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Oando Plc - Some Improvement in Q3'16 Financials

Proshare

Monday, November 07, 2016 9:05 AM / Vetiva Research

·         9 months production averaged 44k boe, close to our 45k FY estimate

·         Part sale of Gas & Power; $116 million proceeds to be used to reduce debt

·         Crude lifting by Oando Trading adding to the mix

·         TP revised upward after model update


OANDO reported a loss after tax of N8.9 billion in Q3’16, showing some improvement from the N31 billion loss reported in Q2. The performance was driven by improved revenue, OPEX containment, reduced interest charge and lower net FX losses.

Revenue for the quarter came in at N111.7 billion, up from N88.5 billion reported in Q2 and raising the cumulative 9 months figure to N228 billion (after adjusting for discontinued businesses).

The cumulative loss for the year now stands at N35.9 billion compared to loss of N47.6 billion reported in the corresponding period of 2015.

Proceeds of 49% sale of Gas & Power to be used to reduce debt
Important corporate activity in Q3 was the signing of a definitive agreement to divest 49% voting rights in Oando Gas & Power (OGP) to Helios Investment Partners for $115.8 million. Management said the proceeds will be used to reduce group debt (N298 billion as at 30 September).

OGP has achieved 59% completion of the Central Horizon Gas Company 8.5km pipeline expansion, which is set to be completed in Q4’16. The pipeline is expected to increase the throughput capacity by 400%.

The division continues to be one of the standout performers in the group with reported revenue of N24.7 billion and profit after tax of c.N4 billion for the 9 months. Given majority shareholding (51%), OANDO will continue to consolidate the financials of OGP.  

Crude lifting by trading division adding to the mix
OANDO’s topline in Q3 was supported by N64.9 billion income from the exportation of Nigerian Crude oil and refined products by subsidiary Oando Trading. We recall that in Q4’15, the NNPC appointed 27 companies (local and international) including OANDO to act as off-takers of the country’s crude oil for 2016 term contract - OANDO was awarded 60k bpd.

Management said that Oando Trading had exported over 11 million bbls of crude oil as well as 213,000 MT of refined products year to date. If we pro-rate the crude export over 9 months we get an average off-take of 40k bpd. We note that off-take has been impacted by the fall of Nigeria’s production due to militant attacks in the Niger Delta.

With ongoing discussions between the government and the militants leading to recent improvement in production, we expect Oando Trading to increase off-take volume close to the 60k bpd allocation in the coming months. This should support revenue for the remaining parts of the year.

TP revised higher after adjusting for sold businesses
Following this 9M’16 result, we raise our revenue estimate to N302 billion (Previous: N212 billion) to accommodate the revenue (up until sale) of the discontinued businesses.

With accumulated losses over the last 2 years, we think improvement of operations and reduction of debt are critical to OANDO’s performance going forward.

We believe management is taking the right steps with the targeted sale of businesses and debt reduction, but will like to see greatly improved financial performance to justify these moves.

We expect OANDO to continue to improve quarterly performance with improved production and complement from crude trading.

We estimate OANDO should turn a profit in Q4 and cut FY’16 net loss to N31 billion. After adjusting for the sold businesses and including crude trading, our target price is raised to N8.81 (Previous: N8.26).



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