Oando Plc: Make or Mar


Friday, July 15, 2016/ 10.35AM / GTI Research

Full Year 2015: Revenue up by 74%, Loss after Tax down by 67%; Debt at 89% of capital

Oando (or the “Company” or “Oando”) Plc, an indigenous oil and gas Company released its full year earnings for the year ended December 31, 2015 on the 1st of July 2016; a technically late date.

The result showed a 73.81% growth in revenue to ₦161.48 billion ($576.71mn) from ₦92.91 billion ($331.82mn) Year-on-Year (YoY) while loss after tax declined by 66.68% to ₦31.19 billion ($111.42mn) from ₦93.63 billion ($334.39mn) YoY.

Gross profit grew by 26.41% while cost of sales increased by 115.18%. Operating profit grew by 130.23% YoY while net finance cost grew by 23.05% YoY.

First Quarter 2016: Revenue down by 9%; Loss before Tax up by 65%
In the first quarter ended March 31, 2016, revenue was down by 9.45% to ₦27.72 billion ($99.09mn) from ₦30.65 billion ($109.46mn) Year-on-Year (YoY) while loss before tax grew by 64.55% to ₦18.65 billion ($66.60mn) from ₦11.33 billion ($40.46mn) YoY. Cost of sales spiked during this period by 35.76% compared to previous period.

Investment Report Summary

Temporary or permanent unprofitable phase? Rev. +73.81% in FY 2015
Highly geared in a cyclical industry, Oando pushes the limits of debt financing by fully utilizing cheap sources of finance which in turn increases financial risk. Interest coverage went underwater in 2014 (-1.41x). Company made strategy remarks on survival by CAPEX downscale and cost optimization. Available suitable assets for security offering to lenders remain strong. However, guarantees to 3rd parties in excess of N419 billion undermine asset sales to reduce debt. Ability to pay off debt remains on the downside (3.41x). Possibility of 39% debt reduction in the near term considering ongoing initiatives will reposition cash flow, boost profitability and increase investor confidence.

Hedging not sufficient to supress interest rate hike burden; rising inflation
Successfully reset crude oil hedge ($95.35/bbl to $65.00/bbl) on 10,615bbls/day till July 2017 and an additional 1,553 bbls/day until January 2019 to add $234 million towards debt payment. Expenses were cut (-54% YoY) showing commitment to operational efficiency. CPI driven inflation rose to 6-yr high (+190bps) in May to 15.6%; soon to be followed by interest rate hike. We expect market repricing of the security to be catalysed by completion of pending projects and further spin-offs.

Global oil industry outlook still positive; $46.03/bbl – two-month low
All round significant cut in CAPEX to ensure demand and supply correctly prices the industry seems to be a failing adventure although with a lagging effect. Dividend payments have declined/stopped and divestment of assets to superior portfolio of underperforming operating positions are new measures.

This includes wage cut and layoffs to reduce labour costs. The industry players are also aggressively renegotiating contracts at price points 20 - 30% lower, often to the point of break-even for the OFSE supplier. Part of the reality is that operators with high debt and large impairments will likely have to resort to asset sales as access to capital regresses.

Estimates and Valuation

Business Description
Oando Plc. (formerly Unipetrol Nigeria Plc.) was partially privatized in 1991 and fully privatized in 2000 following the disposal of 40% shareholding of Federal Government of Nigeria to Ocean and Oil Investments Limited and the Nigerian public.

In December 2002, the Company merged with Agip Nigeria Plc. following its acquisition of 60% of Agip Petrol’s stake in Agip Nigeria Plc. The Company formally changed its name from Unipetrol Nigeria Plc. to Oando Plc. in December 2003.

Oando Plc. (the "Company‛) is listed on the Nigerian Stock Exchange and the Johannesburg Stock Exchange. The principal activity of Oando Plc. ("the Company") locally and internationally is to have strategic investments in energy companies. The Company is involved in the following business activities via its subsidiary companies.

a) Marketing of petroleum products, manufacturing and blending of lubricants - Oando Marketing Plc and other petroleum products marketing companies.

b) Pipeline construction and distribution of natural gas to industrial customers - Gaslink Nigeria Limited, Oando Gas and Power Limited, Akute Power Limited and other gas and power companies.

c) Supply and distribution of petroleum products - Oando Supply and Trading Limited, Ebony Oil & Gas; and Oando Trading, Bermuda.

d) Energy services to upstream companies - Oando Energy Services, and other service companies.

e) Exploration and production (E&P) - Oando Energy Resources Inc., Canada, engaged in production operations and other E&P companies operating within the Gulf of Guinea.

Financial Analysis

We expect that the company will return to profitability by 2017 given the outlook of global oil prices, Nigeria’s shifting oil industry and debt management initiatives.  

Investment Risks
Oando remains a going concern with huge debt and liabilities and a fairly good business strategy in a dynamic industry.

Operational: efficient execution of projects in the business portfolio will be very important from earnings perspective and delays could impact negatively on profitability. Looking forward into 2016, we expect significant challenges in the area of profitability as the industry continues reshaping itself in a lower-demand environment. Cost effective operations will be key for survival.

Financial: overall annual return on capital fell significantly since 2014. Decline in cash flow from the businesses will further impact ability to stay solvent considering the currently huge debt profile. Regulatory and contractual obligations under a re-focused NNPC pose another threat to more debt.

The Company is very top heavy and this can depress bottom line growth, especially if oil prices head further south.

Macro-economic environment: growing concern for inflation and possible interest rate hike. The changing politics in the industry could impact regulations going forward. The sell-off of 49% stake in Oando downstream may be counter- productive especially considering that the downstream space has been deregulated.

Price Objective Basis
We have valued the business at N4.22 per share at a PER of 1.14x 2-year forward. We have factored in the debt restructuring exercise and additional revenue streams which may potentially crystalize in the course of the year. We expect market pricing at around N4.22 and N24.45 in 2016 and 2017 respectively.

Oando recorded significant activities in its upstream; 118% increase in total production to 19.9 million barrel of oil equivalent (average production from 24,945 boe/day in 2014 to 54,520 boe/day in 2015), midstream; Oando Gas and Power signs Sales and Purchase Agreement (SPA) to sell the Akute Independent Power Plant (IPP) and downstream; amendment and restatement of terms of recapitalization via the injection of USD210million from Helios/Vitol JV, operations in 2015 as compared to previous year.

Risks to Price Objective: Global oil price, Competition, Project execution, Macro-economic environment.

Related News
1.       Oando Plc to Hold 2016 AGM on Tuesday 2nd August
2.      Oando Plc Key Highlights on Q4 15 and Q1 16
3.      OANDO Concludes Recapitalization Partial Divestment of Equity Stake in Its Downstream Operations
4.      Material Uncertainty May Cast Doubt on Oando’s Ability to Continue as a Going Concern – Ernst & Young
5.      OANDO Releases Q4 15 and Q1 16 Results Declares N4.10bn PAT in Q1 SP N6.50k
6.      Oando Plc Secures 5 Year N94.6 Billion Medium Term Facility with 10 Nigerian Banks
7.      Oando explains what Deregulation of Petrol Price means for its Downstream Operations
8.     Why Oando Plc's 2015 Audited Statements will be released on May 31, 2016
9.      OANDO to acquire OER Minority Shares for a Consideration of US 1.20 per share in Cash
10.  Bursa Malaysia Publicly Reprimands Quoted company for Breach of Main Market Listing Requirements 
11.   OANDO Notifies on Late Filing of 2015 Audited Financial Statements
12.  OANDO Gives a Brief on Key Matters Impacting Its 2014 Full Year Release
13.  NSE Continues its Review of the Situation of Oando Plc
14.  OANDO posts N418million loss as revenue slips by 5.48 in Q3 15 - Proshare 
15.   OANDO Releases Q4'14, Q1'15 and Q2'15 Results, Declares N35.13bn Loss in Q2,(SP:N10.14k)

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