ConocoPhillips: Significant returns await Oando shareholders

Barely eight days ago, Oando Energy Resources (OER) Incorporated completed a landmark acquisition of ConocoPhillips Nigerian oil and gas business for a total cash consideration of $1.5 billion.

Considering the potentials of this deal on the revenue stream of Oando plc, the parent company of Oando Energy Resources, many market and research analysts had favoured the stock for “rally,” indicating an upside potential for investors who had bought or are buying the shares of Oando plc at its current price.

OER believes that the transaction represents a significant opportunity for it as a company to create scale and significant value for its shareholders, adding that: “The total reserves and resources associated with this transaction are; proved plus Probable Reserves of 211.6 million barrels oil equivalent (MMboe); Best Estimate Contingent Resources of 498.6MMboe; Unrisked Best Prospective Resources of 656.9MMboe.”

Ahead of the completion of this deal, many bargain hunters had, particularly those investors who saw Oando trading below its market value, closed-in in their ambition to add more shares of Oando in their existing portfolio of equities.

In the trading week to August 1, 2014, the share price of Oando rose to N27. For existing shareholders, the completion of ConocoPhillips’ deal should spike a return on your investments in the equity.

Also, OER believes that there is significant upside potential from an active exploitation and exploration programme on the onshore and offshore assets, with a multi-year inventory of newly available oil and gas drill-ready opportunities, including an opportunity to supply additional gas to potential off-takers and other gas supply opportunities in the growing domestic market.

The transaction entails the acquisition of ConocoPhillips Nigerian oil and gas businesses consisting of the onshore and offshore businesses.

On the onshore business, Phillips Oil Company Nigeria Limited hold a 20 percent 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 (NAOCL) Joint Venture (NAOC JV).

The NAOC JV has yielded high drilling success rates (89% over last 15 years), high production volumes and premium pricing on crude oil and natural gas and NGLs. For the year ended December 31, 2013, the onshore assets generated net revenues of $620.9 million, profit after tax of $132.8 million and cashflow from operations of $177.9 million prepared in accordance with International Financial Reporting Standards.

The other coventurers are the Nigerian National Petroleum Corporation (NNPC) with a 60 percent interest and NAOC (20% and operator).

On the offshore business, Conoco Exploration and Production Nigeria Limited (CEPNL) holds a 95 percent operating interest in OML 131 located 70km offshore in water depths of 500m to 1,200m; and Phillips Deepwater Exploration Nigeria Limited (PDENL), which holds a 20 percent non-operating interest in Oil Prospecting Licence (OPL) 214 located 110km offshore in water depths of 800m to 1,800m. The other coventurers are ExxonMobil (20% and operator), Chevron (20%), Svenska (20%), Nigerian Petroleum Development Company (15%) and Sasol (5%).

In June 2014, the minister of petroleum resources of Nigeria approved the conversion of OPL 214 to OML 145 for an initial period of 20 years. Through this transaction, OER will indirectly own all of the issued share capital of Phillips Oil Company Nigeria Limited, Conoco Exploration and Production Nigeria Limited, and Phillips Deepwater Exploration Nigeria Limited. The effective date of the transaction is January 1, 2012. In connection with this transaction, OER retains the Petroleum and Renewable Energy Company Limited (Petrenel) as independent reserves.

A 20 percent working interest in the NAOC JV, which includes 40 discovered oil and gas fields, of which 24 are currently producing, approximately 40 identified prospects and leads, 12 production stations, approximately 1,490km of pipelines, three gas processing plants, the Brass River Oil Terminal, the Kwale-Okpai 480mw combined cycle gas-fired power plant (Kwale-Okpai IPP), and associated infrastructure.

OER’s sales production from the onshore assets averaged 36,494 barrels of oil equivalent per day (boe/d) in 2013, and 39,266boe/d in H1 2014. The onshore assets contain 211.6MMboe of Proved plus Probable Reserves, 217.0MMboe of Best Estimate Contingent Resources, and 333.6MMboe of Unrisked Best Prospective Resources, gross to OER.

The offshore assets include a significant share of six separate discovered fields and eight separate prospects, and contain a total of 281.6MMboe of Best Estimate Contingent Resources and 323.3 MMboe of Unrisked Best Prospective Resources, gross to OER.

With the completion of the transaction, OER will be positioned as one of the leading E&P players in the Nigerian oil and gas sector, as measured by end-2013 Proved plus Probable Reserves of 230.6 MMboe, Best Estimate Contingent Resources of 536.8MMboe, Unrisked Best Prospective Resources of 2,051.8MMboe and H1, 2014 production of 44,512boe/d, all gross to OER. The transaction was financed with an approximate 50/50 debt-equity ratio. Half of the deferred consideration of $33 million is due six months after closing with the balance due 12 months after closing. The transaction is immediately cash generative and will contribute significantly to the cashflows of the company.

“This transaction represents a transformational leap forward for our company and is in keeping with our overall strategy to grow our portfolio of Nigerian-based assets by focusing on those opportunities that deliver high quality growth in reserves and production,” said Pade Durotoye, CEO, Oando Energy Resources. “Our management team is familiar with these assets and possesses the managerial experience and technical expertise necessary to unlock their value for our shareholders,” Durotoye said.

While commenting on the transaction, Wale Tinubu, chairman, Oando Energy Resources, said “we believe in the significant potential that the Nigerian oil and gas industry holds and are privileged to play a pivotal role in its consolidation, growth and development. We will continue to seek strategic opportunities that provide a platform for enhanced growth and value creation for our stakeholders.”

The onshore assets are currently producing substantial quantities of oil and gas. OER’s sales production from the onshore assets averaged 36,494boe/d in 2013, and 39,266boe/d in H1 2014. Higher oil and gas recovery factors are expected to be achieved with a focused and committed development programme. OER believes there are many opportunities to further develop the existing fields and increase production.

The Petroleum and Renewable Energy Company Limited (Petrenel) has assigned estimates of Proved plus Probable Reserves of 211.6MMboe, Best Estimate Contingent Resources of 217.0MMboe (OER gross share) to the onshore assets. These Contingent Resources have not been classified as reserves as either (i) oil and gas production associated with these Contingent Resources is not likely to start within five years, (ii) definition of development activities will require more technical work; (iii) gas will be produced and sold after expiration of gas sales contracts, or (iv) oil and gas will be produced after expiration of licence.

For the offshore assets Petrenel has assigned Best Estimate Contingent Resources of 281.6MMboe, gross to OER. These Contingent Resources have not been classified as reserves due to the following reasons: lack of firm development plans; undemonstrated ‘commerciality’ for any development plan; undemonstrated commerciality of gas development in Niger Delta deep-water; pending approval of development plans by the Nigerian government; and significant portion of oil and gas being produced after licence expiry.

Iheanyi Nwachukwu