OANDO PLC REPORT, Q1 2016

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OANDO PLC: make or mar

INVESTMENT HIGHLIGHT

Full Year 2015: Revenue up by 74%, Loss after Tax down by 67%; Debt at 89% of capital

Oando (or the “Company” or “Oando”) Plc, an indigenous oil and gas Company released its full year earnings for the year ended December 31, 2015 on the 1st of July 2016; a technically late date. The result showed a 73.81% growth in revenue to ₦161.48 billion ($576.71mn) from ₦92.91 billion ($331.82mn) Year-on-Year (YoY) while loss after tax declined by 66.68% to ₦31.19 billion ($111.42mn) from ₦93.63 billion ($334.39mn) YoY. Gross profit grew by 26.41% while cost of sales increased by 115.18%. Operating profit grew by 130.23% YoY while net finance cost grew by 23.05% YoY.

First Quarter 2016: Revenue down by 9%; Loss before Tax up by 65%

In the first quarter ended March 31, 2016, revenue was down by 9.45% to ₦27.72 billion ($99.09mn) from ₦30.65 billion ($109.46mn) Year-on-Year (YoY) while loss before tax grew by 64.55% to ₦18.65 billion ($66.60mn) from ₦11.33 billion ($40.46mn) YoY. Cost of sales spiked during this period by 35.76% compared to previous period.

oando

Investment Report Summary

♦ Temporary or permanent unprofitable phase? Rev. +73.81% in FY 2015

Highly geared in a cyclical industry, Oando pushes the limits of debt financing by fully utilizing cheap sources of finance which in turn increases financial risk. Interest coverage went underwater in 2014 (-1.41x). Company made strategy remarks on survival by CAPEX downscale and cost optimization. Available suitable assets for security offering to lenders remain strong. However, guarantees to 3rd parties in excess of N419 billion undermine asset sales to reduce debt. Ability to pay off debt remains on the downside (3.41x). Possibility of 39% debt reduction in the near term considering ongoing initiatives will reposition cash flow, boost profitability and increase investor confidence.

♦ Hedging not sufficient to suppress interest rate hike burden; rising inflation

Successfully reset crude oil hedge ($95.35/bbl to $65.00/bbl) on 10,615bbls/day till July 2017 and an additional 1,553 bbls/day until January 2019 to add $234 million towards debt payment. Expenses were cut (-54% YoY) showing commitment to operational efficiency. CPI driven inflation rose to 6-yr high (+190bps) in May to 15.6%; soon to be followed by interest rate hike. We expect market repricing of the security to be catalyzed by completion of pending projects and further spin-offs.

♦ Global oil industry outlook still positive; $46.03/bbl – two-month low

All round significant cut in CAPEX to ensure demand and supply correctly prices the industry seems to be a failing adventure although with a lagging effect. Dividend payments have declined/stopped and divestment of assets to superior portfolio of underperforming operating positions are new measures. This includes wage cut and layoffs to reduce labour costs. The industry players are also aggressively renegotiating contracts at price points 20 – 30% lower, often to the point of break-even for the OFSE supplier. Part of the reality is that operators with high debt and large impairments will likely have to resort to asset sales as access to capital regresses.

Price Objective Basis

We have valued the business at ₦4.22 per share at a PER of 1.14x 2-year forward. We have factored in the debt restructuring exercise and additional revenue streams which may potentially crystallize in the course of the year. We expect market pricing at around ₦4.22 and ₦24.45 in 2016 and 2017 respectively.

Oando recorded significant activities in its upstream; 118% increase in total production to 19.9 million barrel of oil equivalent (average production from 24,945 boe/day in 2014 to 54,520 boe/day in 2015), midstream; Oando Gas and Power signs Sales and Purchase Agreement (SPA) to sell the Akute Independent Power Plant (IPP) and downstream; amendment and restatement of terms of recapitalization via the injection of USD210 million from Helios/Vitol JV, operations in 2015 as compared to previous year.

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Source: GTI Research

GTI

GTI is a leading Nigerian Investment Banking group with proven expertise in Financial advisory, Securities Dealing (Fixed Income and Equities), Asset management and Deal Origination. We have strong capacity in financial service delivery.

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