Oando emerges stronger

Wale Tinubu, founder and CEO of Nigeria’s biggest indigenous energy company, Oando, is quietly confident. After a ferocious time for the oil and gas sector he has restructured the company and has come out of it all stronger and more determined than ever. “We acted boldly and decisively,” he says.

Over the past year or so he has proved, as much to himself as to any doubters, that Oando can act quickly and withstand a downturn in the market. Last year the company posted a loss of a little under $1bn, mainly from impairments and write downs on some assets. This necessitated some swift action but Tinubu says his team remained calm and there was never a sense of panic. They had a plan and executed it.

In the past year they have partly divested from their downstream operations, raising $335m, and have restructured $300m of debt. This has considerably reduced the company’s debt liabilities and debt refinancing, putting Oando on a solid financial footing.

Started in his parents’ garage in Lagos, Oando is one of the Nigerian success stories of the past decade. A lawyer by training, Tinubu decided to get into the oil business, beginning in supply and trading. Today, Oando’s focus is principally on the upstream (oil exploration and extraction).

As the group shifted strategy and foreign companies divested from Nigeria, Oando went on an aggressive purchasing campaign. In 2014 it bought blocks sold off by ConocoPhillips for $1.5bn, at the time the biggest acquisition in the upstream oil and gas sector by a Nigerian company.

Tinubu insists that the investment is actually a very solid one. “The company has 450m in proven reserves and we have a purchase price of $3 per barrel, one of the lowest in the industry,” he is quick to point out. To finance this investment phase Oando resorted primarily to debt, but the company’s real headache today is the unrest in the Niger Delta, which has cut back production from 55,000 barrels a day to a little over 40,000.

In this exclusive interview, Tinubu tells us about the prospects for the company he founded – which is now listed on both the Nigerian and Johannesburg stock exchanges – and the oil sector in general. He also gives his views on recent calls for the Nigerian government to divest its assets in the oil space.

You stated that the real opportunity for your group lay in the upstream business, so today what’s the makeup between the upstream, midstream, downstream business? The upstream business is about 80% of our balance sheet and right now we have invested in total about $2bn in our operations within this space. We have 450m barrels of proven reserves, which makes us the largest indigenous oil and gas company in the country and we produce about 41,000 barrels a day, down from our 55,000 high.

Would you say that you were overleveraged before the fall in the oil price?

No, because leverage is relative, you can’t be overleveraged. We had the leverage that suited $100 crude oil price and our leverage was primarily for our rig business. We had certain assets which we owned on our upstream balance sheet which at $50 crude did not make sense to develop but at $100 crude kind of makes sense to develop.

So what we had to do in 2015 [after the crash in the price of oil] was effectively write down our balance sheet for those assets we knew we couldn’t develop, as well as the rig fleet, because our rig rates had dropped from $100,000 a day to zero because nobody was drilling. So we have four rigs, in which we had invested over half a billion dollars, which all of a sudden had no work or return and we took a $600m charge.

What we simply did was readjust the balance sheets for today’s reality, and by taking that charge we then decided then and there to recapitalise our balance sheets. We took a decision to sell $300m of assets and restructure $300m worth of loans, which is exactly what we did, and we’ve been very successful, executing the plan within nine months from the start of 2016.

The debt, was it with international banks? Was it with local banks?

Primarily the debt was with local banks, with a little also with international institutions. It’s important to note that we have group debt. The debt that is attributed to our upstream business is doing very well because we hedged at $95 per barrel, so we’ve been able to finance the debt.

Of the $900m we borrowed for the ConocoPhillips deal we’ve paid close to half a billion dollars already in a two-year timeframe. So that debt’s been very well serviced and has got a consortium of over 15 banks involved in it, both local and international.

You’ve sold stakes in your downstream business to Helios, a private equity company who have probably got a 3–5 year outlook on things. What do you think is their strategy and what do you think is going to happen to that?

They are a PE firm. Their strategy is to make the right investments, grow the business and exit at a very good multiple. Our job is to build businesses in the oil and gas sector and provide returns to our shareholders and we have a portfolio of businesses which we would always look within to decide what we’ll put our emphasis on. From our own strategy it was clear to us that the upstream was a long-term feature and we needed to reaffirm our standing in the upstream by selling down our retail fuel and gas businesses.

If you look at the price we got for our downstream operations as an earnings multiple, then you realise we achieved good returns. The beautiful thing is that having a PE firm as a partner means that they have a short to mid term outlook which basically gives us the option to buy back this business three to five years from now.

Is that part of the strategy?

It depends, I mean we would always look and see what is available, it may be a strategy to buy back a percentage of these businesses, in whole or partially, it is always an option for us. As to whether or not we will have the cash flow to do that the answer is yes because if you look at our current pay down rate from our production we definitely in that three to five year period would have paid off the ConocoPhillips loan in its entirety and we’ll have all the free cash flow available to us to buy back into our retail business or into our gas business should we so decide, whenever the PE firm decides to exit.

Are you worried about the oil and gas sector and the health of your competitors, given that you’ve bought at one of the cheaper multiples?

I’m worried in the sense that some companies have taken loans they didn’t hedge and also some of them have been hit by the Niger Delta security issues. But the way I see it is that these are short-term challenges, which they ought to be able to surpass by recapitalising their companies, getting in more equity to pay the shortfall and restructuring their loans, and I think the financial institutions will understand that effectively they’ve been in a force majeure situation.

I believe that the Petroleum Bill issue is not yet finalised. Are you happy with the way government is pushing reform?

I am happy with the reform agenda of the government, the real challenge is the implementation process and that we all need to get involved in the execution. We are not fighting a recession, we’re readjusting an economy for a new long-term scenario, a scenario of low oil prices, and a longer period of lower prices than anticipated or experienced in the past.

And what about the government selling its stakes in NLNG for example, or in its other businesses in the oil sector?

We’ve just done this at Oando. We’ve looked at our balance sheet. You can’t own everything. You’ve got to decide and say, “What’s valuable to me and what’s not valuable to me? What is excess?” And you do need to sell some things to be able to shore up certain other things.

We have all this oil [in Nigeria], and our total [international] borrowing [as a country] is less than $10bn, but instead the government borrows locally in the Nigerian market and crowds out of the private sector. But most of all, we do need to shore up our reserves by selling what we don’t really require and building up these reserves.

Including the assets in the oil and gas sector?

Without a doubt. I mean I gave you a very simple example with joint ventures. We have no reason to own stakes in the joint ventures. With the joint ventures the government is forced to invest $6bn to $7bn per annum in cash calls.

Our reserves are $26bn and so four years of our cash call requirement is already what we have for reserves. So it doesn’t make any sense to hold those assets as an investment. We would easily be able to raise $50bn not to say $100bn.

That’s your reserves. And your net take from the barrel of oil through our royalties and taxes still ensure that your return is still better having sold the joint ventures than being a joint venture equity partner and just converting them to production sharing contracts.

So that means a return of the oil majors to Nigeria?

They are already in Nigeria. The reality is that the majors are here; the indigenous companies produce about 10% of the oil and are increasing their scope. And if those assets were sold, the indigenous companies would still participate and would still invest in those assets.

Like we did, we saw the amount of cash that was paid out to the likes of Shell, who sold their onshore blocks. That money should have gone to the Nigerian Government, and that money would have been part of our reserves today.

And Oando in five years?

Oando in five years will be a company with very, very little debt. We’ve reduced our debt from $2.5bn in January 2015 to approximately $700m. And the rate of pay down means that in less than five years we will have little or no debt obligations. We will have, at least 400m barrels of reserves; we’ll have production well in excess of 50,000 barrels a day and we will still have our investments potentially in our downstream business as well as in our gas distribution business.

I’m very happy that we have been able to pull through in terms of setting out a strategy, building up this group and being able to migrate to the upstream, which is really where we wanted to be. It’s a tortuous path we’ve taken from trading to the retail business to the gas business to the services business and finally to being a producing company.

Any lessons learnt from the past year?

Clearly, I would have liked us to have used more equity in our group but the truth of the matter is that it wasn’t for lack of trying. There is not a lot of equity that comes into Nigeria and we had to sacrifice our growth aspirations vis-à-vis having a very, very conservative balance sheet. So we took on debt in our growth, which clearly, when the oil price changed, had an adverse effect on the company, which was rapidly corrected by our execution.

So I would say, in a perfect world, I would certainly use less debt and more equity. I would also practice more risk management; I could have hedged all our production but I only hedged half of our production for example.

So you feel like you should have been more risk averse?

I was happy with the audacious steps we’d taken building an oil group and moving our nation forward in terms of being able to build our midstream jetty; like we built the first gas pipe distribution system in the country. We’ve been building gas pipelines for over 10 years and if we hadn’t been pioneers, our service industries would have no gas to power their factories.

The Lagos monorail system is going to run on power generated from our gas. We’ve done so much in terms of moving the infrastructure needle in the oil and gas space and I’m very happy that we’ve been able to do that. I would say that the mistake that I believe we made was not executing a divestment strategy early.

But when I look at the numbers at which we’ve been able to do our deals, we still got good value for those businesses because they are unique. We have the largest retail network in the country; we have the largest gas network in the country. The fact that we acted swiftly has really put us in a position to continue our dream of building a profitable, well-diversified, oil and gas indigenous major.

And that’s the dream that you had in the garage 20 years ago?

Correct.

To compete with the majors?

The dream was focused on building a company with global standards, no different from how they operated in Nigeria. So if you look at the size and scope of the business which we have, we may not be a global major but by Africa’s standards we are sizeable.

We produce and have reserves of oil equivalent to a major in Nigeria. We are the only company, we are the only indigenous company who is a bona fide partner in a joint venture. In other words, we have the status of a major in Nigeria.