EUR 48.04 For Business Accounts Only

OANDO PLC - Trudging towards financial stability

• OANDO reported long awaited FY’15 and Q1’16 results. The FY’15 results showed 74% y/y growth in revenue to N161 billion over FY’14 (adjusted) with net loss of N50 billion (FY’14 loss N146 billion). Q1’16 revenue was down 10% y/y to N28 billion whilst bottom line showed a net profit of N4 billion (Q1’15 restated loss of N1 billion), boosted by gain on sale of discontinued operations. It is important to note that the results for the periods did not consolidate numbers of Marketing and Supply & Trading divisions, Oando Energy Services Limited and Akute Power Limited, as well as OML2 125 and 134 which have been classified as held for sale (which together make up discontinued operations). The consolidated results now largely reflects reporting operations of Exploration and Production (E&P), Gas & Power and Corporate & Others.
• OANDO seeks to raise $350 million (N100 billion) in asset sale this year to help deleverage balance sheet. On 4 July, management announced the completion of the partial divestment of downstream businesses to HV Investments (a JV between PE firm Helios and oil trader Vitol) for $210 million (N59 billion) – proceeds will be used to recapitalize the downstream business. Contained in the 2015 accounts, is the disclosure of the completed sale of 100% equity interest in Akute Power Limited to Viathan Engineering Limited in March 2016, as well as a Sale and Purchase Agreement (SPA) signed in respect of Oando Energy Services under a Management Buy-out (MBO) arrangement. In December 2015, OANDO signed an SPA with Nigerian Agip Exploration Limited (NAE) for the sale of its non-operated interests in OMLs 125 and 134. Furthermore, in June 2016, OANDO concluded a N94.6 billion debt restructuring with 10 banks. The deal, a 5-year Medium Term Note at Nibor + 200 bps with a 3-year moratorium on principal, is expected to ease debt obligations for the Group going forward. We believe these are significant steps aimed at restoring financial health to OANDO, however, successful execution of these initiatives are paramount in bringing financial stability.
• We are maintaining our production target of 44,867 bpd, below 2015 level of 54,520 bpd. Our lower production figure is driven by expected reduction in CAPEX for 2016 and conservative uptime factor. In 2016, OANDO plans to rationalize its portfolio to cope with the low oil price environment. OANDO has guided to lower CAPEX of $73 million for 2016 - $60 million allocated to core assets OMLs 60-63. According to management, CAPEX is subject to variability due to non-operator status of its main assets acquired from COP. We also note risk to production from militant activities in the Niger Delta region. We estimate Group revenue of N119 billion and profit for the year of N21.7 billion (boosted by one-off gain from sale of discontinued business). Following the adoption of a market determined FX policy, our naira valuation for OANDO Group has improved. This was driven largely by the conversion of OER USD valuation to NGN using a NGN285/USD exchange rate (Previous: NGN199/USD). As a result, our NGN EV valuation for OER rises from N160 billion to N228 billion. Our Group EV rises from N321 billion to N389 billion. After adjusting for net debt of N176 billion, our Target Price per share comes to N14.80 (Previous: N11.29). We highlight that reduction of interest expense is critical to sustaining profitability in the years ahead.