B-O-O-M: COP acquisition drives Oando into massive losses

Oando Energy Resources, the Calgary based subsidiary of Oando Plc has released its 2014 Full year results. The company said Net revenues increased 43% to $421.4million. However, despite this increase in revenues the company recorded a net loss of $320million as it wrote down asset values. This results now suggest the Parent company’s profits maybe severely disappointing as revenues from OER forms a significant portion of its earnings.

The summary of the result is below and we have highlighted the key areas.

• Net revenue was $421.4 million in 2014, an increase of $294.2 million over $127.2 million earned in 2013, primarily as a result of the COP Acquisition. OER had hedged 10,223 bbl/day of crude oil production between $91/bbl and $97/bbl until July 2017 and January 2019, respectively, with further upside available if certain price targets were met. The hedges represent approximately 47% of the fourth quarter production rates of crude oil. In February 2015, the hedge price was reset to $65/bbl following the restructuring of the hedge agreement; proceeds of $234 million were realized and used to repay debt;
• From July 30 to December 31, 2014, the Acquisition Assets contributed $136.8 million to net income before taxes based on $299.0 million in revenue, $116.5 million of production expenses, and $45.7 million in depreciation, depletion and amortization (“DD&A”) expense;
• The Company incurred a net loss of $320.0 million during the year, as compared to a net loss of $38.2 million in 2013. This was mainly due to non-cash asset impairment charges of $462.8 million, as well as approximately $84.9 million in transaction costs associated with the acquisition of the ConocoPhillips Nigerian business. These amounts were partially offset by the $288.3 million net gain on financial instruments;
• The Company recognized impairments on property, plant and equipment (“PP&E”) of $61.4 million and impairments on exploration & evaluation assets (“E&E”) of $401.4 million, as a result of lower crude oil prices;
• Production Expenses increased by $122.9 million to $152.9 million from $30.0 million in 2013. The increase was primarily due to additional production expenses from the Acquisition Assets of $116.5 million of which $38.6 million related to non-recurring acquisition accounting fair value adjustments. Production expenses improved to $16.66/boe in 2014 from $20.57/boe in 2013;
• General and administrative costs (“G&A costs”) for 2014 increased by $47.9 million to $70.0 million from $22.1 million in 2013. The increase was related to the $41.2 million non-recurring governmental consent fee, $25.4 million write off of OML 125 receivables due from the Nigerian National Petroleum Corporation (“NNPC”), $84.9 million of non-recurring COP Acquisition costs, and other write offs of joint venture and trade receivables of $4.4 million;
• Cash flows from operating activities were $116.1 million, an increase of $38.7 million from $77.4 million in 2013, primarily as a result of increased cash flow generated by the Acquisition Assets;
• The COP Acquisition on July 30, 2014 added $1,099 million in fair value of assets and $161.0 million was incurred on capital expenditures during the year. The capital expenditures consisted of $38.1 million for enhancing the Acquisition Assets and $122.9 million for Legacy Assets’ drilling and completion activities, construction of gathering systems and facilities, and capital asset maintenance projects; and
• As at December 31, 2014 the Company had a working capital deficiency of $567.2 million, and significant levels of debt for which specific debt covenants must be satisfied. An additional $345.6 million of borrowings was reclassified to current borrowings as a result of debt covenant breaches (refer the Borrowings Section); the breach of the covenant gave the lenders associated with the $450 million loan the ability to accelerate the maturity of the loan on demand. However, the lenders chose not to exercise the rights to exercise their acceleration rights under that facility and the Corporation received a waiver of the current ratio requirement for the December 31, 2014 calculation at March 31, 2015. OER has taken measures to improve liquidity by converting long-term debt to equity, attracting equity financing, focusing on projects with highest short-term cash flow returns, and realizing financial commodity contract gains subsequent to year end. Since December 2014, the Company has since paid $238 million of debt down out of this working capital deficiency with money received from hedges.