So what’s happening at Oando?

Markets were stunned last Friday when Nigeria’s Oando Plc announced a humongous after tax loss of N183.9 billion for the 2014 financial year ending December 2014 compared with a profit after tax of N1.4 billion in 2013. The company also released Q1 and H1 2015 results which showed after tax losses of N35 billion in the first six months of 2015. There was uproar on social media and many were alarmed as speculation went into overdrive over the shocking results. Oando’s management had neither provided profit warnings nor sensitized the market on what was imminent, so negative public sentiment was probably justified. The results had been released without advance explanations for the losses, so some commentators prematurely but not unexpectedly began to speculate on the nature of the “administrative expenses” that, based on summary figures, appeared to be responsible for the losses.

On the other hand, once I got over the initial surprise, I reflected on Oando’s company and industry context and began to anticipate probable explanations for the results. Oando has been very bullish in its growth ambitions. It had recently in 2014 accomplished an ambitious $1.5 billion (that is N300bn!) acquisition of ConocoPhillips Nigeria’s onshore hydrocarbon assets apart from previous acquisitions as it evolved post-privatization and acquisition of the company by the present management team. The company’s acquisitions and indeed the bulk of Oando’s assets – rigs, platforms, etc. – were acquired at a time oil prices were relatively high over the past five years, rising to around $110 per barrel, and given current state of the oil market, some write-downs were probably inevitable? In its downstream business, any oil marketing company that participates in the federal government’s oil subsidy regime would have significant receivables from government which may require some provisions apart from possible foreign exchange translation losses, since oil products are purchased in international currencies while government’s (usually delayed) payments are made in naira. Did Oando’s losses have anything to do with this syndrome?

In addition, given its strategic moves and acquisitions, I suspected that Oando probably had a higher level of leverage than some of its peers, and may therefore have suffered a higher burden in interest and other financial charges, especially given drastic slowdown in energy sector activity which may amplify the costs of leverage. As I reflected on these possibilities and context, Oando’s hitherto surprising results became less of a mystery to me, but what was unclear was why the company had delayed publication of the 2014 financials by ten months!
The global oil market is having to adjust to a new reality. I wrote in my firm, RTC Advisory Services’ August/September 2015 Business and Economic Review about the Goldman Sachs report “The New Oil Order – Making Sense of an Industry’s Transformation”, recalling how the US went from importing 50 percent of its oil requirement in 2006 to becoming the world’s largest producer of natural gas; how the shale revolution has altered the global energy landscape; and speculated that oil prices could fall as low as $20 per barrel due to persisting surplus production which suggests prices may “remain lower for longer” before markets could be rebalanced. That Goldman Sachs report noted substantial potential for even larger increases in global oil output due to Iranian re-entry and noted that the industry may see between $700bn-$1.3bn of projects shut-in due to shale oil offsetting the need for several complex deep-water projects. Major international oil companies including Shell, BP, Statoil and Chevron are deferring large projects, and it was probably inevitable that Oando which had made a big effort to transition from the downstream to the exploration and production segment before the market crisis would be affected. The performance of Nigerian quoted downstream marketing companies had also generally declined in line with the global trend.

Now as information emerges from Oando, my speculative analysis tallies by-and-large with the review my analysts have completed as to the explanations for Oando’s 2014 bloodbath. The largest component of the N183.9bn loss was upstream impairments and write-downs on the booked value of the company’s upstream assets, including receivables which amounted to N130.2bn. Clearly when you acquire upstream assets at a time when revenues of your underlying commodity are projected at over $100 per barrel and the price of the commodity plunges by more than 50 percent, a write-down of the value of the assets is unavoidable! The real surprise was that the write-downs, according to Oando CEO Wale Tinubu, did not relate to the ConocoPhillips acquisition, but legacy assets which in today’s markets had effectively diminished in value. The second-largest element of the loss which emanated from upstream services is also inevitable – when oil prices fall to an average of $50 per barrel, the cost of services required to extract and process the commodity will inevitably fall, as well as asset utilization, making nonsense of prior projections relating to revenues and profits from such business. Again, a charge for impairment is unavoidable in that respect accounting for N36.4bn or about 20 percent of the loss. The third major loss item is, not surprisingly, due to currency devaluation as I speculated accounting for N7.3bn or 4 percent of Oando’s 2014 loss.

The silver lining is that these three non-cash, one-off, non-recurring charges collectively account for over 90 percent of the loss, and the company’s financials post-impairment reflects the reality of the operations and financial condition of Oando Plc. The other re-assuring information is that the company’s upstream strategic pivot is yielding production, if not yet overall corporate profits as its boepd (barrels of oil equivalent per day) increased from 5,000 to 51,000; and proved and probable reserves (2P) multiplied from 18.9 mmboe (million barrels of oil equivalent) to 430 mmboe by end of 2014. On a positive note also, the ConocoPhillips acquisition is contributing to the group and the company is reducing leverage.

I gather that the delayed publication of the accounts was due to the magnitude of these write-downs which necessitated an extended period of verification (and re-verification!) by the firm’s auditors and internal finance team – perhaps people were engaged in a search, ultimately in vain, to find that it was all a mistake and no such impairments were necessary! That was clearly erroneous. On the other hand, there will be a valid debate over Oando’s strategy and acquisitions; over its scenario building in relation to the direction of oil markets; and over its financing strategy. What may not be in question is that given developments in the oil sector, the prudent course of action was to write-down the company’s assets so investors will not be misled.

Opeyemi Agbaje