28 Oct

What went wrong? A look at Oando’s 2014 horror show

A lot has already been said about Oando PLC’s (Oando) shocking 2014 results which were released a few days ago.

Our story starts from Oando’s 2013 financials. The company’s annual report very boldly proclaimed that “Oando has boldly transitioned from a dominant downstream player to an integrated energy group.” This is clearly the company’s goal: diversification and integration. Oando started out as a largely oil marketing business but within a few years has become a highly diversified business which plays actively across the entire spectrum of the petroleum industry – up-, mid- and downstream

As at December 2013, a year with consistently high oil prices, Oando’s total assets had topped N585billion:

  • Its key upstream assets include several oil producing and mining licenses at various stages of exploration and production and 4 swamp rigs
  • Its midstream assets include gas distribution pipelines in various parts of Nigeria, gas processing facilities and Power Plants
  • In the downstream sector Oando offers a wide range of refined products across over 400 service stations and depots, several LPG refilling and lube blending plants

Basically in business, you acquire assets to generate revenues and in good economic times, this is what happened. In fact, Oando generated revenues of over N456 billon in 2013. To put this into context, GTBank which is Nigeria’s most profitable bank only generated N242 billion in 2013. Things were really looking up for Oando in 2013.

Fast forward to 2014 – crude oil prices which had been relatively steady above the US$100 per barrel mark throughout 2013 suddenly plunged to an average of $59.46 in December, 2014 as per OPEC’s Monthly Price Report of December 2014. The same assets which were generating those huge revenues the previous year had suddenly become burdensome.

To be fair to Oando, the petroleum industry is a very tough one with tight margins. The down- and midstream sectors are filled with uncertainties, and the upstream sector is extremely capital intensive, requiring sound technological expertise. More importantly, the terrain of marginal fields which majority of indigenous companies play in are very risky and uncertain.

According to the Africa Oil and Gas report, the return on average capital employed (ROACE) declined on the average from 11% in 2012 to 8.6% in 2013 for independent oil and gas companies and this was with $100+ oil prices.

Oando generated N425 billion in 2014 (down by 7% from 2013), but the company spent N390 billion generating the turnover. After backing out other administrative expenses, Oando’s operating profit or EBITDA (earnings before interest, taxes, depreciation and amortisation) stood at N45 billion, just 5% short of the previous year. Not bad considering the tough economic conditions, right?…..Wrong! Remember what we discussed about all those assets? If you cannot get them sweating out revenues, then there is a problem.

NGN ’Million

FYE 2014

FYE 2013

Variance

Turnover

425,693

456,984

-7%

Gross Margin

69,575

59,433

17%

Non-interest Expenses

-88,523

-33,331

166%

Other Operating Income

63,980

21,400

199%

EBITDA

45,032

47,503

-5%

Net Finance Costs

-32,105

-23,647

36%

Depreciation & Amortization

-22,595

-16,144

40%

Impairment of Assets

-166,557

100%

Loss before Tax (LBT)

-176,224

7,711

-2385%

Loss after Tax (LAT)/Net Loss

-183,893

1,397

-13264%

Source: Oando PLC

Oando accumulated a whooping N166 billion in impairments for the 2014 fiscal year. This points to a plunge in value of its upstream assets following the crash in crude oil prices. This, along with huge finance costs (mainly bank borrowing) and asset depreciations condemned the company to a loss of over N183 billion.

Oando’s key assets include property, plant and equipment. One asset class needing write downs are Oando’s rigs. Rig utilisation in Nigeria has dropped significantly by over 90% from the mid-1980s to mid-2014 (about 300 rigs were operating in the mid-1980s but as at June 2014 between 24 and 36 rigs were in operation). This certainly implies that there are currently fewer drilling activities in Nigeria due to various reasons including asset divestments by the IOCs.

The company’s loss was further compounded by a write down of its long term receivables (up to N12 billion) due from NOAC on their joint venture due to what it terms as underlift.

Finally, currency devaluation set the company back by over N13 billion. Considering Oando’s business, this was unavoidable but it comes with the business of trading commodities. Companies in other climes have been proactive in reducing losses stemming from this by getting in bed with financial derivatives and related financial instruments Oando claims to have hedged against a fall in the price of oil shortly after the completion of the ConocoPhillips deal. Unfortunately they probably forgot to include the fact that their main country of operations generates the largest portion of its revenues from crude oil and would necessarily devalue its currency in the event of a considerable downward pressure on oil prices and therefore hedge against Nigeria.

Perhaps the biggest lesson for Oando and other indigenous petroleum companies is that integration sounds good on paper, but it comes at huge risks and with huge implications.

201510_Analysisng-Oandos-Horror-Show

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