Oando’s $115m divestment to help deleverage balance sheet

by | September 26, 2016 12:18 pm

There are strong indications that Oando’s decisions to sell part of its stake in a subsidiary are to recapitalise the balance sheet, reduce its loads of interest bearing debt, fund future expansion plan and strengthen shareholder’s fund.

 Last week, Helios Investment Partners LLP, a premier Africa-focused private investment firm, acquired 49 percent of the voting rights of Oando Plc’s midstream business subsidiary, Oando Gas and Power Limited (OGP), for $115.8 million (34.50 billion).

 It is logical for management to take these strategic steps given the negative impact of a sharp drop in oil price by more than 50 drop since 2014 and the effects of the devaluation of the naira by more than 30 percent on cash flows.

Also, the militant attack on oil facilities in the Niger Delta region dampened production.

 The objective would be to get cash into the business.

Oando is highly levered because the company raised a lot of debt to buy Conoco Philips.

It would have been more difficult for the firm to go to the equity market to raise capital given the economic downturn, according to Dolap Oni Head of Equity research at Ecobank Group in a telephone interview with Markets Intelligence.

 “Basically the objective of the part divestment is to reduce their debts and pump more money into their upstream stream operation. The company recently rescheduled their loans and that should help reduce their debts,” said Oni. Tajudeen Ibrahim, head of equity research at Chapel Hill Denham says the decision by the company is broadly consistent with its plans to deleverage the balance sheet. “This should be supportive of earnings and cash flow,” he said.

 In 2014, Oando acquired Nigerian Upstream Oil and Gas Business of ConocoPhillips for a total cash consideration of US$1.5 billion.  

If Oando decides to use 60 percent of the proceeds from the sale of assets to fund future expansion and 40 percent to pay off debt, there will be an appropriate mix of debt to equity that will strengthen asset base.

 Fourty percent of the N34.50 billion-that is N13.80 billion-proceeds from the sale of assets will help reduce the Nigerian oil and gas giant’s total debts in the balance sheets to N265.74 billion, from N279.54 billion as at June 2016 while debt to equity (D/E) ratio will fall to 175.84 percent after the reorganization as against 202.75 percent in the period under review.

Finance costs that increased by 55.95 percent to N35 billion, will also fall.