Allied Energy IPO

Allied Energy Plc is a subsidiary of CAMAC International Corporation based in Houston, Texas, USA. The company is gearing up for an Initial Public Offering of 1,500,000,000 ordinary shares of 50K each at N48 per share with a minimum subscription of 500 units. The company already has 3,176,712,824 shares in issue and fully paid. The successful completion of the IPO will increase the number of shares in issue to 4,676,712,824, which will be admitted into the official daily list of the Nigerian Stock Exchange. The offer has been jointly underwritten on a firm basis up to the tune of 80% with BGL Limited owning the largest percentage. The public offer will commence soon after listing on the floor of the Nigerian Stock Exchange.

The company presently has been authorized for 6 billion ordinary shares meaning that they will have 1.323 billion shares in reserve, which may be used as bonuses or for a public offering in the future when the need arises to raise more money. Some shares may also be taken out of the reserve to fill up to 25% of oversubscription if it happens.

The money Allied Energy wants to raise will basically be used for refinancing and acquisition of OML 125 and OML 134, which are off-shore oil rigs, exploration of pre-existing assets, OYO field development and to boost working capital. These strategic investments will help the company expand rapidly in the future and help reduce the present debt load to boost profitability.

Allied Energy is in the business of up-stream hydrocarbon exploration, drilling, refining and acquisition of oil wells.

Noteworthy issues
OML 125 is currently upstream and will act as veritable source of income while the company has enough working capital to complete the work on other remaining assets. This particular asset is 15% owned by Allied Energy and has a calculated depreciable life of about 15 years based on the data provided in the prospectus. OML 120 is a near producing asset that will soon be on-stream, OML 134 is in the developmental stage, OML 121 is in the appraisal stage, while OPL 282 and OPL 278 are in the exploratory stages.

The company has a very good plan in place to ensure corporate governance, which will protect shareholders’ interests. All other companies on the NSE will do well to emulate this concept.

The chairman referred to the Niger Delta master plan, which will help mitigate the trouble in the region. This plan has been in an idea of the Federal Government since the past era, which is yet to yield any kind of fruits and is highly unlikely to dampen the recurrent restiveness because it is yet to take any shape. The incessant tumult is likely to continue into the future for as long as the government continues with its lackadaisical attitude towards this Niger Delta phenomenon. OPL 282 and OPL 278 are vulnerable to any uprising in the region, while the remaining four assets are more or less immune because they are offshore.

The CAMAC Group, which is the mother of Allied Energy, has a website www.camac.com, which is not regularly updated and has no section for investor relations. The site seemed to have been hurriedly put together and needs more functionality and more details into what the corporate body is all about.

Three macroeconomic assumptions were used as the basis for the projection of the 5-year forecasted results. They are an exchange rate of N116 per dollar, inflation rate of 8.2% for 2008 and crude oil price of $90 per barrel. The first assumption is quite solid while the last two have become questionable because of current events. The current inflation rate is 14.5%, which is already 77% higher than the one that was used. The benchmark of $90 per barrel was reached as a result of the high oil prices that were in the region of $120 - $130 per barrel when the prospectus was developed. It was initially thought to be a conservative value. The current futures price is $96.37 with a high probability further slide in price if the feelers from the US Senate house are anything to go by based on their stance about the $700 billion bailout plan for the financial/mortgage sector.

Financial analysis
Ernst and Young, the reporting accountants, could not give a full approval of the past 5-year financial statements because of limited data, however they had no problem with the going concern status of the company, meaning that they are likely to continue operations into the distant future.

Allied Energy used the full cost capitalization method to account for their expenses that dealt with all exploration and drilling activities. This means that all costs are capitalized regardless of whether or not those activities proved fruitful. This policy is acceptable worldwide and it reduces the volatility of income as the costs are depreciated over time. However it may give a falsely low return on asset and return on equity if measured against comparable companies that use selective cost capitalization method.

Depreciation method used by the company is conservative, which means that expected income will increase appreciably in the future. There are however off balance sheet items, which were not disclosed in the prospectus, which has rendered a full analysis of the financial status of the company null and void.

The figures provided showed a current (liquidity) ratio of 0.02 over the past five years, which is extremely low meaning that if their creditors were to come knocking, the company could end up being liquidated. However, the chances of this happening are slim as the mother company has protected it from such a shock through the use of deposit for shares. The debt-to-equity (solvency) ratio has been around 1.62 on the average over the past five years. This means that no corporate lender will ever want lend out money to this company because of its high financial leverage. This could be the reason why the company has come to seek a cheap source of funds through the Nigerian Stock Exchange.

At the offer price of N48, this company is selling at a price earning ratio of 35 and a dividend yield of 1% for the forecasted year end results of December 2009. The growth of the company could not be calculated from the information given using the dividend discount model but using the dividend yield model a price of N27.60 was reached while the price earning model provided a figure of N27.42. This provided an average price of N27.51.

Conclusion
Allied Energy’s public offer price of N48 is on the expensive side considering the forecasted results. This price could have been arrived at as a result of the fact that it has the potentials of being an astronomically high growth stock in the nearest future but it should also be stated that this company has the potentials to be a miserable failure. Based on the high risk associated with this company, with its attendant high financial leverage, and with the current sentiments in the stock market, it would have made more sense if the company had come out with a price of N15 per share.