Oando Braces For Tough Growth Advancement

Oando Braces For Tough Growth Advancement

Sopuruchi Onwuka

Indigenous energy group, Oando Plc, has successfully recalibrated its strategies for continued growth advancements following financial turbulence associated with the global oil price fall that saw oil world’s strongest companies staggering to regain balance.

The company last week secured approval of its shareholders for strategic repositioning in the industry. The company plans to activate available fund raising measures to boost its cash flow, embark on accretive asset acquisition and drive a sharpened growth in specific business niches that offer best returns on invested funds.

From proposals presented to its shareholders at its Annual General Meeting (AGM) in Lagos, there are indications that Oando plans to change from an integrated energy group to a group of independent business affiliates with diversified ownership structure and broader corporate governance structure.

The new business model, apart from spreading risks and cutting overhead liabilities at a time of revenue downturn in the industry, appears targeted at standing the business arms of the company as independent competitors in their different fields of play and relieve them of encumbrances of integrated management.

The new business moves form the major responses of the group’s management to the revenue adversity that overwhelmed the industry following the acute fall in the prices of fuel commodities in the international market after investors sunk huge investments in asset acquisition and development.

The fall of international prices of crude oil and natural gas has compelled rebasing of all industry value projections and downgrading of asset values, a development that impacted the booked value of assets and financial projections of companies that span across the full industry business chain.

With the continued global economic downturn due to depressed oil prices, companies have taken proactive measures such as divestments, capex cuts, and suspension of projects to ensure profitability and returns for shareholders in this new reality of low oil prices.

The developments at Oando Plc is of special interest to the Nigerian investment community given the position of the company as the sign post of indigenous capacity growth across the full spectrum of the petroleum industry.

The company which sprouted from seed ideas from a team of dynamic young investment upstarts in the downstream end of the industry has since rapidly grown into a multinational energy factor with a diversification spread that has since established Oando as integrated energy group.

Oando PLC currently stands tall among its peers as Nigeria’s largest indigenous oil and gas company and integrated energy solutions provider with huge market influence across the West African region and equity interests in Nigeria, South Africa and Canada.

Going by numbers-including volumes of traded commodity, and financial value of assets and deals-Oando’s affiliates still maintain leadership in their different business niches in Nigeria. Oando Energy Resources stands Nigeria’s biggest oil and gas producer by equity; Oando Gas & Power leads in delivered volumes, diversified products and market coverage; Oando Marketing boasts of the biggest product volumes as well as the highest number of retail outlets among the major oil marketers in the country; Oando Energy Services commands control of some of the most sophisticated rigs in the country; while Oando Trading is the uncontested leader in domestic market supply.

The businesses of the affiliates of the Oando Group desirably and expectedly support a myriad of small ancillary businesses whose activities sum up to significant contribution to the nation’s gross domestic product (GDP).

Given the pioneer and leadership roles of Oando in the indigenous sphere of the Nigerian petroleum industry, it is therefore not outside the field of sound logic to see the business performance of the company as a critical gauge for the success of the highly celebrated Nigerian Content policy in the petroleum sector.

It is in the foreground of the Oando’s highly rated position in the industry that the company’s 2014 financial performance put investors, financial services providers and analysts on alert over the impact of the global oil price crash on the fate of corporate outfits that sunk fortunes in asset growth just before the prices came crashing.

Oando recorded debilitating losses following writedowns on booked asset values and financial projections which lost bases with alteration of revenue expectations from the market where plummeting prices shattered calculations that supported bullish investments.

But the management of the company has remained boldly unshaken, constantly reiterating that the company’s losses were primarily in asset value and not in cash, technically described as impairments.

While explaining that the key drivers for the company’s 2014 losses are asset impairments, the Group Chief Executive (GCE), Mr. Wale Tinubu, explained in a financial statement that “an impairment occurs when the current value of a company's assets are reduced or can no longer be recovered as a result of certain market conditions. The company’s impairments were largely caused by the global drop in oil prices.”

He clarified that “it is important to note that these impairments are not cash losses, but are reductions in the value of our assets.”

Consonant with the global market downturn, the company’s oil and gas reserves shed huge market value with the crash in crude oil prices. OEs’s drilling rigs also lost value as service rates and activities took a hit from the price depression.

Other policy, fiscal and transactional glitches in the domestic environment also imposed challenges that eroded the value of cash in transaction. Lingering government debts, depression of local currency and bad debts meant that the company also suffered additional losses unrelated to oil price fall.

Inevitably, the cumulative impact of challenging operating environment and market gloom on the company’s balance sheet was negative for the financial year; and the management has evolved new business models to advance against the headwinds.

During the AGM, Oando’s management presented a new business agenda to the shareholders, which primarily entails minor restructuring of the company to raise funds and strengthen the company against prevailing challenges.

In the new plan captured in the company’s 2015 to 2019 strategic objectives, Oando targets to increase production from current 55, 000 barrels of oil equivalents per day (55 kboepd) to 100 kbpd in the near term, and grow its proven and probable reserves from current 420.3 million barrels of oil equivalents (420.3 MMboe) to 500 million barrels of oil equivalent through organic growth, mergers and acquisitions.

Oando also plans to modify its oil services play through partial or full divestment of Oando Energy Services (OES) within the period and enter into strategic partnerships to jointly deploy deep-water and offshore rigs.

In the gas and power portfolio, Oando declares plans to expand its footprint through development of up to 300 megawatt (MW) grid based and embedded power projects, develop up to 100 million standard cubic feet per day (mmscfd) of compressed and liquefied natural gas (CNG & mini LNG) projects, build a 300 mmscfd gas processing plant, and expand gas pipeline footprint to 300 kilometres.

In the downstream, the company proposes to commission its Apapa Jetty which, it stated, will be Africa's first midstream jetty that will contribute significantly to the company's overall net profit through tolling fees.

The company’s management also plans to successfully conclude the partial divestment of its downstream business which in order to reposition Oando for renewed investment and profitability.

The company stated that the growth strategy would adapt to the extended period of lower oil prices through aggressive debt reduction, financing via partial divestments, and further diversification into the higher margin upstream.

“Additionally, by ensuring a reduced overhead at the group-level and to optimise performance, Oando seeks to drive focused, independent subsidiaries which can raise stand-alone capital to exploit clear market opportunities.” The company stated in briefing notes to journalists in Lagos.

Mr. Tinubu said: “The sale of 60% of our downstream business is in line with our strategic goals of placing our fundamental growth expectations in the Upstream, and the cash proceeds of the divestment will be utilized towards debt reduction to shore up our balance sheet in these challenging times. Our strategic focus is to increase our operational efficacy across our subsidiaries, deleverage our balance sheet, and return the company to profitability, whilst creating the necessary platform to be the partner of choice to the IOCs as they continue their divestment programmes.”

The company stated that it has continued to execute its strategic plan as outlined in previous years, successfully completing the first segment of the 10 km Greater Lagos Pipeline Ijora - Marina extension, and signed an agreement with an indigenous contractor for the nine kilometre extension of the CHGC pipeline in Port Harcourt.

The company has also signed agreements with General Electric, Nigeria to engage in various initiatives to develop power generation projects, Compressed Natural Gas facilities and mini Liquefied Natural Gas projects, aimed at aggressively expanding its gas footprint in Nigeria whilst remaining the gas provider of choice to consumers.

“The company steadily navigated the ups and downs of the cyclical oil & gas market by adapting quickly, recording key operational milestones and being fiscally innovative to enable its business operations run efficiently. This led to an 82% increase in 2P reserves from 230.6 MMboe to 420.3 MMboe and an 11 fold increase in production from 4,531 boe/day in H1 2014 to 55,399 boe/day in H1 2015,” according to the briefing notes.

Oando also reset its crude oil hedge floor price from an average of $95.35 per barrel to $65 per barrel. “This measure saved the company $65 million in interest payments over the remaining term of the loan facilities used in its landmark acquisition of ConocoPhillips Nigeria. The company also upsized $91 million of its senior secured facility from $215 Million to $306 Million, and repaid its $100 Million African Export-Import Bank subordinated loan facility, thus reducing its debt position from $900million as of July 2014 to $500million as of October 2015.  Looking to the future Oando’s E&P subsidiary is expected to contribute $150 million on an annual basis translating to expected dividends for shareholders once its debt portfolio is cleared.”

“Oando also completed the construction of the Island Jetty in Apapa, Lagos which will provide a more efficient platform for product receipt to all marketers and lead to higher margin volumes with an estimated $36 million expected annually in revenue and $120 million demurrage cost-savings for the sector per annum.”

With convincing plans and action strategies before them, the shareholders of the company overwhelmingly granted all the prayers of the management, thus clearing all hurdles for Mr. Tinubu and his team of business technocrats to advance realization of the company’s agenda under a new strategy designed to thaw through the current industry headwinds and deliver the objectives of sustainable value for all stakeholders.