Once upon a time, Nigeria discovered oil. Soon enough, it became our main source of livelihood, the foundation upon which our national budget rests, and the one commodity that provides most of our forex inflows. To be able to extract value from this oil, we created refineries – all of which are government-owned and managed. Sadly, the rest of the story includes heavy bouts of politicking, lots of bloodshed, corruption, explosions, and billions of Naira in losses. Oil might have been one of Nigeria’s biggest blessings, but it also undoubtedly doubles as its biggest curse.

On Monday, the Nigerian National Petroleum Company (NNPC) released its audited financial statements for 2018, noting that its refineries recorded losses of N154 billion. As embarrassing and disappointing as it sounds, it is not as surprising. The nation’s 3 refineries located in Port Harcourt, Warri, & Kaduna, reported combined losses of N154 billion. Kaduna Refining and Petrochemical Company (KRPC) incurred a loss of N64.5 billion, Port Harcourt Refining Company (PHRC) recorded a loss of N45.6 billion, while Warri Refining and Petrochemical Company (WRPC) recorded a loss of N44.4 billion. The losses also aren’t new as all refineries performed better than the preceding year 2017. The only thing more confounding than the billions in losses is the convenience with which Kaduna refinery conveniently recorded zero revenue for 2018.

The madness behind the numbers

Many issues feed into the wreckage that has become Nigeria’s refineries and most of these issues date as far back as decades prior to now with the last of the nation’s refineries built 40 years ago. For a recap, here’s an overview of some of the problems that have led us this far.

1. The 3 incapacitated refineries

As far back as the 1970s, Nigeria, Norway, and Malaysia set up national oil companies for the exploration, production, and refining of oil. So when Norway came up with Statoil (now Equinor) and Malaysia, Petronas, Nigeria created NNPC. Today, while Malaysia and Norway boast of having the biggest state-owned oil and gas companies in the world, NNPC has a long list of excuses and mind-boggling losses to show for it. While PH and Warri and in oil-producing states, Kaduna does not produce any oil. For the sake of balance and to have a national spread, some of the crudes are moved to Kaduna via pipeline. Hold that thought.

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The capacity of all three refineries is also insignificant, compared to the required consumption of the nation. Hence, most of our oil is still imported because we cannot produce enough. This rate of importation is over 80% of our consumption. The existing refineries also operate significantly below capacity. Sometime last year, the refineries operated as low as 5.55 percent capacity. To increase capacity, the country carries out turnaround maintenance periodically and not only does it cost an arm and a leg, it takes months – but barely anything ever changes. Production stays low and cost stays high. Even if we turn all 3 around successfully, we have shown that we are incapable of increasing their capacity. Essentially, Nigerians will still need to import. Other factors contributing to the losses are spillages, explosions, and theft.

Yet in the midst of this, salaries and employee benefits are huge. KRPC, WRPC, and PHRC reported 13.8 billion, 13.8 billion, and 9.2 billion in employee wages and salaries, excluding directors’ remuneration, staff pension and other benefits. Given the inefficiency of the operations of the refineries, the only thing that could have been done asides creating better refineries is to have an overhaul of the entire thing and shut down the refineries. But that’s a different problem.

2: The politics of it

The first thing you’ll learn about oil in Nigeria is that everybody wants it. All of our refineries were built in the Military regime – as far back as that. Given the failure of the refineries, the first attempt to sell them off was made by former president Olusegun Obasanjo. When Umaru Yar’ Adua became president, he reversed it citing that the process lacked transparency. The fears of the unions in the oil and gas sector was also palpable as they saw the sale of the refineries as a ploy by the government to award the deal to its cronies. In November 2012, former President Goodluck Jonathan also recommended that the refineries be sold as a result of inadequate finance and under-performance, but they still remained. It didn’t take long before more issues emerged.

With developments going on in non-oil producing northern parts of the world like the State’s capital and barely any developments in the south, Niger Delta Militants sprung up and swore to wreak havoc on the entire nation. Also worthy of note is that today, President Buhari still remains the minister of petroleum.

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3: The scam that is fuel subsidy

One of the most confounding things is the fuel subsidy saga. With the cost of import landed cost high, the government had thought it a great idea to subsidize fuel for the average Nigerian. Forget the question of whether we should be paying subsidies or not, how much in subsidies is the government really paying? Subsidies are based on the volume of petroleum consumed, but one unconfirmed information is how the subsidy is being calculated. Even today, NNPC and PPRA cannot agree on the volume of petrol being consumed daily in Nigeria.

If DPR says Nigeria is consuming around 38 million litres in a day and NNPC suggests that the country’s daily petrol consumption is around 50 – 60 million litres, it means there are significant discrepancies. As it is, no one knows how much subsidies Nigeria is actually paying every day and where the money is going to if we’re not actually consuming as much.

Yet, the king of all the problems is corruption

Of the series of challenges the refining space is plagued with from theft of petroleum products, to poor maintenance and a series of operational challenges, corruption ranks tops – and it isn’t news. Corruption in the downstream sector was also exposed during the subsidy probe. It revealed that some of the companies that took money for subsidy did not even import refined products at all. With marketers preferring to import, our refineries stay dormant. The funds used in Turn Around maintenance (TAM) annually also does not also contribute to any meaningful and could also be another avenue for exploiting the industry.

While Nigerians sit and watch the decay in the system fester, one billionaire is on course to provide an alternative that both the government and the private sector are basing all their hopes and dreams. Aliko Dangote’s 650,000 barrels a day refinery which is set to be one of the world’s largest, is due to start operations in less than a year’s time. Even as we hope that the refinery brings some sanity to the modus operandi and reverse the decades-old rot in the system, it too isn’t bereft of flaws. Yet, it is the only foreseeable hope we have to put an end to the joke that is our refining system and commence the process of recovery.

AIICO Insurance Plc. is a market leader in the insurance space, offering a range of from pension management, asset management, health insurance, and more. One of the oldest in the game, the company has grown in capacity, optimizing its available resources to attain new heights. Currently the 2nd largest insurance company in Nigeria by gross premiums, the past few years have shown the company’s desire for expansion through capital raising to expand its operations – amongst other real reasons.  

So far, the company’s performance has been admirable. In 2019, its Profit after Tax grew from the N3.2 billion it made in 2018 to N5.9 billion as at the end of 2019 which was a whopping 88% in growth. The insurance company’s gross written premiums for FY 2019 also increased by 33% to N50.1 billion last year while gross claims grew by 6% to N30.6 billion in 2019. Over the past year, the company has set various plans in motion to raise capital. While its CEO had noted that the objective of the capital raising is to strengthen the company’s balance sheet and provide additional capacity to underwrite more risks, there’s more to the aggression. 

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The Capital-Raising Journey 

AIICO has not had a public offer in recent memory. It had only conducted rights issues just 3 times, with the last being in 2006. Yet since last year, the company had been in the business of raising funds. The company first announced last year of its desire to create 16 billion ordinary shares of 50 kobo each, in line with the existing ordinary shares of the Company. It then set up a private placement phase of its recapitalization exercise with an uptake of 38.83% of its shares by two strategic investors; LeapFrog Nigeria Insurance Holdings Limited acquired 28.24 percent stake while AIICO Bahamas Nigeria Limited acquired 10.59 percent stake. As a result, the paid-up share capital of the company has increased from N6.1bn to N11.3bn. Its shareholders’ equity also increased by 92% from N14.5 billion in 2018 to N27.9 billion.  

But it still wants more. 

The company sought shareholders’ approval to increase its authorized share capital by N3.5 billion or more by way of a rights issue. So just last month, the Company’s Board of Directors’ meeting held on May 12, 2020, the company announced a rights issue of 5 new shares for every 13 shares held as well as Bonus shares of 1 new share for every 5 shares held, ahead of the Company’s next Annual General Meeting. 

Why does AIICO need more money? 

The first answer is NAICOM. NAICOM had introduced a new tier-based minimum solvency capital structure, detailing the new minimum capital base for composite insurers. A new capital structure was proffered for Life, Non-Life, and Composite insurance companies, including reinsurance companies, which were increased from N2 billion, N3 billion, N5 billion, and N10 billion to N8 billion, N10 billion, N18 billion and N20 billion respectively. For AIICO, the goal had been to attain its required N18 billion through various instruments towards meeting the NAICOM guidelines. Not only did the company want to raise funds, but it also needed to raise capital above the minimum capital. 

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But that’s not all.  

AIICO also owes the IFC N2.42 billion which it obtained in 2015. The loan also has embedded an option to convert in the event that there is a change in control or sale of a substantial part of the company’s assets or business. The option unfortunately expired in December 2019. Thus, shareholders could get significantly diluted if the company does not pay off IFC. 

A closer look at its N26.9 billion shareholder fund composition shows that N5.2 billion and another N3.5 billion are classified under deposit for shares and revaluation reserves respectively. Making it not exactly count. Speculations have been made about the possibility that the deal with LeapFrog may preclude the company from using the proceeds to pay off debts. That said, AIICO Insurance has until December 31, 2020, to meet the new capital base after the insurance regulator postponed the June 2020 deadline.  

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To retain ownership and not further dilute the shares of its existing shareholders, it leverages right issues to raise funds. What is even more confusing is why there was a declaration of Bonus shares as well. Alongside its last disclosure, it declared bonus shares of 1 new share for every 5 shares held. Why issue bonus shares in the middle of capital raise? Typically, when the price per share of a company is high, new investors will find it unattractive to buy. With bonus shares, the overall capital remains the same but price per share tends to reduce. So liquidity of the stock is enhanced and existing shareholders end up with a reduced percentage of the company.  

Given its fund-raising requirements, amongst other expansionary reasons, AIICO might just be in the business of raising funds. The company’s expansion strategies, however, appear to be paying off given its 88% growth in profit in 2019 so we can only conclude that they know exactly what they’re doing. 

From its packaged sausage rolls to packaged ice cream and cakes, UAC Nigeria has spent decades creating the perfect snack experience for Nigerians. Even with widely-known brand names like the beloved Gala Sausage Roll, the company hit new lows over the past few years, no thanks to its now-discontinued operations in its real estate subsidiary, UPDC.  

In 2018, it reported a write-down of N13.7 billion due to a combined net-loss from its holdings in the subsidiaries UPDC, MDS Logistics, and UNICO with UPDC contributing N14.9 billion in losses. It eventually took a bold decision to spin off the loss making real estate unit.  

However, barely a year after making the tough call to shed the dead weight, it has set off on a course to pay dividends on each of its 2.88 billion shares outstanding. 

For the year ended 31st December, 2019, UAC of Nigeria Plc announced a dividend of 10 kobo per ordinary share. Come Thursday 16th July, the proposed dividends will be paid electronically to shareholders who have completed their e-dividend registration.  

The UACN’s Annual General Meeting is also set to take place on the 15th of July. While the proposed dividend payment will serve as a silver lining of some sort to its shareholders, is this the best move for the company? 

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It’s still a loss-making company 

In FY 2019, a loss of N14.6 billion arising from discontinued operations (UPDC) led to a net loss of N9.3 billion for the year, which was a marginal decrease from its loss of N9.5 billion in FY 2018. With the proposed dividends charged against 2019’s ailing books, one question to be asked is, “Why?” Even strong companies suspend dividends when there’s financial trouble. 

A dividend of 10 kobo per ordinary share on its 2.88 billion shares outstanding will cost the company a total of N208.8 million. While the company’s Cash & Cash Equivalents sits at N8.13 billion as at 2019, giving it a level of flexibility to pay out dividends, the need for liquidity particularly in these times cannot be overemphasized. Given its recent challenges, the company might be better off relegating avoidable costs to the background. 

READ MORE: Why shareholders of Nigerian banks should expect lesser dividend payouts in 2020

A better approach 

A better approach will be to focus on a growth strategy, deploying all available resources to set the company off on a course that will ensure its sustainability. It needs to come up with innovative solutions to expand its core business while also looking out for divestment opportunities that are certain to pull it out of the quagmire it has found itself in.  

The UACN stock experienced a rally in May before falling to its current share price of N7.20 and a price-to-book of 0.3951. The company’s growth efforts will do well in attracting new growth investors who will embrace the idea of purchasing the company’s shares low and watching it set off on a path to success. 

 Even better is that its existing investors will now be presented with a better option in terms of valuing the company’s benefit to their overall investment portfolios.  

*This article has been updated*