Oando Plc: Trudging Towards Financial Stability

Proshare

Friday, July 08, 2016/ 4.11pm / Vetiva Research

·         Reports FY’15 after tax loss of N50 billion, turns profit of N4 billion in Q1

·         Concludes 51% sale of Downstream businesses

·         Operations not fully out of the woods

·         Successful asset sale critical to financial stability

·         Weaker NGN creates LCY upside, TP raised to N14.80 (Prev: N11.29)

 

OANDO reported long awaited FY’15 and Q1’16 results. The FY’15 results showed 74% y/y growth in revenue to N161 billion over FY’14 (adjusted) with net loss of N50 billion (FY’14 loss N146 billion). Q1’16 revenue was down 10% y/y to N28 billion whilst bottom line showed a net profit of N4 billion (Q1’15 restated loss of N1 billion), boosted by gain on sale of discontinued operations.

It is important to note that the results for the periods did not consolidate numbers of Marketing and Supply & Trading divisions, Oando Energy Services Limited and Akute Power Limited, as well as OML2 125 and 134 which have been classified as held for sale (which together make up discontinued operations). The consolidated results now largely reflects reporting operations of Exploration and Production (E&P), Gas & Power and Corporate & Others.  

Auditors raise concern on 2015 accounts
Auditors Ernst & Young (EY) raised a flag on the going concern status of OANDO premised on significant back to back losses reported for the FY’14 and FY’15 periods, and a sizeable net current liability balance for the period ended 31 December 2015. The auditors noted:  

“Without qualifying our opinion, we draw attention to Note 47 to the financial statements which indicates that the Group reported comprehensive loss for the year of N37.8 billion (2014: N116.5 billion) and as at that date, its current liabilities exceeded current assets by N247.9 billion (2014: N329 billion).

The Company also incurred comprehensive loss of N56.6 billion for the year ended 31 December 2015 (2014: loss N66.5 billion) and as at that date, its current liabilities exceeded current assets by N32.8 billion (2014: N34.7 billion). This note indicates that these conditions, along with other matters, indicate the existence of a material uncertainty which may cast significant doubt on the Group’s ability to continue as a going concern”.

For the Q1’16 period ended 31 March 2016, we compute net current liability of N309 billion and N48 billion for Group and Company respectively. Whilst this does raise material concern, we note that management has taken steps to address the issue with ongoing sale of assets and debt restructuring which should help deleverage the balance sheet.  

Establishing financial health through asset sale
OANDO seeks to raise $350 million (N100 billion) in asset sale this year to help deleverage balance sheet. On 4 July, management announced the completion of the partial divestment of downstream businesses to HV Investments (a JV between PE firm Helios and oil trader Vitol) for $210 million (N59 billion) – proceeds will be used to recapitalize the downstream business.

Contained in the 2015 accounts, is the disclosure of the completed sale of 100% equity interest in Akute Power Limited to Viathan Engineering Limited in March 2016, as well as a Sale and Purchase Agreement (SPA) signed in respect of Oando Energy Services under a Management Buy-out (MBO) arrangement. In December 2015, OANDO signed an SPA with Nigerian Agip Exploration Limited (NAE) for the sale of its non-operated interests in OMLs 125 and 134.

Furthermore, in June 2016, OANDO concluded a N94.6 billion debt restructuring with 10 banks. The deal, a 5-year Medium Term Note at Nibor + 200 bps with a 3-year moratorium on principal, is expected to ease debt obligations for the Group going forward.

We believe these are significant steps aimed at restoring financial health to OANDO, however, successful execution of these initiatives are paramount in bringing financial stability.

Operations not fully out of the woods
OANDO’s Q1’16 performance showed still challenging operations. Revenue declined 10% y/y, largely reflecting the impact of low oil prices on E&P business. After a 32% y/y jump in Cost of Sales, the Group reported operating loss of N6 billion.

However, a N21 billion gain on sale of discontinued business lifted Group bottom line to a N4 billion profit after tax. At N14 billion, interest expense remains disturbingly high.

We had expected to see lower interest expense figure following efforts to reduce borrowing over the past year – we recall the resetting of hedge in March 2015 which released $234 million, relief from discontinued businesses and other debt reduction initiatives.

Total borrowings at N214 billion continue to hover FY’15 levels despite significant repayment (N175 billion) during the quarter. With the recent N94 billion debt restructuring, which increases the tenor on specific loans, we expect interest expense to gradually fall in the quarters ahead.




Weaker NGN creates local currency upside
We are maintaining our production target of 44,867 bpd, below 2015 level of 54,520 bpd. Our lower production figure is driven by expected reduction in CAPEX for 2016 and conservative uptime factor.

In 2016, OANDO plans to rationalize its portfolio to cope with the low oil price environment. OANDO has guided to lower CAPEX of $73 million for 2016 - $60 million allocated to core assets OMLs 60-63.

According to management, CAPEX is subject to variability due to non-operator status of its main assets acquired from COP. We also note risk to production from militant activities in the Niger Delta region. We estimate Group revenue of N119 billion and profit for the year of N21.7 billion (boosted by one-off gain from sale of discontinued business).

Following the adoption of a market determined FX policy, our naira valuation for OANDO Group has improved. This was driven largely by the conversion of OER USD valuation to NGN using a NGN285/USD exchange rate (Previous: NGN199/USD).

As a result, our NGN EV valuation for OER rises from N160 billion to N228 billion. Our Group EV rises from N321 billion to N389 billion. After adjusting for net debt of N176 billion, our Target Price per share comes to N14.80 (Previous: N11.29). We highlight that reduction of interest expense is critical to sustaining profitability in the years ahead.

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