Oando’s Expensive Route To 25,000BOPD

The potentials and downsides of the biggest onshore Niger Delta asset sale in History

Oando’s ongoing purchase of the Nigerian assets of ConocoPhillips, the American independent, is a historical event. The price on the table is larger than the proceeds of any single bid round in the country in the last 10 years.

The invoice total comes to $1.79Billion, of which $1.6Billion will be paid by the Nigerian company for 20% stakes in four onshore assets, all of them operated by Agip and producing roughly 100,000 Barrels of Oil Per Day(BOPD) gross, which translates to 20,000BOPD net to Oando, on final purchase, around March 2013. The remaining $190Million is what Oando is paying for ConocoPhillips’ deep-water hydrocarbon properties. The $1.6Billion bill for onshore assets is the biggest price any one company has paid for an onshore asset or group of onshore assets in Nigeria.

The company will have to raise $1billion of equity and $790Million of debt, which it is hoping to raise from Nigerian banks. Oando has commenced proceedings on a $350MMilion rights issue, on the Nigerian and the Johannesburg Stock Exchanges. The company has thought of selling its rig services unit, which has four rigs. It is also mulling a disposal of half its downstream assets.

The purchase of ConocoPhillips’ Nigerian assets is the result of a very competitive exercise, involving over 10 companies and consortia, the last of which were Seplat Petroleum Production Company, Lekoil, Midwestern/Transcorp consortium and Oando.

The winner is getting the prize because it has agreed to pay over $400Million more than most of the other finalists were willing to part with. The deal comes across as a desperate effort by a company faced with the stark reality that the Nigerian state is not disposed to conducting regular, periodic, open transparent bid rounds.

Oando is not buying assets directly in this transaction, but rather, paying for ConocoPhillips’ four subsidiaries in Nigeria. By the time the last kobo has changed hands, Oando would have secured ownership of: 1)Phillips Oil Company Nigeria Limited (“POCNL”), which holds a 20% non-operating interest in Oil Mining Leases (“OMLs”) 60, 61, 62, and 63 as well as related infrastructure and facilities in the Nigerian Agip Oil Company Limited (“NAOC”) Joint Venture (“NAOC JV”), and Phillips Brass Limited (“PBL”), which holds a 17% shareholding interest in Brass LNG Limited, which is developing the Brass LNG project, a Greenfield project to develop a two-train, 10 million ton per year, Liquefied Natural Gas (“LNG”) facility in Bayelsa State, Nigeria. These two constitute the onshore business.

Oando is also purchasing: (3)Conoco Exploration and Production Nigeria Limited (“CEPNL”), which holds a 95% operating interest in OML 131, and (4)Phillips Deepwater Exploration Nigeria Limited (“PDENL”), which holds a 20% non-operating interest in OPL 214.  The other partners are ExxonMobil (20% and operator), Chevron (20%), Svenska (20%), Nigerian Petroleum Development Company (15%) and Sasol (5%). These constitute the offshore business.

The Nigerian minnow will thus be 20% owner of approximately 213 million  barrels of oil equivalent (“MMBOE”) of Proved plus Probable Reserves, 198 MMBOE of Best Estimate Economic Contingent Resources, and approximately 110 MMBOE of Risked Prospective Resources in four Nigerian Onshore Assets.

With 112Million standard cubic feet of gas(112MMscf/d), most of it sold to the NLNG, the daily sale of hydrocarbon fluids from ConocoPhillips’ onshore assets  in Nigeria comes to roughly 43,000 Barrels Of Oil Equivalent Per Day(BOEPD). This, in addition to the proceeds from sale of 450MW power to the National Grid, by Agip operated gas fired plant in Okpai, Delta State, is what Oando is paying for.

This purchase will move Oando up from the rank of small Nigerian oil producers(currently it is doing 4,500BOPD net), domiciled in the marginal field space, to the mid league populated by Conoil(25,000BOPD net), SEPLAT (18,000BOPD net) and SAPETRO(25,600BOPD net).

Oando’s long term target itself is between 50,000-10,000BOPD, according to a November 2012 presentation it gave at an investor conference. It is hoping to have 2P reserves of 300MMBO, “though a mixture of acquisition and organic growth”. The timeline defined as “long term” is not stated in the report.

Oando has always fancied itself as a big, integrated energy company, with significant tentacles in the upstream, midstream and downstream sectors of the oil and gas sector, as well as the country’s emerging electricity supply industry(ESI).

Through a hectic annual calendar of conferences and appearances on the glitziest global media platforms, it advertises itself as one of Africa’s leading energy solutions providers, claiming a large space on the oil patch: “the largest publicly quoted energy company in Nigeria and sub-Saharan Africa’s largest indigenous energy company, based on revenues”.

Every year the company’s CEO is positioned to speak, after the Petroleum Minister’s speech at the opening session of the Nigerian Oil and Gas Conference(NOG), the country’s top notch gathering of petroleum professionals, ranking bureaucrats, government and business leaders. It has been a key sponsor of segments of the World Petroleum Congress (in South Africa in 2005, in Spain in 2008 and in Qatar in 2011), appearing at these glittering events with large entourage, and sharing  the limelight with companies who could buy it many times over.

But for all the glamour that comes with showing up on the cover of Forbes Africa as King Of African Oil, Oando has been, in reality, a rather small player in Subsaharan Africa, and an also-ran, in the upstream ranking, in its home country Nigeria. For example Oando’s 228km of piped gas supply in Nigeria doesn’t compare anywhere with, say, Sasol’s gas supply network through 2 500 kilometres (km) of pipeline, including the 865-km cross-border pipeline linking the gas fields in Mozambique to the Sasol Gas network in South Africa. Sasol has built a 140MW gas fired plant in South Africa, utilizing the Mozambican gas to power its own operations. The company is involved in constructing another gas fired plant capable of delivering in excess of 107MW, to end users in both Mozambique and South Africa. This is a small slice of Sasol’s operations, which include assets in Canada, and the United States. But Sasol is an indigenous Subsaharan African company, primarily listed on the Johannesburg Stock Exchange, an African Stock Exchange.

Ninety percent(90%) of Oando’s total  annual revenue of 584Billion naira or $3.72Billion, comes from its downstream activities. This means that petroleum products supply and crude oil trading brought in 525.6Billion naira (or $3.353Billion) in the last year it reported. Its midstream effort, largely the piped natural gas supply market(it supplies companies like Cadbury in Ikeja and Flour Mills in Apapa), brought in 3% of the total revenues: 19.6Billion naira or $125Million. The upstream (Exploration and Production)business turns in 7% of the earnings: 41.3Billion naira or $263Million. Nigeria’s downstream business is fraught with uncertainties. With the knowledge that E &P is a far more profitable than downstream activity, Oando wants to turn the upstream revenue around.

The offshore business constitutes one of the key downsides of this purchase. Neither of these assets is anywhere close to development in the next five years. Appraisal has not started on the Chota-Bolia structure, which is the main prospect in OML 131(which Oando will be operator). OPL 214 is squarely in the exploration phase. Yet these two have attracted close to $200MM.
This pay out is quite large.

To assemble the $1.79Billion for the purchase, Oando can only raise $800Million, which they are most likely to raise from Nigerian banks. Foreign banks have said that the debt capacity of that transaction is $600Million at the most.

To raise a total equity of about $1billion, Oando is embarking on a rights issue to raise $350Million (N54.6 Billion) from the Nigerian and Johannesburg Stock Exchanges.  It is issuing 4,548,236,276 (4.5Billion) ordinary shares of 50 Kobo at N12.00 per share, on the basis of two (2) new ordinary shares for every ordinary share of 50 Kobo each by all its registered shareholders in Nigeria and South Africa. The company says that proceeds from the rights issue will be used for “part-repayment of N60 billion($380Million) syndicated loan used to fund the acquisition of upstream assets and swamp drilling rigs, part-financing of acquisition of upstream and midstream assets by Oando’s Upstream subsidiary, Oando Energy Resources (“OER”) as well as investment in working capital to support increased level of business”.

This simply means that they won’t apply all those monies to consummating this deal, but it’s hard to think that Oando will not apply all the $350Million realizable from this rights issue when it has $1.79Billion invoice to pay for a transaction it considers life-changing.

But, assuming it is using all the $350Million raised from the rights issue, to pay for the ConocoPhillips assets purchase, Oando will still be needing $650Million from other equity holders. If Oando is able to raise $650Million outside of the rights issue, it would mean that the debt-equity split is 65: 35.

Remember that these assets are going to Oando Energy Resources(OER), the Company’s relatively new 94% owned subsidiary listed in Canada? In the event of this transaction, those investors bringing in the $650Million will be owning 65% of the equity in OER. That company itself will be saddled with a debt of $800Million. Oando’s own shares in OER  will be so diluted it’d become like just any other investor in Oando Energy Resources, having a small stake.

From the proceeds (sale of roughly 25,000Barrels of Oil Per Day and 112Million standard cubic feet of gas as well as part payments for power generated from Okpai), OER will pay cash call on the projects as well as service the debt with roughly $150Million per year for the next seven years.

Oando must desperately need this asset to have agreed to do this.

Oando is taking a huge risk with the company’s ownership structure with this transaction. What Ocean and Oil(the original Oando) currently owns in the company is 10.63%. IBTC Pensions owns 11.5% of the company. Other shareholders own 77.37%. Is this a recipe for a take over?

Oando’s CEO Wale Tinubu and his team must have acknowledged this possibility. But for whatever it is, this is a very expensive route to own 25,000BOPD.