MR. WALE TINUBU, OANDO CHIEF EXECUTIVE OFFICER
…Oando major objective was to be a leading downstream player
…Gross margin drops due to fuel subsidy
…Drop in oil price affected company’s debt profile
…Diversifies from downstream to upstream
…Rebrands its gas company
By Felix Douglas, Olufunke Afolami
Nigeria’s downstream industry responsible for trading and marketing in the oil and gas value chain has always been enmeshed with turbulent experiences. Operators do find it difficult to thrive in the sector owing to government regulation especially on fuel subsidy, a situation where Premium Motor Spirit, PMS, is sold at regulated price without the market being allowed to drive itself with current realities in place.
Oando is one of the indigenous oil giants in Nigeria, the company has set out to do great things in the oil industry with accolades as a local player in the country’s downstream.
Recently, the Chief Executive Officer, CEO, of Oando Plc, Mr. Wale Tinubu, gave an elaborate insight about the ups and downs of the indigenous company at the Nigeria Oil and Gas Conference, NOG 2019, held in Abuja.
Wale, as he is fondly called by business associates and his admirers in the oil industry said; “Oando has won a lot and failed in a few, but no matter what, it is resilience and would continue to soldier on irrespective of the odd, it remains truthful in its vision to be a world class company.”
The Oando CEO pointed out that when the company first started business its wish is not only to a be a world class, but an indigenous company with a global standard in all it did. He stated thus: “I still remember in early days, twenty-five years ago when we started the company, people are laughing at us saying who did they think they are? They want to be like Shell, what is all these process and procedures that they have internally. But at the end of the day, we came to realize we needed to be a part of the choice for those who will invariably finance you, global financial institutions who will partner you, international parties and to be able to execute and succeed in this extremely challenging terrain, you will definitely have to be the best in class or attempt to be best in everything you do.”
Tinubu revealed that Oando started as a trading company in 1994 with a lot of support from the Nigerian National Petroleum Corporation, NNPC. There is no indigenous company that does not have its support base from the national oil company. NNPC has done a lot in supporting and creating indigenous companies. He said Oando got credit and opportunity to do business with NNPC and the corporation supported the company.
Tinubu stressed further “I remember one of the transactions we did with them which was technically at the golden age of the industry when the four refineries work to full capacity, the pipelines worked in the 90’s we had opportunity of doing something when the refinery work very well in Kaduna and we had excess LRS, which was long residue and we were able to secure an innovative solution rather than the refinery shutting down for extra number of months or weeks.”
“We used the trucks, almost 100 trucks per day down south we had no storage terminals in the ports which we have today because all the pipelines worked. We had to use vegetable oil tanks to store the fuel up to 8000 tons. We will export it to Lome, built into 50000 tons, ship it for the oil refinery to use as feed stock. There were more interesting things we did in the early days, Tinubu enthused.”
He stated further that during the privatization exercise of 2000 Oando had opportunity in participating in the process with an NNPC company known as UNIPETRO which had downstream assets and the company acquired 30% stake in 2002, it also acquired Agip downstream operations.
Oando’s drive was to be the leading downstream player which was its major objective. This was achieved in 2004, when it became the first indigenous company in terms of market distribution.
The company delved into infrastructural opportunities with NNPC and built the first gas distribution network in Lagos known as Gas Link, Nigeria Gas Company, NGC, which it was able to negotiate and created concession that was never done before. It commenced from scratch to concession.
Oando took budget and finance risk for the project, NNPC gave credit, and at present 130 industries are taking gas from the company and the country has been able to drop 40% the cost of power to those industries and stimulate economic growth.
Tinubu noted that there are other laudable projects done by Oando in some major cities in Nigeria such as Port Harcourt, 250 kilometres pipelines in Calabar including other infrastructural projects like the midstream jetty which was geared towards reducing over $50million a year of demurrage currently being experienced in the oil industry.
EVOLUTION OF OANDO
In terms of evolution, Oando focused on infrastructural projects but had challenges in the downstream industry, the margin was 10% when Oando commenced business in 2000. The gross margin has dropped, 2% to 4% because the government effectively subsidize the price of petroleum products for social palliative which was not supported by players in the industry.
Tinubu expressed outrage that Nigeria spent $5million on subsidy and more money is still being spent on subsidy than health, education and housing. The growth rate was 3% with population risen to 5% and continues to double yearly. He asked: “What is the best investment? Investing in infrastructure or investing in consumption? This is a big debate. I think the oil industry absolutely need to challenge and champion that debate with the federal government. The politicians want to win both at all cost but there is a long-term damage that we are doing to our country.”
It is a long term damage we are doing to our industry that must be championed because we do need to ensure that subsidies are halted, the downstream needs to be commercialized, the refineries need to function, the pipelines need to function and there is no logic in us transposing all the products we do by roads at an extreme expensive rate without the chance to build the multiplier effect of having vibrant a downstream.”
He advocated that the industry should have a strong voice in its matters rather than accepting what is given to it by politics of the day, “We do have a voice and we do need to be heard.”
One of the key things that Oando did as it evolved is the company’s contributions to the oil industry in Nigeria, in 2005, it moved to the upstream. It did a cross border listing on the Johannesburg Stock Exchange, it created a platform to raise equity, in 2006, it got an $100million which was the largest amount ever raised by a Nigerian public company. In 2008, at the height of oil crash, the company was able to raise another $100million from US investors to come to the Nigerian market through Oando and take some opportunities in the oil industry.
In the upstream, Oando produces 5000 barrels per day in its marginal field. The capacity defining transaction was $1.8billion acquisition of Conoco Phillip business stake in Nigeria. It was a signatory transaction for the downstream giant.
CHALLENGES OF OANDO
The investment was extremely challenging because the company had to pay a deposit of non-refundable $500million which it did. It had to raise a capital investment within the time frame. There were regulatory delays for almost 18 months to get a consent and a number of challenges the company had securing consent from the Ministry of Petroleum Resources even though it is an indigenous operator. Eventually, it was close to transaction and had $800million in equity and $1600million which the company parted with cash. It also had working capital adjustment of $200million. It raised up the money to $1.8billion, but actual cash the company parted away with was $1.6million.
According to Tinubu, it was an extremely challenging transaction. The crude oil price was $112 when the transaction closed in July but by December of that year oil price had dropped to $60 per barrel. Just one year of the transaction, crude oil had dropped to $30 per barrel, “You can imagine the luck of Oando signing the biggest cheque of its life and the market being in complete reverse coupled with the time when a lot of Niger Delta militants disrupted production and it was severely hampered.”
He stated further that there was flooding with swamp operations, a lot of pipelines were affected in the flood while production was reduced. Effectively, key business decision was taken immediately towards being able to ride over the challenges on ground. From the company’s experience, there was need to reduce footprint size of its business portfolio while deciding on the next actions.
On downstream, the challenges had been on subsidy, regulation, high inflation, low returns and devaluation of the naira from $120 to $360.
However, Oando took some specific decisions, it has to diversify from a naira earning downstream distribution business and focus on the upstream dollar earning export-related businesses. There was divestment of rate, it had $400million rig fleet company, divested its rig business, converted its debt note and divested substantive interest in its downstream and brought world class commodity trader with one of the largest private equity firm joining the fray.
“At a time when exchange rate was plummeting, also the time when the industry mergers experience lot more of volatility, it speaks to quality of businesses irrespective of the macro challenges that the country and the industry were facing, we still have off takers who joined us in those ventures, Tinubu added.”
The Oando CEO opined that same divestment was done in its gas business, the company’s local gas company has been rebranded and known as Axxela. Through this gesture, it was able to reduce its debt from $2.5billion to $500million in the last three years of operations.
Incidentally, out of $800million that was borrowed for Conoco Phillip acquisition, it has paid $700million and only $100million left which will soon be paid in the next 12 months.
The reality is that it was a challenging operation which the company has been able to manage. At $95 per barrel when Oando did the first transaction, it recouped the high price. Tinubu asserted: “I must tell our indigenous colleagues you must have a very hygienic strategy when you buy the assets from the International Oil Companies, IOCs, the IOCs sold us these assets at top prices. What I think about it, I think Nigeria made a mistake not allowing the NNPC to sell down their interests in those Joint Ventures, JVs, for the top prices the IOCs got. The IOCs got over $10billion value which was extracted from Nigeria indigenous players and Nigerian banks. All that capital ended abroad. Most of these assets are under water today and struggling to be serviced. Only few of those loans have been successful.”
Looking forward Tinubu advised, as the federal government has resolved to sell down some of its interest in the JVs, there is need to ensure that Nigeria does not lose opportunity for the second time, indigenous companies has to grow. The acreage is only available from the IOCs and indigenous companies has to buy it from them. This is capital flight; the money goes abroad. Indigenous players should take the opportunity of extracting value and keep the capital within its own environment.
THE SUCCESSES OF OANDO
At present, Oando business is 90% upstream. It has an asset portfolio that is close to $400million with 80million barrels of reserve 43000 of production and it has partners in the offshore, Sao Tome and Princepe. The company has stake with ExxonMobil, JV with ENI and certain number of marginal fields which it operates.
One of the key lessons the indigenous giant has learnt in terms of managing challenges is never to confuse its clear line of vision with straight line of execution.
Tinubu told indigenous company executives to “Prepare to be innovative and pick up your feet, prepare to execute and to be resilient in the way and manner you plan your strategies.”
When Oando acquired downstream companies in UNIPETRO and AGIP, the margins were 10% the priority was growth. 10% growth margin will be $500million turn around in the next four years. It never realized deregulation will occur.
Tinubu emphasized on the Petroleum Industry Bill, PIB, which commenced during the administration of President Olusegun Obasanjo and almost 16 years, the country is still struggling with the bill. No indigenous operator could have known that the refining industry will be so challenging after twenty years.
Seemingly, In the 90’s when Oando commenced business, indigenous oil companies exported so much oil out of Nigeria. The export was handled in Lagos by Sales Manager. Tinubu explained: “I never saw the Managing Director of Petroleum Products Marketing Company, I never saw the Group Managing Director of NNPC, I never knew who they were but I was able to do a sizeable business dealing with the corporation. It is key to always have flexibility of understanding that business plan will not be affected.”
He stated that financing is key and a lot of indigenous players are focused on debt. Debt is good when it is available because when there is liquidity, it will create opportunity for another loan. “But it is always a day of reckoning when you are to pay that money back and in paying, it is extremely painful. Invariably, you will be working for the financial institution; you will not work for shareholders.”
Oando went through servicing of debt for a long period of time. In terms of taking massive amount of debt, building a very large corporation, midstream, downstream, upstream with integrated players, the company realized that it didn’t return as much as it would have done to shareholders. The company was working for financial institutions. Although it has built a lot of infrastructures for Nigeria, which it is proud of, the company sees it as a national appointment being an indigenous operator.
Counselling local operators, the Oando boss said managing business as an indigenous company, focus should be on cash flow and returns with discipline. It is important not to be carried away by opportunities. Most indigenous players have simply taken what is available to them to get into the oil sector.
Tinubu revealed that local content existed before the law was codified and signed by federal government and Local Content was being practiced by NNPC. Thus, the country does not need laws or regulations to operate, the collective good will of the industry is enough to be able to drive positive objectives forward in the industry.
Oil is a commodity with fluctuation in prices. As a new company, Oando did not foresee the cycle which the multinational had with 200 years of history in running oil and gas company. No indigenous company could have seen what they saw. It is important to invest when the price is low and use it to benefit when the price is high. Investing when the price is high, should there be change of cycle an indigenous operator will be in trouble.
Stressing further to indigenous operators, Tinubu accentuated that the key thing which indigenous operators did was that they bought assets at the height of the market and spent $10 to $15billion when it was $100 per barrel and it closed but now the price is less than $64. The only reason why crude oil stays even though there has been decline was because no capital expenditure in the last four years by oil majors. Natural decline is about 3% to 5% on the average.
Tinubu made an observation that the shale industry introduction moving from $5 to $12billion barrels per day in the US in the last ten years coupled with geopolitical tension, Iran and the Middle East unrest, the oil price still stays less than $65. In reality, the indigenous companies need to get involved in transaction. They should not wait until price rises again but be active with NNPC and the IOCs. “The truth of the matter is that the IOCs have no business of being in the onshore because they have wonderful capital and budget with first class technology to develop the onshore and allow the indigenous oil companies have access to acreage onshore, we will do a better job with the communities in ensuring that we mine the oil that is there.”
“We will not forsake the reserves or the size of the opportunities which the threshold of the majors do not accept, Tinubu added.”
The Oando helmsman encouraged government to embrace public and private sector partnership particularly in the aspect of refinery. If an issue is approached by trying to fix it for ten to twenty years in a particular manner and it didn’t work, another method should be applied. Nigeria has a lot of indigenous capacity and capital which if put together will provide an immediate financing solution for the moribund refineries.
The indigenous oil companies and local populace of the country will benefit immensely if the refineries and pipeline systems are made to work. This will in turn create employment opportunities for the country. There will be avenue for small medium size players to get actively involved in pipeline maintenance surveillance while the refineries continue to contribute their quota.
Tinubu enjoined the IOCs to have an active programme of ensuring that acreages they held onshore are placed in indigenous oil companies on better structure terms and conditions. Previously, tenders were done and the highest bidders got it, cash was paid upfront, and most majors had 70% of their production while 30% comes from onshore asset.
The scope for optimization with indigenous companies whereby a value is agreed, a portion of the cash is paid and there is an earn out over time which ensures that IOCs have security in the barrels but independent operators are able to put reasonable amount of capital into the investments and make a return as well in a long term as the IOCs get full value. This will resolve some pending issues bothering the industry in Nigeria.
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