Boom and bust mark the trajectory of economies the world over. Through the crests and troughs, businesses fail or succumb to mergers or acquisitions. But resilient companies, often the best run ones, survive and then rebound to profitability over time.
The journey is rarely smooth and due to its peculiarities, navigating the Nigerian business environment is even more precarious requiring out-of-the box thinking, courage and foresight.
The year 2015 saw the entry of a new government whilst the economy was already showing danger signs. A global oil crisis was brewing; oil prices had begun a steady descent and the country’s foreign reserves began to shrink. Strain on the oil and gas industry in Nigeria was apparent. But not many could see the depth to which the economy would sink, especially considering the goodwill the Muhammadu Buhari Presidency began with.
Looking back, with several economic indices still in the red, it’s obvious that Oando Plc was one of the few businesses operating in Nigeria that saw the 2016 recession coming and strategised effectively to ride the storm.
Oando’s 2015 full year end results left much to be desired. The company, which is the first Nigerian company to have a dual listing on both the Nigerian and Johannesburg Stock Exchanges, announced a 10 per cent decrease in turnover, having posted N381.7 billion compared to N425.7 billion in 2014, and a marginal increase in gross profit, N77.7 billion compared to N72.3 billion (2014).
However, some wins were recorded. The group’s upstream business, spearheaded by Oando Energy Resources (OER), saw a 118 per cent increase in total production to 19.9 million barrel of oil equivalent (boe) in 2015 compared to 9.1 million boe in 2014, and growth in average production from 24,945 boe/day in 2014 to 54,520 boe/day in 2015. That year, it also celebrated five years of continuous operations without a Lost Time Incident (LTI) on its “OES Teamwork” swamp drilling rig and 3 years of continuous operations without a Lost Time Incident (LTI) on its “OES Passion” swamp drilling rig.
In the midstream, Oando Gas & Power (OGP) commenced an 8.5km pipeline expansion for the Central Horizon Gas Company (CHGC), and signed a Sales and Purchase Agreement (SPA) to sell the Akute Independent Power Plant. While in the downstream, Oando signed an agreement for recapitalisation via the injection of USD210 million from a Helios / Vitol JV; it increased its global footprint by incorporating a trading business in Dubai; and completed the construction of a 14.4 million litre PMS tank in Apapa terminal.
Overall, despite the global turbulence that pushed industry players to re-engineer their business models to focus on cost optimisation, increasing operational efficiency and downscaling capital expenditure, Oando could still have considered 2015 a decent year. But for Oando’s Group Chief Executive Officer, Wale Tinubu, this was not enough – it was time for change!
With the audacity that he is known for, Tinubu declared early 2016 that with the re-evaluation of the business, Oando was primed to return to profitability by the end of the year.
The new business strategy was clear, growth was projected to come from the group’s dollar-earning upstream business; de-leverage through recapitalisation and asset divestments, and profitability would be hinged on its dollar earning oil trading business.
Months before Nigeria’s economic recession set in, Oando had set sail on its path to recovery. The group’s executive management had examined its business model and introduced a six-step corporate strategy to restore the business to profitability. First, it began to de-leverage the business and optimise its balance sheet through debt restructuring, asset divestments and the injection of $350 million of capital.
By June 2016, it had successfully restructured its debt through a N94.6 billion Medium Term Note with lower capital costs circa 15 per cent and a renewed five-year tenor, and was clearly on its way to achieving its re-capitalisation target. When the first quarter results were published, Tinubu insisted that the target to return the business to profitability by the end of 2016 was still achievable.
Despite fluctuating oil prices and a volatile exchange rate, Oando’s focus on growing its dollar-earning upstream higher margin and export trading businesses, was paying off.
As part of its strategy to ensure financial efficiency, Oando took a number of prudent steps in Q1 2016, one of which included delisting Oando Energy Resources from the Toronto Stock Exchange (TSX). The reason was simple: it had not realised any aggregate returns or fresh capital from the cost of listing the business and running its operations in Canada. As a result, it succeeded in improving its general and administrative costs from $3.70/boe in Q1 2015 to $3.19/boe in Q1 2016.
Also in that quarter, Oando Gas & Power successfully divested from the Akute Independent Power Plant, a 12.15MW power station servicing the Lagos State Water Corporation.
The end of the year saw the completion of two key corporate actions that would change the structure of Oando’s business. The first was the $210million recapitalisation for a 60 per cent share of its downstream operations to Helios Investment Partners a premier Africa-focused private investment firm and the Vitol Group, the world’s largest independent trader of energy commodities. As a result a new company was formed – OVH Energy. The second was the partial divestment of its midstream business subsidiary, Oando Gas & Power Limited to Helios Investment Partners.
The year 2016 was a busy year for the Group, a year of changes but more importantly ended in the green as Wale Tinubu had projected.
The final year-end result, showed that Oando’s turnover increased by 49 per cent, N569.0 billion compared to N382.0 billion (FYE 2015); Profit after tax increased by 107 per cent, N3.5 billion compared to a loss of (N47.6 billion) (FYE 2015); and net debt reduced by 35% N230.6 billion compared to N355.4 billion (FYE 2015).
This is in spite of the fact that during that year, Oando Energy Resources recorded a 20 per cent decrease in total production to 15.9MMboe (average 43,503 boe/day) from 19.9MMboe (average 54,520 boe/day) in comparative period of 2015.
Some other significant achievements Oando recorded in 2016 include the sale of its interests in OMLs 125 and 134 to the operators for cash proceeds of USD5.5m and assumption of USD88.5m in cash call liabilities due to joint ventures. Oando Trading witnessed continued growth resulting in a 106 per cent increase in traded volumes of Crude Oil and Refined Petroleum Products. It transacted physical volumes of 13 million barrels of crude oil and 3 million MT of refined petroleum products, and its trading revenues hit USD1.4 billion.
At the dawn of 2017, it was obvious that Oando had rebounded. Riding on the stability it had achieved at the end of 2016, the group cruised to even better results in Q1 2017.
By March 31, the group’s turnover stood at N138.4 billion, a 116 per cent increase compared to N63.9 billion (Q1 2016). Its gross profit increased by 53 per cent, 13.4 billion compared to N8.7 billion (Q1 2016), and its net debt reduced by 29 per cent, N225.9 billion compared to N316.6 billion (Q1 2016).
Its trading business continued upward trajectory with 150 per cent growth in crude and refined product volumes compared to Q1 2016, and increase in turnover to N115.6 billion compared to N4.3 billion in Q1 2016
Though the sector and business environment was not faring well – continued security challenges, economic headwinds and a fluctuation in crude prices – the numbers reflected a return to normalcy for Oando.
“Our resilience is evident in our capacity to grow via a diversified model, and as we continue to chart our deliberate path in this challenging business environment, we look forward to better performance in the quarters to come,” Tinubu said in April 2017 when the Q1 results were published.
By June, the clouds were clearing for the industry. The country’s production levels were recovering and activities had resumed on the Trans Forcados Pipeline. Also, the Petroleum Industry Governance and Institutional Framework Bill was passed with the expectation that it would improve regulatory efficiency and establish long-term policy certainty in the sector, and optimism was on the rise.
As some other players in the industry began their journey to profitability, Oando posted a H1 turnover of N267.1 billion, a 26 per cent increase compared to N212.3 billion (H1 2016). It also posted gross profit of N33.4 billion, a 76 per cent increase compared to N19 billion (H1 2016), and its Profit after tax increased by 117 per cent, N4.6 billion compared to a loss of N26.9 billion (H1 2016).
Announcing the H1 results, Tinubu said “Oando remains committed to optimising its overall production base, seeking unique profit-driven opportunities to further partner with IOCs, while firming up its balance sheet to provide greater shareholder value.”
Clearly, Oando’s two-year journey from 2015 to 2017 provides a case study for business students and financial analysts seeking to understand how great companies through history have braved economic headwinds and emerged stronger each time.
As of today, all indices seem to be looking up for Oando. This is a compelling case study. It is not just a story of rebound to profitability, it is also a story of resilience worthy of emulation by other Nigerian businesses.
This article was first published by THISDAY.