Oando Energy Resources (OER) released its FY15 results, reporting a net profit for the first time in two years. We see progress in 2015 operations with a reduced operating cost, but overall view the results as neutral. In addition, the outside date for the OER-Oando Plc deal was extended to 29 April, where Oando will acquire all of OER’s outstanding shares for $1.20/share (CAD1.55/share). As we are of the view that the deal will close at this deal price, we maintain our HOLD rating and CAD1.40 TP.
FY15: $16mn net profit
OER reported a net profit of $16mn for FY15, supported by an income tax recovery of $65.6mn and reduced impairment charges in comparison to 2014. We appreciate that OER was able to maintain a strong production of 55kboe/d in 2015, reduce its debt outstanding by 61% YoY and reduce opex to $11.9/boe, from $12.6/boe in 2014. However, we remain cautious on the stock especially at these low oil price levels and given all the structural changes and lender approvals the group is undergoing. In addition, OER obtained pioneer tax status on its gas production from OMLs 60-63 and on its production from OML 13.
Outlook for 2016
In 2015, management guided for a capex spend of $141mn but only spent $87.7mn; For 2016, we expect flat or slightly reduced production because OER did not spend capex on drilling but on production optimisation, which we expect to continue in 2016. If both deals currently on the table (the OER-Oando Plc deal and OMLs 125 & 134 deal) are approved, OER will sell OMLs 125 and 134 to its operator for a cash consideration of $5.5mn and become a private subsidiary of the group (Oando Plc). The sale of OML 125 is mainly due to its high capex obligations, little upside at current oil prices and zero tax benefits. We do not expect significant impairment charges for 2016 and expect a profitable year, helped by the company’s c.58% of oil production hedged at $65/bbl.
Delisting from the Toronto Stock Exchange (TXN)
Oando, which currently owns 93.7% of OER, is set to acquire the remaining 6.3% of OER shares outstanding, for CAD1.55/share. The outside date has been extended to 29 April 2016 and is subject to approval by OER’s two facility lenders. After final approval of the deal, OER will be delisted from the TXN. OER has not benefitted from the listing on the TXN and has only endured the cost downside. Management has guided that the delisting will save c. $7-10mn in costs annually.