Nigerias premier and largest indigenous integrated energy services

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Section 1 - Company Analysis

Oando Plc was founded in 1956, and is Nigeria's premier and largest indigenous integrated energy services provider, with primary listing on the Nigeria Stock Exchange (NSE) and a secondary listing on the Johannesburg Stock Exchange of South Africa.

The company currently has a market capitalisation of approximately US $1.3 billion and is in the top ten (by market capitalisation) Nigerian controlled companies quoted on the Nigerian Stock Exchange. (OANDO PLC, 2007-2009)

Comprising of 5 major business units, the Oando group is vertically integrated, originating from downstream petroleum products marketing and rapidly expanding to Supply & Trading, Gas & Power, Exploration & Production and Oando Refining. All these subsidiaries provide integrated energy services in Nigeria & West Africa, with presences in Bermuda & the British Virgin Island.

Financial Performance

This will be analysed using the IFRS [1] (International Financial Reporting Standards) figures rather than the NASB [2] (Nigerian Accounting Standards Board) for ease of interpretation.

Table 1

OANDO PLC: FINANCIAL SUMMARY

 

2009

2008

2007

 

US$'000

US$'000

US$'000

Revenue

2,283,557

2,686,544

1,501,794

Gross Profit

241,614

326,105

173,280

Operating profit

152,610

138,057

64,129

Profit before income tax

94,831

90,925

60,692

Profit for the year

75,234

74,579

49,804

 

 

 

 

Return on net operating assets (RNOA)

9.10%

10.25%

 

Financial leverage (FLEV)

274.88%

207.12%

 

Return on equity (ROE)

21.20%

20.74%

 

Assets turnover

1.72

2.43

 

Over the past 3 years, Oando group has witnessed a notable performance with an increase in revenue YoY [3] . According to reports by financial analysts in May 2010 (Meristem Analysts, 2007), Oando's profit after tax has grown at a CAGR of over 50% on the average. In the recent FY09 results, PAT [4] was about 21 %( See Table 1 above). This growth is as a result of expansions in its downstream operations, exploration and production upstream earnings as well as increased income from its gas distribution subsidiary.

Although the company's turnover is advancing at a CAGR [5] of 35% (VETIVA, 2010), assets turnover decreased from 2.43 in 2008 to 1.72 in 2009. This decline was driven by the 15% reduction in sales from US$2.7 billion in 2008 to US$2.3 billion in 2009 and a 20% increase in average net operating asset.

Table 2

This may signify that Oando was not efficient in using its assets to drive revenue in 2009 but Oando's strategy to expand upstream led to huge CAPEX [6] due to ongoing financing of E&P assets [7] . Also profit margins have been low due to issues with market price caps in Nigeria [8] in downstream marketing which is Oando's largest revenue contributor to date. Another significant financial factor for the company is the increase in financial leverage from 207.12% in 2008 to 274.88% in 2009. This increase was driven by the increase in average net debt and the slight reduction in average book value of equity from US$360m in 2008 to US$355m in 2009. The large debt to equity ratio is attributable to expansion plans and trading activities of Oando in importing refined products to Nigeria. As noted by VETIVA, a capital investment company and a reliable source of company's financial analysis in Nigeria, Oando group uses debt financing to fund its asset acquisitions and utilizes short term facilities such as import finance (VETIVA, 2010) to fund its working capital requirements, leading to the reduction in Return on Net Operating Assets and high interest payments. Oando enjoys relatively large Returns on Equity (ROE) as a resultant effect of its high financial leverage. Fin24, South Africa's leading and biggest source of business, economics and personal finance news reported Oando's explanation of the groups drop in revenue in 2009 as ''a result of depreciation of the local currency (naira) to the US dollar by about 26%, the Group revenue reduced by about 15% compared with the corresponding period of 2008.'' (Fin24, 2009)

Capital & Cash Flow Growth

In an effort to raise capital for further expansions into gas and power (to refinance its acquisition of upstream assets by buying onshore oil blocks from multinational oil majors: Shell, Chevron, AGIP and some West African Oil Companies to boost production [9] ), Oando has raised about $142 Million this year through the capital market in Nigeria and South Africa. This will also reduce its financial leverage and provide operating capital. In a recent newspaper publication (OSO, 2010), Oando has plans to raise about $250 million by selling up to 49% stake. Cash flow has been on the rise in 2009 due to one of the increasing production of the OML125 asset.

Non-Financial Performance

Market Position

The market position of Oando is based on the company's strengths and weaknesses and how it will use these factors to align explore opportunities or mitigates risks posed by threats in the sector.

Strengths:

Oando, integrated into almost all the segments in the oil and gas value chain, has a very strong brand perception in the industry and country as a whole. The company has moved fast to become number one in the downstream sector in Nigeria, with above industry - average earnings and turnover growth. With strong competences in downstream marketing & distribution, it is pioneering the development of Sub-Sahara Africa's largest gas pipeline network & Independent power plants in strategic locations in Nigeria. Oando leveraged it's capabilities in oilfield services to integrate backward into upstream E&P. The company's entry into Refinery makes Oando poised to exploit opportunities presented by the new laws requiring indigenous companies obtain contracts and win bids so long as they are capable, in order to promote the Nigerian content the oil industry.

Weaknesses:

Oando's major weakness is its high gearing as a result of its capital intensive operations, high costs of interests and extended payback periods in some of its subsidiaries due to high sunk costs.

Production and Reserves Growth

Oando operates about four oil blocks in different stages of development. In 2008, it acquired a 49.8% stake in OML 125 & OML 134 from Shell Nigeria Exploration & Production Company (SNEPCo). These deep offshore blocks, co-owned by Italian oil giant, AGIP were won in an international bidding process in competition with BP, two Chinese national oil companies and the Korean National Oil Company, making Oando the first indigenous oil and gas company in Nigeria to have a stake in a producing deep offshore asset. (RIGZONE, 2008). Although data for proved/unproven reserves has been difficult to find via available resources, analysts' research has shown that Oando is fast adding new assets with quick production yields and hopefully, this will help sustain their production and reserves growth.

Costs

Oando in the last 3 years has pursued its future strategy to be ''the no 1 Integrated Energy Solutions Provider in Africa'' and this has led to high capital expenditures as well as operating costs. Their FD&A [10] costs in 2008 in the E&P segment was above US$625.7 million [11] and the cost of capital (interests) attributed to the observed increase in its financial gearing. Costs in the downstream and distribution segments will decrease as soon as the refinery goes into operation.

Section 2 - Sector Analysis

According to the Reference case projection from the International Energy Outlook 2010, (International Mining, 2010), world marketed energy consumption is set to grow 49% between 2007 and 2035, driven by economic growth in the developing nations of the world. This demand has led to the sector's strong drive to create and manage the supply and as such has defined the energy terrain with the following trends:

Increasing difficulty in developing and improving the efficiency of traditional fossil fuels

The dynamism of the roles of government and other institutions such as regulatory bodies and stakeholder expansion

Reducing the GHG emissions from the burning of fossil fuels

Exploring alternative sources that can be integrated into, leveraging current assets and competences

These trends have affected the business strategies of oil and gas companies and their entire value chain. It has impacted governments and new regulations have to be put in place especially due the risk posed current and future activities of the sector to our environment.

Trend in the Oil and Gas Sector in Nigeria

Looking at the sector within the Nigerian context, the upstream oil industry is the most important sector in the Nigerian economy and the VETIVA research publication of January 2010 revealed that the sector attracted Foreign Direct Investments and earnings and had led to the enormous growth in government revenue and GDP as shown in the Figure below:

The Federal Government intends to boost production levels to about 4 million barrels per day, while also increasing the country's oil reserves which currently stands at about 36.2 billion.

Looking more closely at the factors affecting Oando with respect to the trends, the oil and gas sector is characterized by three types of ownership structure: National Oil Companies, International Oil Companies (IOCs) and the Local Oil Companies. Oando is indigenous and privately owned and in competition with IOCs and other local oil and gas companies. In the distribution and Supply segment where Oando has it's largest turnover, the company leads all others in terms of market share as stated in the 2008 NNPC Annual Statistical Bulettin, where , Oando has the largest market share(Oando had 17.87%, Total 15.84%, African Petroleum 14.44%, Conoil 7.52%, NNPC Retail 5.13%, Mobil 4.58% and Texaco 4.47%.) (Placeholder11)

Most of the LOCs listed above are mid-sized firms focused on the petroleum products marketing segment of the industry. Oando, in line with its growth strategy has delved into upstream business as well as refining, thereby competing with IOCs like Mobil, Agip, Total & Chevron(Texaco) in the integrated energy business from exploration(onshore, offshore and deep offshore) to products marketing.

With the bulk of Oando's operations being in the downstream petroleum marketing and supply and distribution segments, it faces the challenge of its products being commoditized and price dominated in the future hence to enhance its earnings; it is highly committed to building a 360,000 capacity refinery in Lagos. (Meristem Analysts, 2007)

Opportunities:

High Demand for Petroleum Products:

Nigeria is in the emerging market phase with a lot of petroleum consumption and demand driven by businesses & individuals. According to the EIA, in 2009, total oil production in Nigeria was slightly over 2.2 million bbl/d, making it the largest oil producer in Africa. (US EIA, 2010) This may be attributed to GDP growths leading to automobiles affordability and the poor power supply in the country, characterized by consumers generating power (electricity) in homes and offices across the country. The current and forecasted high demand for petroleum products in Africa has necessitated a need to increase power production to homes and businesses. The BMI Report forecasts that between 2010 and 2019, there will be an increase in Nigerian oil and gas liquids production of 55.3%, with volumes rising steadily to 3.40mn b/d by the end of the 10-year forecast period. Oil consumption is set to increase by 82.9%, with growth slowing to an assumed 7.5% per annum towards the end of the period and the country using 708,000b/d by 2019. Gas production is expected to rise to 126bcm by the end of the period. With demand rising by 205.3% between 2010 and 2019, export potential should increase to 65bcm, largely in the form of LNG. (Business Monitor International, 2010).

Source: Nigeria Oil & Gas Report from BMI (Business Monitor International, 2010)

2001

2009

2014

African Oil Use

2.98mn b/d

3.60mn b/d

4.14mn b/d

Africa Oil Export

4.86mn b/d

6.08mn b/d

7.66mn b/d

Africa Oil Production

7.84mn b/d

9.69mn b/d

11.79mn b/d

Abundant Oil and Gas Reserves:

The oil and gas reserves are huge and this gives latitude for production growth, especially when the reserves-to-production ratios are high.

Nigerian Fuel Market Deregulation:

The Nigerian government plans to implement a full deregulation policy in the petroleum products market which will eliminate the price caps on the products. This policy will encourage companies to invest in the refining segment and reduce the importation of refined products into the country.

Petroleum Industry Bill (PIB)

The PIB was recently signed into law (April 2010) and is aimed at reforming the oil and gas sector. Its aim is to turn the National Oil Company and its subsidiaries into profit making ventures and local content participation in the sector, especially important to Oando is the privatization of downstream activities, the release of unused assets previously owned by IOCs and the planned increase of natural gas production to fuel power stations in the country.

Threats

Niger Delta Violence [12] 

One of the most recent threats has been the resistance and violence in the Niger Delta area in demands for regional resource sovereignty which hampered exploration and production operations, lowering production output since 2007. Pipeline vandalism is another threat to the oil and gas sector in Nigeria as it sabotages production efforts by the companies (bunkering activities).

Lack of Adequate Infrastructure

Nigeria is rated as the world's 10th largest exporter of petroleum products [13] , yet, due to poor refinery facilities as well as transportation in Nigeria has led to a substantial amount of gas flaring and heavy reliance on road transport, increasing carbon footprint. In spite of the high reserves to production rates, poor distribution facilities have left Nigeria importing almost all its fuel. This is a key reason why vertical integration in the sector is popular as companies have to develop their own infrastructure to support their businesses and reliance on others within the value chain may cause unwanted variability. Another limiting factor in the sector is the problem of ports congestion which delays imported products 'time to market.

Delayed Subsidy Payments

The delays in the subsidy payments by the government pose a big threat to increased investment and negatively impact the cash flow of the companies in the sector. This is further aggravated by the delay in passing the fuel market deregulation bill.

Low Carbon Future

The effect of the future low carbon economy will be enormous on the oil and gas companies in emerging markets as they will be 'jumping on the train too late.' This implies that Fossil fuel production in Nigeria may increase at a time when export demand for it will decrease. The US is the largest importer of crude from Nigeria, accounting for 40% of (the 80% total Production volumes) total crude exported out of Nigeria. With the drive to lower GHG emissions and increasing utilization of alternative energy sources, export demand will drop by over 50% in the next 10-20 years. The discovery of unconventional gas which may likely be cheaper poses a threat to the company's gas operations.

Source: (EIA, 2010)

Volatile Oil Prices

The sudden increase in oil prices translates to lower margins for operators in the downstream sector due to importation of refined products which is tied to crude oil prices. Oando incurs high costs due to exchange rates and instability of Nigerian Naira.

In summary, the business strategy of Oando which is aimed at serving the West African Market reduces its dependence on the global trends in the short run as these do not align with the local trends peculiar to Oando's region of operation.

Section 3 - Scenario Analysis

Oando Business Strategy

Oando's key strategy is diversification into upstream oil and gas production while maintain leadership position in the downstream sector in West Africa. Most of its recent strategy implementation has been geared towards actualizing this goal. Oando is currently investing in infrastructure to gain competitive advantage in the industry by moving the company into a 'price setting' position in the market. The commencement of the pipe-laying project across the country is to strategically equip the company for domestic gas distribution nationwide, making it the number one energy supplier of choice to homes and businesses.

The Institute for the Analysis of Global Security has highlighted that due the USA's search for sources of crude oil and the move to reduce the world's dependence on the reserves in the Middle East(After 9/11), oil production in Africa, especially Nigeria has boomed. (Placeholder1) But as Nigeria's oil reserves have been predicted to peak within a decade from now (oil reserves will decline by 2020), Oando's E&P operations need to be focused on delivering energy through traditional crude quickly and expanding its operation into alternative energy sources or renewable in order to boost the efficiency of their integrated operations - providing energy and becoming the leader in market share in the Sub-Saharan Africa region.

The Shell 2050 Scenarios

Former Shell CEO, Jeroen Van Der Veer predicted that "Energy demand will double between now and 2050," based on forecasts that world population is set to grow by 50%, thereby causing increased CO2 emissions. CO2 concentrations need to be limited to 450ppm (parts per million)

The decisions that will be made in the next few years by O&G companies will shape the future of the planet. Business managers in the energy sector need to consider the future of energy, alternatives that may abound and align their strategies to avoid risks and exploit opportunities inherent in the scenarios for their companies. The 2050 scenarios present two outlooks for future trends in energy supply and demand, and the climate change impacts of each. . These scenarios are described briefly below (Taken from the Shell Energy Scenarios to 2050 report):

Scramble: Where policymakers pay little attention to more efficient energy use until supplies are tight and GHG emissions are not seriously addressed until there are major climate shocks.

Blueprints - Where growing local actions begin to address the challenges of economic development, energy security and environmental pollution. A price is applied to a critical mass of emissions giving a huge stimulus to the development of clean energy technologies, such as carbon dioxide capture and storage, and energy efficiency measures with the aim of lowering carbon dioxide emissions.

Scenario 1 - SCRAMBLE

With 40% of the US crude oil imports from Nigeria alone, it brings Nigeria's Oil and gas market to the forefront as a major global supplier. As earlier mentioned, the USA is pitting against the Middle East oil producers by encouraging African countries to increase their production of crude oil for export purposes to maintain existing lifestyles. There is little collaboration seen between nations as each is trying to maximize their energy supplies. In Nigeria, we see this scramble in the recent activities in the sector with the Chinese O&G firms competing rigorously for oil blocks and refineries in Nigeria. As China must import about 60% of its oil needs, this scramble reflects that the interest and inter-country trades are aimed to ensure continued supplies and economic prosperity, rather than building a sustainable global future.

Oando's business strategy in partnering with Russia's Gazprom [14] to develop oil and gas assets and infrastructure in Nigeria and some parts of West African, though seen as a profitable strategic alliance by Wale Tinubu (CEO, Oando), smacks of Russia's deliberate intent to monopolize the European gas market by sabotaging EU chances of getting oil via the Trans-Saharan gas pipeline from Nigeria within the next decade. (IHS Global Insight, 2008)

The Nigerian government's involvement in the deal is also to promote FDI and grow its GDP.

China's interest in the oil and gas sector in Nigeria and it's fierce bid for about 90% of the government offered oil blocks in 2008, along with the resistance from American and European IOCs in the country show that lowering climate stresses are not the priority for these investments, rather the 5 to 10 year strategy of these international trade relationships is to ensure the security of energy imports.

Oando is currently investing in upstream oil projects and the focus for the future is addressing increasing demand and supply pressures. Online research on Oando's strategy has not produced any low carbon initiatives support which allows me to suggest that climate change is low on the company's focus priorities in the near future and this can be said to of Nigeria. Some other reasons why Oando may not be exploring alternative energy production such as renewable may be due to lack of infrastructure to carry out these innovations, the country's relatively low CO2 emissions w.r.t. USA and China may give companies in Nigeria a false air of not contributing to the risk of the GHG emissions, the cost associated with addressing climate change.

Scenario 2 - BLUEPRINTS

One of the trends in Nigeria that will spur a move towards energy efficiency is the deregulation of the downstream market. The increase in price of petroleum products will bring about a change in the use of these products, towards efficiency and finding alternative sources.

Oando's diversification strategy necessitates that it pursues new oil and gas discoveries as well as drilling technologies to tap into conventional and unconventional reserves in Nigeria and West Africa.

Oando's strategy for the future (15 - 30 Years) should be to collaborate with the IOCs and government, leverage their technical competence, and boost production of both oil and gas.

With the move towards lowering the demand for crude by the developed nations, Oando has invested in infrastructure that will enable the company meet local demands adequately. The gas distribution network is also a good foundation for Oando's long term strategy, contributing to the success of Nigeria's plan in developing and monetising the country's Liquefied Natural Gas plans.

The advent of alternative energy sources in other countries around the world may bring about its importation into Africa and lead to demand reduction for fossil fuels. Oando has to leverage its gas station networks to provide charging bays for electric vehicles across West Africa. Proactive strategic alliances with international companies skilled in carbon capture and storage technology to enhance oil recovery post its assets oil peak. In an article on The Future of CCS in Nigeria , West Africa, and particularly Nigeria, represents the highest potential for CO2-EOR and CO2 storage in oil and gas fields. (ANASTASSIA, FREDRICK, & MALCOLM, 2009)

Oando can enter into an agreement under the Clean Development Mechanism (CDM) [15] via the Nigerian government with government of other nations interested in Nigeria's reserves, pioneering the promotion of low carbon emissions in the country. This is another source of competitive advantage and will ensure business sustainability.

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