[ANALYSIS] Oando’s Loss ‘Could Be Worse’ Than Reported

Oando Plc reported its 2014 FY, 2015 Q1 and H1 results last week reporting a record loss of combined N214 billion in the periods reported. The losses as reported already blew away most analysts estimates as it basically wiped out over $1 billion from the company’s assets and has now thrown the company’s retained earnings into a negative N188 billion.

This results whilst monumental has even provided investors with a lot more to worry about as it could be a sign of something worse. For example, whilst the loss was mostly recorded in the last quarter of the year with about  N189 billion in losses alone, most will look at the “admin expenses” line which ballooned from N47.8 billion to N277.6 billion. A lot of that expense was mostly made up of impairments from its legacy assets such as rigs which had not been operational for years.

However, the company still has about N253.2 billion in intangible assets as at June 2015. Whilst the company is yet to release its full account disclosures, many believe the huge number mostly contains goodwill on the acquisition of the ConocoPhillips assets, which it probably has not yet fully revalued. With oil prices more than 55% down from when it acquired the assets it is expected that the net present value of the future cash flows expected from the assets would have been impaired. The asset was acquired on the back of a projected oil price that was above $100. Based on this, we could be looking at another N100b to N150billion in impairments by the end of the year or if oil prices continue to be sub $60.

Oando’s other downstream and midstream assets may also be experiencing a decline as crushing debts and rising expenses take its toll. Though its midstream assets appear to be doing quite well, it still face challenges collecting some of the cash earned from sales from power companies. It has spun off the downstream assets and may well have to even sell the midstream assets if it is to stay afloat.

The earnings call scheduled for 4pm local time on Monday will help shed more light on the results as the management of the company will have to explain if the assets on its balance sheet face further risk of impairment. Investors surely will be looking to get more guidance from the company as regards further losses or a potential spin-off of some assets.