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Oando: Story of an energy company built on leverage - BUSINESSDAY

JUNE 13, 2019

…Directors earned jumbo pay as company struggled

 

Globally, funding business operations is as important as the business itself. Different companies adopt different models to fund their operations. Two of the most used models include debt finance, which means money is borrowed from external lenders such as banks, and equity finance, which means owners of the business investing their own money, or funds from other stakeholders, in exchange for partial ownership.

Interestingly, companies also adopt the leveraged buyout model to either acquire more assets or expand their operations.

Oando plc, one of the major players in Nigeria’s upstream and downstream oil sector, over the years has adopted the leveraged buyout funding model.

A leveraged buyout is an acquisition of a company or division of another company financed with a substantial portion of borrowed funds.

In a leveraged buyout, a company is acquired by a specialised investment firm using a relatively small portion of equity and a relatively large portion of outside debt financing.

Some portion of the debt incurred in a leveraged buyout is secured by the assets of the acquired business.

Broken down to simple terms, a leveraged buyout can be likened to buying a house which requires part payment in cash and a loan for the remaining amount. And most of the times loan forms a major part of the entire transaction. The “down payment” is called equity (cash) and the “loan” is called debt.

Oando was listed on the Nigerian Stock Exchange (NSE) in 1992 and on the Johannesburg Stock Exchange (JSE) in 2005, making it the first African company to have a dual listing, otherwise known as cross-border listing.

Oando’s CEO, Jubril Adewale Tinubu (JAT), studied Law at the University of Liverpool, graduating in 1988, and by 1989 he had earned a Master’s of Law from the London School of Economics. He has since garnered many years of professional experience, having started out working in his family’s law firm.

Coincidentally, JAT tops the list of highest earning CEOs of listed companies on the nation’s bourse.

Figures from the company’s 2018 financial results show that he earned a total of N568 million per annum in 2018, representing a 67 percent increase in his executive compensation compared to the previous year.

History of loans and borrowings 

Though a trained lawyer, JAT had his eyes on the oil and gas business. He, alongside his friends Jite Okoloko and Mofe Boyo, established Ocean and Oil Ltd and acquired a shipping boat called “The Carolina”. They got a microfinance institution to loan them $100,000 at 10 percent interest rate per month, which they used to purchase the boat.

In 2000, during the privatisation programme of former President Olusegun Obasanjo, Ocean and Oil Ltd won the bid for 30 percent of Unipetrol, which the government put up for sale. Again in 2002, the ‘three musketeers’ led Unipetrol to acquire a  60 percent ownership of Agip Oil and obtained a syndicated loan of N8 billion from a consortium of banks led by First Bank Nigeria to pay for the acquisition of Agip.

In 2003, Unipetrol Nigeria plc merged with Agip Nigeria plc and was rebranded “Oando”. Jite Okoloko, however, left the group and is currently group CEO/managing director of Notore Chemical Industries plc.

Oando then embarked on its first rights issue in 2004. The company initially planned to raise N5 billion. However, buoyed by the frenzy and hype that came with the birth of the indigenous integrated energy company, the rights issue was over-subscribed by N11 billion.

Still basking in the euphoria of the over-subscribed rights issue, it launched an audacious move in 2005, which was to list on the Johannesburg Stock Exchange, a feat never recorded by any African-owned company.

Technically, the listing on the JSE gave the group access to more capital to fund rig ownership, invest in upstream assets, and expand its midstream business.

In 2011, Conoco Philips (COP), an American oil company, was divesting from OML 131 and valued its stake at about $1.7 billion.

To show its commitment to acquiring the asset, Oando needed to pay about $435 million, representing 25 percent of the purchase consideration.

In 2012, through a reverse listing, JAT led Oando to acquire a Canadian entity known as Exile Resources Incorporated. It later changed its name to Oando Energy Resources (OER). A reverse listing is an acquisition of a listed company by a private company, resulting in the private firm listing its shares on a stock exchange. It is basically used by private firms to list their shares on the stock exchange without having to pay the expensive cost of public listings and going through tough regulatory scrutiny.

In July 2014, Oando (OER) successfully paid $1.79 billion for the acquisition of COP, one of the biggest oil deals ever to take place in Nigeria. The new acquisition increased its production capacity to an estimated 50,000bpd.

In December 2015, Oando plc announced that it had reached an agreement to buy the minority shares of Oando Energy Resources (OER), its Canadian listed subsidiary.

The deal was worth about US$13.7 million and implied an equity value for the company of approximately US$955.3 million.

Oando in June 2016 announced that it had secured a N94.6 billion restructuring loan facility from 10 domestic banks as part of its plans to restructure its finances and return to profitability, a huge deal for a company that reported losses of over N180 billion in 2014 and another N45.6 billion in the first nine months of 2015.

Also in 2016, Oando plc announced that it had secured a $210 million recapitalisation deal for its downstream operations by HV Investments II B.V. (“HVI”).

HVI is a joint venture owned by Helios Investment Partners (“Helios”), a premier Africa-focused private investment firm, and the Vitol Group (“Vitol”), the world’s largest independent trader of energy commodities.

Directors’ pay and shareholder returns Directors of Oando Nigeria plc were earning jumbo pay even as the oil and gas giant was grappling with huge operating expenses, spiralling debt, and recurring losses. Analysts say the regulator should strengthen the boards of the audit committee of a company because they are in charge of fixing and presenting salaries of executives at the annual general meeting.

This means the Companies and Allied Matters Bill, still at the National Assembly, will have to be tweaked to solve the corporate governance quagmire in most corporate entities.

The challenge is that where you have dominant shareholders who likely compose the directors, the interest of minority shareholders may not be taken to account, according to Johnson Chukwu, managing director and CEO, Cowry Asset Management Ltd.

“Elections to the board of audit committee should be based on knowledge and competence,” said Chukwu.

Investors and shareholders are asking themselves why stewards of a company should be paid so much while they are getting little value.

The directors of Oando were paid N1.31 billion in salaries and emoluments in December 2014, but the company recorded a loss of N183.25 billion, when a sharp drop in crude oil price of mid-2014 dealt a blow to cash flow.

Total debt in the balance sheet stood at N247.33 billion that year, from N255.28 billion as at December 2013. The debt was 5.48 times total equity as heavy losses eroded shareholders’ funds.

Similarly in 2015, directors were handed N1.78 billion in pay, while the company recorded a loss of N48.15 billion.

In 2016, directors’ pay of N1.93 billion was 55.13 percent of N3.49 billion net profit. Total debt stood at N246.10 billion in December 2016, and debts were 2.67 times total equity. In 2017, directors were paid N1.47 billion in salaries and emoluments, while net income stood at N13.15 billion.

In 2018, the most interesting of the years under trend analysis, directors were paid N2.08 billion. A breakdown of this figure shows executive directors went home with N1.43 billion while other called emolument was N652.12 million.

Total debt in the balance sheet stood at N348.71 billion in the period under review as against N360.05 billion the previous year. Total debt for 2018 was 1.25 times total equity.

An analyst who didn’t want his name mentioned said top executives at Oando shouldn’t have been compensated when the company was going through troubles. In saner climes, directors’ pay is often benchmarked with the company’s share performance.

As of June 2013, Oando’s share price was trading at N29.50, but it is trading at N3.85 as at June 10, 2019, as investors continue to dump shares following the recent Securities and Exchange Commission (SEC) probe.

The SEC gave a directive for the resignation of the firm’s board members, and also barred the group CEO, Wale Tinubu, and his deputy from being directors of companies for five years. This is after the capital market regulator concluded investigation into the activities of the company and alleged infractions and other market violations.

However, the Federal High Court has restrained the SEC from removing Wale Tinibu and Omamofe Boyo as Oando plc’s Group CEO and Deputy CEO, respectively. The court also restrained SEC, its servants or agents from taking any step concerning the commission’s letter dated May 31 and also restrained the commission from imposing a fine of N91.13 million on Tinubu.

Ready to correct past mistakes No doubt, Oando has transformed itself in the past few years from a mere fuel retailer to oil producer and now competes with multinationals such as Shell and ExxonMobil, but its growth has been largely built on debt.

Its high financing costs coupled with lower oil prices hit its profits. It posted losses including a record $1.10-billion loss in 2014.

Recently in an interview, Tinubu revealed that Oando has paid over 77 percent of the acquisition debt and plans to pay off the rest in 12 months which would allow it to resume dividend payments to its shareholders, noting that Oando would be left with total debt of $300 million.

Oando’s losses narrowed to N18.3-billion in 2018 while its auditor Ernst & Young questioned its “going concern” status, saying that its current liabilities were in excess of its current assets.

Oando said in a note to its 2018 accounts it would reclassify some current liabilities as long-term liabilities to remedy its working capital by June and swap N27.5-billion of debt into equity. It also plans to sell up to $200 million via a rights issue by October and cut its stake in its upstream unit to raise $275 million in 2020.

Tinubu further said he was confident with the capital-raising initiatives and that over the next 24 months Oando would raise funds as plans were far advanced. How soon will the company weather the storm and return to the path of profitability? Only time will tell.

BALA AUGIE & OLUFIKAYO OWOEYE

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