Placing a Value on NLNG

Nigeria LNG Limited has been in the news for the past few weeks. This was a result of the recommendation that came from somewhere about selling some national assets to plug some of the hole Nigeria has found itself because of the recession and low oil price.

As for me, I have no opinion about whether it should be sold or not. The only opinion I have is that if the NLNG assets are to be sold, they should be sold at the right price. Anything less than the right price will be a slap on the collective faces of tax-paying Nigerians — let’s add non-tax-paying ones, as long as they qualify to hold the green passport.

So, as a dutiful tax-paying Nigerian, I have decided to go on a little adventure to calculate the value of the assets. According to the MD, Mr. Tony Attah, the NLNG assets are worth $13 billion. Nigeria holds 49% of these assets. This invariably means that if the economic managers decide to sell Nigeria’s stake in the company, that should bring in about $6.73 billion. Hmm. Is that all it is really worth? He definitely knows much more than I do. I do not work at NLNG. He is the MD. Big difference.

But as an investor, I like cross-checking asset values. And this one definitely concerns me. So, I will check.

First, we know that Nigeria received $12.9 billion as dividends over a period of 8 years. I have searched high and low, but I have not been able to get a breakdown of how the payments were made. So, for the sake of simplicity, we will assume that the payments were made equally over a period of 8 years. If that is the case, then NLNG paid $1.6125 billion annually as dividends.

8 years is a long time and good enough length of time to cover an economic cycle. So I believe that assumption is sound.

The next step is to determine the discount rate to apply. Yeah, this is a little mathematical, but not too difficult. Using the Capital Asset Pricing Model, the discount rate for the Nigeria LNG should be about 6.36%. This is a pretty much safe asset. And this is also very close to the average yield on Nigeria Eurobonds, which is 6.32%.

Now, let’s go to the valuation part. Remember that the annual estimated dividends received by Nigeria is $1.6125 billion. We are assuming that the country will continue to receive this amount into perpetuity. Now, using the discount rate of 6.36%, the value of 49% of the NLNG assets should be $25.35 billion. This means that NLNG as a whole should be worth approximately $51.73 billion. So where did Mr. Attah get $13 billion?

If we use the MD’s valuation, that means he either used a discount rate of 25.3%, which I believe is too high, or he believes that the dividends that NLNG will pay going forward will decline rapidly. It may also be the case that he used the book value of the assets, which is just a function of the historical costs.

But I will humbly disagree with Mr. Attah at this point.

As a tax-paying Nigerian, I wish to let the economic managers know that if they must sell our stake in Nigeria LNG, any price below $25.35 billion is not acceptable.

PS. To determine the discount rate, I used 0.97 as the beta (the unlevered beta for petroleum producing companies), risk free rate of 2.4822% (which is the US 30-year bond yield as at October 13, 2016), and market risk premium of 4%.