Analysis: 10 Things We Learnt From Oando’s Approved Plan To Divest From Downstream

Oando Plc shareholders finally approved that the company divest all or part of its holding in the downstream sector. The company had in its last earnings call informed participants that it was looking at spinning of its downstream assets as it bids to consolidate on the Conoco Philips assets as well as position itself to become a major indigenous upstream player in Nigeria. So now that the shareholders have finally approved this sale what have we finally learnt from Oando and the downstream sector. Here are a few;

1. Cash Cow – If you ever wanted to go big time in the oil and gas sector (at least in Nigeria) then you would probably have to start in the downstream sector. Wale Tinubu, Oando’s CEO confirmed this much when he mentioned that the downstream sector played a major part in finances most of the company’s big forays as well as laying the ground work for the COP deal.

2. Thin Margins – The downstream sector provides a lot of cash flow but then margins are thin and profits is not guaranteed. To make matter worse, it also involves a lot of debt, regulatory oversight and can be an operational nightmare. Profit margin for most downstream Nigerian companies on the NSE is probably no more than 5%. That is for every N100 of revenue only N5 of it is profits.

3. It is over – The shareholders of Oando approved that the company sell all or part of its downstream sector. Wale Tinubu was also quoted as saying that they could sell 49% or all of the company if they found the right buyer and the right price. “We are ready to divest 49 per cent of our holdings but should we receive good offer, we will do away with the rest of the business.” This all suggest the company probably has no long term need for its downstream unit and may well  sell it off completely if now or later. The downstream sector is obviously the past.

4. Upstream all the way – Oando sold part of it’s midstream assets last year when it sold East Horizon Gas asset to Seven Energy Ltd. This was to set the stage for the current sale of its downstream assets and signifies a new phase in the company’s future as a leading oil and gas business. That new phase is the upstream sector with Oando now owning some of the juiciest oil assets in the country. The company is now expected to consolidate on this section of the oil and gas industry

5. Not the end – This is also not the end of story as regards sale for Oando as we expect more spin offs, asset sales and restructuring in the coming months. Some aspects of the mid stream assets may also face a spin off just as employees and support for the downstream assets will probably be downsized or severed completely.

6. Rumor continues – Now that shareholders have approved the sale, rumors about which company will be acquiring the downstream assets will move to a new stage of notoriety. Who will buy Oando Downstream? Your guess is as good as mine.

7. Shareholders Pain – Shareholders of Oando may have approved this deal but in reality did they have a choice? The company management just like most Nigerian owned companies hardly get their requests unapproved. The dilemma for long time shareholders now is whether this move will eventually provide the much needed stability and capital appreciation for the company’s stock thus replacing the volatility it has come to be known for. They did approve dividend payment but the yield wasn’t as impressive as one would expect. Yes they have now introduced a dual dividends policy but the yield will also determine the quality of dividends shareholders get.

8. Debt is really a problem – Oando is still highly indebted and the jury is still out on what it will use the proceeds from the sale of the downstream sector for. Assuming it sells the entire downstream sector which post profits of N2.5billion at the end of 2013 for 30X its earnings it will get about N75billion. It sold East Horizon Gas for $250million (about N41.2billion). Even if it puts all that in defraying debts, the debt profile will still be stubbornly high (N238.6billion as at June 2014). The company may also need to finance new capital expenditure in the future as it expands its foothold in the upstream sector.

9. Challenges still persist – Despite the sale of the downstream sector, problems still persist for Oando. The shale boom in the US is causing a scramble for buyers amongst oil producers just as oil prices drop to a scary era of below $100. The company and its partners will have to also ensure it has reliable takers of its oil and also ensure a pressure hedge is in place for price fluctuations. It also faces shut downs and other disruptions that negatively affect production as was the case this year.

10. Flattery Returns – Oando suggest it is on course to hit a profit of between “N24billion to N30billion” this year. This will probably be its highest in recent times if not ever. However, a lot of the items written to profits the first half of this year were accounting profits and probably have no chance of reoccurring next year. In fact, the CFO confirmed that the second half of this year may not be as good as the first half which saw them post a N10billion profit.