Divestments, acquisitions in oil, gas sector: Stringing the deals together
The past five years has seen a number of acquisitions in the upstream sector of the Nigerian oil & gas industry as a result of asset divestments by international oil majors. The reasons for each divestment by the International Oil Companies (IOCs) have been varied, but all have a similar thread; a strategic decision from the point of view of the global portfolio of the IOCs, doubtlessly spurred on by the vandalism and theft that occurs at their onshore facilities in the Niger Delta.
These divestments have however taken on more of a positive narrative for local firms in the oil & gas sector, who have remained for the most part peripheral players in the upstream sector. The local oil and gas companies that have stepped up to snap up the assets getting divested by the IOCs include ND Western Ltd, which took over Shell Nigeria’s Oil Mining Lease (OML) 34, Elcrest E&P which took over Shell Nigeria’s OML 40, Shoreline Natural Resources Ltd which took over Shell Nigeria’s OML 30, Lekoil which took over Panaro Energy’s OML 113, Seplat Plc which took over the Shell Nigeria-led consortium’s assets of OMLs 4, 38 and 41 and most notably Oando Plc, which is in the process of taking over ConocoPhillips’ Nigerian business unit for a record amount of $1.65bnby an indigenous firm.
The ConocoPhillips divestment
Oando Plc currently does not have financial statements released for the year 2013, however, analyst reports on their Canadian subsidiary which is owned 95 percent by Oando Plc and is the acquirer of COP’s Nigerian assets, gives some insight into the valuation of Oando pre-acquisition (financial year 2012) and expected valuation post-acquisition (assuming financial year 2013).
The Enterprise Value (EV) of Oando, which measures a company’s overall value and is a better measure than market capitalization as it incorporates net debt, minority interest and preferred shares, shows the entire firm, Oando, was valued at C$ 1.52bn pre-acquistion (Source: Garett Ursu, Conmark Securities Inc. 2013). Using the CAD-USD exchange rate for December 31, 2012 (1 USD = 0.9942 CAD), that gives a value of USD$1.53bn. Expected EV for 2013, incorporating the acquisition of COP’s assets, was estimated to be $2.813bn (Source: Aminul Haque, Stonecap Securities 2013). That is an 84 percent increase in EV derived from the acquisition of COP alone.
Analytical metrics also give an insight to the impact of the acquisition of COP’s Nigerian assets on Oando:
These metrics show an improvement in Oando’s EV/DACF and an increase in NAV per share. The improvement in EV/DACF seems marginal; however this is because the EV is increasing even as DACF is increasing.
The Seplat acquisitions
Looking at Seplat Plc, another indigenous Nigerian firm that has grown through acquisitions, we see that the Enterprise Value of the firm is estimated to be $2.521bn currently. That is on par with the valuation for Oando post-acquisition ($2.813bn), showing how the acquisitions have influenced the worth of the firm.
Metrics for Seplat Plc are summarized below:
Seplat Plc in comparison to Oando Plc, has a higher EV/DACF. This is as a result of Seplat’s lower DACF (Debt-adjusted cash flow). However, as Oando completes the acquisition of COP’s assets and commences operations, the DACF and EV/DACF for both firms can then be compared conclusively.
The divestments by IOCs have had a positive effect on local firms in the industry. Not only are the firms growing exponentially, as can be deduced from the records of the publicly traded companies, the deals have also created a platform where local content has grown aggressively, more jobs are being created and local firms are better-positioned competitively.
The Nigerian content dimension
According to Mr. Ernest Nwapa, Executive Secretary of the Nigerian Content Development and Monitoring Board (NCDMB), “Many Nigerian companies have become proud owners of upstream assets and this has in turn led to the engagement of indigenous contractors. They have never had it so good. Nigerian companies are now handling lucrative pipeline construction projects. Things can only get better for them. The more patronage they get, the more they are able to improve their capacities. It is a virtuous cycle.’’
However, with all these euphoria, many questions have been raised regarding the funding of these acquisitions and the technical capacity of the local firms. The local firms have however been proving the naysayers wrong. Seplat Plc was able to raise the necessary funds, take over the assets and produce 60,000 barrels per day (Company records). Oando has also reported that the necessary funds have been raised, and has a joint venture agreement with Agip to operate the assets. As Aminul Haque, Analsyt at Stonecap Securities Canada points out, “With the Oando acquisition, Agip continues to be the operator of the JV. With its long and varied international experience, Agip is a comparatively more desirable operator”.
The local firms have also had better success dealing with their host communities than the IOCs they took over from. According to Ildar Davletshin, analyst at Renaissance Capital, “Seplat has been successful in engaging local communities in direct dialogue and co-operation, which helped to reduce incidents of third-party interference to zero in 2013 (from six in 2011 and four in 2012).” He continues, “The Company spends $1-3mn annually on improving the social environment for local communities, through support for local health care, scholarship awards, electrification and water projects, among others. The company has also established an employment programme for host communities. Seplat has signed memorandums of understanding (MoU) with four major communities (Ovhor, Oben, Amukpe and Sapele), which help define mutual obligations and commitments and contribute to peaceful co-operation.”
It is expected that Oando would record similar success as well in its relationship with its host community.
Great expectations
Looking forward, the expectations are high for these local players that are growing aggressively, and for the oil and gas landscape in terms of local participation. It is expected that technological transfers and greater undertakings would improve the capability and scope of the local players.
Also, in the near future, the acquisitions in the industry are not expected to decline. Seplat has indicated in a statement that its recent IPO listing was to raise funds partly to buy up more oil and gas assets in the country.
Moreover, more M&A activity can be expected in the industry. It is possible that local firms begin to merge and bigger firms acquire smaller firms with strategic interests to improve economies of scale, capacity and efficiency. Furthermore, IPOs from other firms could be expected as the Nigerian Stock Exchange, Banks and Capital Market firms have been courting local oil & gas firms through roadshows, workshops and other events, to raise capital through the stock exchange.
It seems as though the benefits of this 60 year old dominant industry would finally begin to tickle-down to the indigenes/locals.
Yinka Abraham