrant competitors. Though its performance is reported in Naira, but what really matters to the investor, is the milk they get out from the cow, be it a Nigerian or American based cow.

ARADEL says, you get 34% of my operations as your profit, SEPLAT says you get 24%, TOTAL would give 10%, EXXON gives 16%, SHELL and CHEVRON offer a margin of 5% and 9% respectively.

There must have been a very large increment in ARADEL’s operation (looking at the numbers in 2023 and 2022) as crude oil sales jumped up from N13.7 billion to N108.4 billion, gas sales increased by 96%, and refined product sales increased by a 117%.

I think if the business was not publicly traded (as per looking at it from the general businesses we encounter everyday), it ought to be taken seriously. Publicly traded companies (stocks per say) are very underrated, as the market blatantly acts as regards short term miscomings.?

ARADEL’s interest coverage though not as high as the rest of its counterparts, but when compared in naira terms, it might do better than SEPLAT. This info is with respect to credit per say.

The other robust firms report in $ and averagely take at least 29% higher than ARADEL’s figure with EXXONN yielding the highest at 61 times.

ARADEL and SEPLAT report financial performance in the naira, however, ARADEL only contributes an average 17% of their total sales combined on a 5-year trend. Technically, SEPLAT might be getting a higher share of the total sales pie.

Book Value

Recently, ARADEL placed an extra N378 billion on its book value, increasing the wealth of its shareholders by close to a 120%. And if we should track it from prior years dated to 2019, the intrinsic value has a compound growth rate of 40%, stacking an average 21% yearly on its worth.

Debt

I think ARADEL’s debt stance is quite moderate, as total capital fetched is majorly supported by shareholders funds. Leverage only takes about 10%. Looking at the competitors, CHEVRON and ARADEL do have the lowest debt to total capital ratios. On average in the industry, 25% of the total resources to run business has been financed with borrowed money. Which tells us ARADEL’s really doing a great job coming out as the least in that respect.

Operating earnings to PPE

The top competitors in ARADEL’s energy space drag along its side in terms of their physical assets’ contribution to operating earnings. Industry generates 14% just as ARADEL, but TOTAL beats the pack with an all-time 5,700 basis points.

Future Outlook

Aradel is massively capitalizing on its technological resources. In 2022, it spent a total of 16.1 million on man hours, coming 2023, that figure dropped to a relatively small 721,274 hours. ARADEL intends to get stake from Shell Petroleum Development Company (SPDC).

Its strategic focus remains ensuring the firm sustains its long-term growth trajectory. It also tracks the completion of its PMS train project, which would have a positive impact on its performance in terms of sales volume, revenue and value creation.

It desires to expand its operations beyond Ogbele to Omerelu, creating opportunities for greater market share. It is promising a genuine commitment towards its employees’ value proposition. Such a strategy could highly motivate its people and boost performance beyond a normal degree.

But considering the economic risk associated with the business, the inflation rate of 34.8% as at December 2024 causes a general rise in prices of all product offerings, it might pose as a threat in terms of reduced demand, and as renewable energy is the future, it poses a threat to ARADEL’s offerings only if the firm plans to dive into that space could we say it’s dealt with.

However, in Nigeria, there’s still barely any reasonable chance for electric vehicle movement, this still validates its competitiveness in the natural energy space.

Fair Value Estimate: circles around N5.2 trillion (Free Cash Flow and NPV blended).

Disclaimer: insights are forever to the Sun, though they may take time before they appear (given the required time and effort to build them up). Your due diligence is appreciated.