Nigerian integrated oil and gas company, Oando, has agreed to divest 60 percent of economic interest and 51 percent of voting rights in its downstream operation including the petroleum product marketing arm to a consortium of investors including Vitol and Helios Investment.
Oando’s operation in the downstream sector includes petroleum product marketing, lubricants blending and marketing, supply and trading as well as a terminal operation in Apapa, Lagos. The company has indicated interest in divesting its downstream operation since it completed the acquisition of the assets of ConocoPhillips in the Nigeria upstream industry, thereby positioning itself as the biggest indigenous upstream company in the country.
The company secured shareholders consent at its 2014 annual general meeting to divest 49 percent of the downstream segment and the entire business if a potential buyer can be sourced. Consequent upon the acquisition, the consortium will own 60 percent of Oando downstream but with 51 percent voting rights, giving the consortium the ability to control the affairs of the company. A statement by Helios and Vitol said a new, separate company will be created by the joint venture, however the Oando name and brand will be retained.
Oando owns and operates over 400 service stations across Nigeria with an estimated 12 percent of market share of sales of petroleum products. Oando downstream also operates two subsidiaries in Ghana and Togo with licenses to market petroleum products via its 17 retail outlets in Togo and 27 in Ghana. The company also markets lubricant blended at its 10 blending plants spread across Nigeria. Other key assets include 10 LPG filling plants, 1 bitumen plant, 7 terminals, 6 petroleum products depot and 3 aviation depots in Lagos, Abuja and Kano.
This is the first major deal for a downstream business in Nigeria in 2015 and comes in the midst of ongoing delay in payment of subsidy arrears worth an estimated N295million (about $1.2 million), to petroleum marketers. However, the timing of the deal coincides with the increasingly strong call for subsidy removal and total deregulation of the downstream sector. Analysts believe this could be a major motivation in this deal as it would considerably improve the fortunes of major oil marketers.
The proceeds from the sale are expected to be used to reduce Oando’s debt, which is largely domiciled in its upstream subsidiary. OER’s debt outstanding as at the first quarter of 2015 stood at $564 million after the company used income generated from oil hedge reset to prepay $238 million during the period. With the new injection OER debt will likely be reduced by 60 percent. This is expected to significantly reduce the company’s interest expense. In lieu of this development the loss making subsidiary is likely to revert to profitability as early as the first quarter of 2016.
With the divestment, Oando’s revenue is expected to decline significantly as the downstream business was responsible for $1bn of the $2bn revenue the company reported in the 2013 fiscal year (FY). However, the company has since reduced its activities in the petroleum marketing segment while consolidation of revenue from OML 60, 61, 62 and 63 continue to compensate for the revenue loss. ‘We expect over 25 percent decline in revenue in FY2015 financials. Consequently, we also expect a significant decline in total assets, administrative expenses and short term debt both of which are associated with the downstream business. Profitability is also expected to increase given the higher margin from its upstream segment relative to the thin margins offered by the downstream business,’ an Ecobank analyst said.
‘We believe the transaction will add value to both parties. For the Vitol& Helios partnership, it represents a forward integration by Vitol into a key market and a major piece of the downstream business in Africa, which was missing when the two acquired Shell’s operations in 2011. Furthermore, the acquisition automatically gives Vitol a market leadership position in the supply of petroleum products and LPG riding on Oando’s strong dominance of the downstream segment,’ the analyst added.