Oando’s gamble with audacious investments

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By Sopuruchi Onwuka

Nigeria’s biggest integrated energy group, Oando Plc, is luckily steering into the profit highway after struggling with financial challenges associated with huge capital investments and low oil price cycle.

The company says it has emerged from the worst of its financial turbulence associated with headwinds in the global oil market, challenges in the local operating environment and cost runs in upstream industry operations.

In a summary of its recently released financial results, Oando stated that its recovery strategies that entailed cash recovery from low return downstream and midstream businesses and fund injection into the high reward upstream portfolios are delivering quick wins that will rapidly rewrite the balance sheet after years of downturn.

Besides balance sheet, the company boasts that it leads other indigenous companies in value creation and generation of variegated economic benefits saves money for government, creates employment for young Nigerians, and powers social and economic activities in the country.

It would be recalled that the company has staggered since 2014 when it took a visible position in the upstream petroleum industry with a major farm in agreements and outright asset acquisitions in a number of producing oil fields. Since then, the company has concentrated on the high risk, long gestation and dollar targeted upstream operations.

Before now, Oando, formerly Unipetrol, had since its rebranding, sustained steady growth and expansion by diversifying across business opportunities in the petroleum industry chain. Over a period of time, it became the first Nigerian business brand to be listed in Nigerian Stock Exchange (NSE), Johannesburg Stock Exchange (JSE) and Toronto Stock Exchange.

The successful listing in three equity market platforms conferred complex shareholding status on the company, expanding its liabilities beyond Nigeria, and strengthening its corporate governance.
From fuel marketing, lubricant blending, terminating facilities, storage depots, gas pipelines and marketing, power generation, jetty development, trading operations, oilfield services to crude oil production, there were huge concerns among stakeholders that the company was expanding into a staggering size.

The rapid growth, expansion and diversification carried cost liabilities that took a few years to fix.

The company’s business fact box available to The Oracle Today showed that Oando had launched cost recovery strategy after its daring mop up of the joint venture assets of departing ConocoPhillips, a feat that positioned it as the first indigenous oil firm to farm into traditional JV partnership with multinational players.

However, the $1.5 billion deal which made Oando equal partners with Eni’s Agip in the NNPC/NAOC/Oando joint venture came with daunting challenges that saw the desperate indigenous firm pooling equity and debt funds to finance the purchase in 2014 when global oil prices hovered above $110 per barrel ($110/bbl).

Projections were that receivables accruing from the new asset portfolios would offset the cost of the acquisition in the short term, and drive expansion of the company’s tentacles across the full industry business loop.

But market projections did not envisage that strong prices leveraged commercialization of unconventional resources, especially US shale oil and Canadian tar sands.
Production boom from various unconventional sources eliminated the US market, altered market demand and led to supply glut in the export market.

Ill conceived moves by the Organization of Petroleum Exporting Countries (OPEC) to attrite unconventional players with price war boomeranged as oil prices plunged from $110 in 2014 to as low as $37/bbl at the end of 2015.

“Fall in crude prices forced us to record significant reductions in the fair value of our asset portfolio leading to the recognition of about N76.9 billion of impairment charges in our exploration and production business.

We prudently booked an additional N16.9 billion write down on under-lift receivables and Production Sharing Contract receivables in our exploration and production business

“Our energy services business realized impairments of N37.1 billion, as the new oil price environment brought about reduced drilling activity and in turn reduced day rates accruable to our rig assets,” the company reported.

The impact of low oil prices on Nigeria’s economy also threw additional constriction.
“Devaluation of the Naira generated significant foreign exchange losses in our downstream business where we import in dollars and recover our costs in Naira and led to a N7.3 billion in foreign exchange losses,” the company stated, adding that “the delay of payments of subsidies from the Federal Government led to a realization of N7.3Bn in foreign exchange losses.”
The listed adversities led to the company announcing a loss of N183.9 billion, the largest in the history of the Nigerian Stock Exchange (NSE).

The financial turbulence forced the company to deliberately shrink its large portfolios by altering its business model to “focus on cost optimisation, increasing operational efficiency and downscaling capital expenditure.”

Consequently, the company adopted stringent cost cutting measures in a strategy to redirect application of resources towards high profit portfolios. This means that dollar denominated earnings now dominate the company’s investment priorities.

“This re-evaluation of our business resulted in the development and execution of strategic initiatives, which would return our business to profitability in the short-term in 2016, with Growth through our dollar earning upstream portfolio, Deleverage through recapitalization or asset divestments, and Profitability hinged on refocused dollar oil export trading business,” the company explained.

It added: “We restructured our existing debt through a N94.6bn loan facility with a 5-year Nibor + 200bps loan led by Access Bank in a syndicate with 8 other banks: Diamond, Eco, FCMB, Fidelity, Stanbic IBTC, UBA, Union and Zenith.

Part of the recovery measures adopted by Oando also entailed sale of some of its low profile business units including Oando Energy Services (OES), East Horizon Gas Company (EHGC) and a few power generating plants.

Other measures include divestment of 60 percent of downstream operations to Helios and Vitol for US$210 million and 75 percent sale of our Gas & Power business to Helios for $115 million.
Oando points out that “both divestments have been with strong partners and will facilitate the rapid expansion of both businesses with Oando still playing an integral role in their future.”

The company said it has completed its 5-point strategic roadmap to return its business to profitability, and has drastically reduced the company’s debt position from N473 billion in 2014 to N218 billion at the close of second quarter or half year (H1) 2017.

In posting an outlook for the future, Oando pointed at stable and resilient foundation for profitability stating that it has already posted profit of N1.7 billion for first quarter and N4.6 billion for the second quarter of 2017.

The document has it that growth would be supported by Oando’s “vibrant and exponentially growing trading business” in which company declared over 7Mb of crude oil export, and 600,000 MT of refined petroleum products import in the first half of 2017. The export and import figures, according to the company, represent 20% and 96% increase respectively.

In the upstream, Oando stated that it has increased production 10 fold from 5,000 barrels of oil equivalent per day (boepd) to about 51,000 boepd. It also declared growth in proven and probable (2P) reserves from 18.9 million barrels of oil equivalent (mmboe) to 430 mmboe following the acquisition investments.

In the midstream, said its Gas & Power business partnership with Helios would enhance rapid expansion and bring competitive advantage on a level field with international oil companies. Similar partnership with Vitol and Helios in the marketing business would also leverage collective strength for advancement, Oando stated.

In amplifying its contributions to the economy of the nation, Oando stated that one in five cars on Nigerian roads drives on fuel from Oando, adding that its Apapa jetty saves the economy $120million in demurrage annually.

The document also claims that Oando Trading supplies 7% of Nigeria’s domestic fuel requirement.
The company also pointed at its contribution in the quality of Nigerian auto care through the training of 5,000 auto technicians and mechanics over a period of five years.
In the midstream, Oando boasted of pioneering power solutions, development of gas infrastructure, and firing commerce and industry.

In the upstream, the company stated that it is turning the country’s natural resources into wealth by becoming the first indigenous company to totally purchase assets of an international oil company (IOC), and first Nigerian company with three trans-border listings: Nigerian Stock Exchange (NSE), Johannesburg Stock Exchange (JSE) and Toronto Stock Exchange (TSX).

“Oando is an indigenous company built by Nigerians, employing Nigerians for Nigerians. We have achieved all of the above feats via the support of local and international banks, investors and shareholders alike that see and buy into our vision. As a proudly Nigerian company our core staff base consists of a 98% indigenous workforce. We directly and indirectly employ over 2,000 Nigerians,” the company declares on its local content profile.

Rebound of the company posts powerful signals and writes good notes on policy drives groom and grow indigenous companies that would take responsibilities in powering Nigeria’s social, commercial, and industrial development.