30 January 2015, Lagos – Buffeted by the decline in global oil prices from a peak of $115 per barrel in June 2014 to around $48 currently, several oil companies in Nigeria are restructuring the loans they obtained from banks for the development and purchase of oil and gas assets.
Nigerian banks have significantly grown their exposure to the oil and gas sector following the 2008/2009 banking crisis. This growth has been driven by the divestment of some onshore assets by international oil companies and the resultant entry of indigenous players.
At the close of the third quarter of 2014, First Bank had the highest exposure to the oil and gas sector (40 per cent), GTBank (28 per cent), Fidelity Bank (28 per cent), Skye Bank (27 per cent), and Access Bank and Diamond Bank (25 per cent each), according to a recent report by Ecobank Research.
Others are Zenith Bank and Ecobank (18 per cent each), United Bank for Africa (16 per cent) and First City Monument Bank (14 per cent).
It was gathered that a number of indigenous oil companies had asked their banks to stretch the repayment period of their loans by three to four years as the plunge in oil prices had slashed their revenue.
Last week, United Kingdom-listed independent oil and gas producer, Afren, announced that it might seek to delay a $50m loan payment due at the end of this month.
The oil exploration company, which has significant assets in Nigeria, is said to be taking advice on restructuring its finances if the expected takeover bid from Nigerian oil producer, Seplat Petroleum Development Company Plc, fails to materialise.
The Team Lead, Oil and Gas Upstream, Diamond Bank, Mr. Onome Atife, in a telephone interview with our correspondent, said a high percentage of the Nigerian exploration and production companies borrowed money from banks for the acquisition and development of assets.
“What they used in determining the cash flow is between $65 and $70 per barrel, and now that the price has fallen below $50, it means the model has failed already. If the price remains at its current level, they won’t be able to pay the banks back. So, now all the stakeholders are sitting down and having meetings,” he said.
Atife noted that the oil companies were already busy trying to restructure the loans, adding that the banks had no choice but to stretch the repayment of those loans, given the current oil price scenario.
“Restructuring doesn’t mean they are running into losses; it means it is going to take longer time for them to get back the money they lent the oil companies,” he said, adding that for the restructuring, a bank might decide to impose an extra cost on the client.
The Head of Energy Research at Ecobank Capital, Mr. Dolapo Oni, said the continued decline in oil prices had started to exert a toll on the cash flows of the marginal field operators and smaller indigenous companies, who took significant loans to finance the acquisition of oil and gas assets but lack the financial flexibility required to cope with lower oil prices.
“Based on our survey of the average cost of production per barrel for the indigenous producers (excluding capital expenditure costs), you are looking at a range between $15 and $40. If you add capex costs required with secondary recovery and additional costs like pipeline repairs, community payments etc., you are looking at a range of between $40 and $60. Thus at the current price of $48, these companies are bleeding cash and require loans restructuring,” he said.
The Vice President/Head of Energy and Natural Resources, FBN Capital Limited, Rolake Akinkugbe, said, “Debt financing limits will increasingly be tested by lower oil prices. Banks have issued nearly $20bn in reserve-based loans in Africa in the past six years.
“Other ways, such as bond markets, are increasingly being sought to finance new development opportunities – though the impact of quantitative easing tapering on rates could slow momentum.”
The Group Managing Director and Chief Executive Officer, UBA Plc, Mr. Phillips Oduoza, had in an interview with Bloomberg TV Africa on the sidelines of the World Economic Forum in Davos, Switzerland, said the risks from the fall in oil prices were good and there was no problem, especially if they had financed the upstream oil and gas.
“What it will entail is elongating the tenure of the loans and the payment period, and I don’t see any non-performing loans arising from this,” he said.
According to Oni, Nigerian independents such as Oando, Seplat and others, which have recently concluded asset acquisitions, continue to drive exploration activities in the industry currently.
“They, however, will have to cut these programmes due to the drop in cash flows. They are likely to intensify efforts to increase production to boost revenues as oil prices fall. This will continue to reinforce the over-supply in the Atlantic Basin, resulting in lower price differentials,” he added.
– The Punch