A Review of the Nigerian Energy Industry

Nigeria: Oando repays N47.5bn bank loans

Oando Oil's Managing Director Wale Tinubu.
Oando Oil’s Managing Director Wale Tinubu.

07 March 2015, Lagos – Integrated energy giant, Oando Plc, through Oando Energy Resources (OER), its indigenous oil and gas upstream subsidiary has so far repaid $238 million to local and foreign banks that participated in the financing of its $1.5 billion acquisition of ConocoPhillips Nigeria (COPN) assets last July.

The deal was funded with a 50-50 debt-equity mix, helped by a consortium of financial institutions such as FBN Capital, First City Monument Bank Limited, Zenith Bank, and Fidelity Bank, which bought into Oando’s long-term vision for regional domination within the energy sector.

Of this amount, the Nigerian financial institutions are estimated to have received about N47.5 billion.

A statement by Oando said it realized the $234 million “by resetting its crude oil hedge floor price from an average of $95.35 per barrel to $65.00 per barrel on 10,615 bbls/day for the next 18 months and another 1,553 bbls/day for a further 18 months until January 2019.”

The proceeds from the hedge unwind/reset (in addition to $4 million from cash in hand), the statement by Pade Durotoye, chief executive of OER Incorporated were used to prepay loan facilities such as the $188 million applied to the $415 million in the Reserves Base Lending facility, resulting in a balance of $227 million, as well as the $51 million applied to the $338 million in the Corporate Facility, resulting in a balance of $287 million.

“The decline in global crude oil prices led to a substantial gain for our company and we have 10,832 bbls/day average production hedged for the balance of 2015 and 8,000 bbls/day for 2016,” Durotoye added.

“Cashing out some value from this hedge will enable us reduce our outstanding loans and leverage by $238 million, saving the company $65 million in interest payments over the remaining term of the loan facilities, whilst preserving a floor of $65 per barrel,”he stressed.

Hedge positions are investment decisions often taken by companies with the intention of offsetting potential losses/gains that may be incurred, especially during a global downturn, and the company has substantially reduced its total debt from $900 million in August 2014 to $615 million today; effectively reducing its debt by 30 per cent in the space of seven months.

It would be recalled that the 2009 stress-testing of banks by the Central Bank of Nigeria (CBN) under the leadership of Lamido Sanusi showed that the nation’s banks were severely weakened by their excessive exposure to the oil and gas sector, as well as the capital market.

There have also been fears that the banks are once more exposed to the oil and gas sector, a situation to the stock market reacted negatively as the oil prices nose-dived.

Last year, for example, total market capitalisation of the banking sub-sector of the Nigerian Stock Exchange (NSE) fell by 24.5 percent from N2.219 trillion to N720 billion.

Continuing, he said “the hedge adoption effectively ensures OER receives income approximately pegged to a pre-agreed price, and enables it to conveniently service its debt obligations, which are denominated in both Naira and USD, regardless of oil prices and without foreign exchange exposure.In spite of the global trends and domestic challenges facing indigenous oil & gas companies the decline in prices made the optimisation of its balance sheet a key facet of the company’s short term strategy while it steadily navigated the ups and downs of the cyclical oil & gas market by adapting quickly and being fiscally innovative to enable its business operations run as normal.

Reacting, one analyst who craved anonymity noted that “given its reserves and its exploration verve, Oando is the indigenous industry leader, and it is repaying the faith shown by the local debt markets in financing the development of its asset portfolio. With the global downturn and energy firms declaring write downs, I believe Oando is still uniquely well-positioned.”
*Kingsley Ighomwenghian – Thisday

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