Falling oil price sets up winners and losers amid economic turmoil

Plunging oil prices are not proving a sole negative for the Nigerian economy, as new investors prepare to capitalise on cheaper assets amid an economic turmoil that threatens to bankrupt at least five states.

From bankers to oil barons and profligate Nigerian state governors who refused to save for the proverbial rainy day, the 45 percent slump in crude oil this year presents opportunity as well as pitfalls.

“Nigerian oil assets are much cheaper now and present a good time to

take positions,” said Diekola Onaolapo, CEO of Eczellon Capital, a Lagos based boutique investment bank, in a Dec.15 interview with BusinesDay.

While firms like Eczellon that just launched a $250 million Private Equity (P.E) fund targeting oil and gas deals  are looking to buy beaten down assets, those who gorged up on debt to finance acquisitions when oil traded above $100 per barrel are having to restrategise.

Oando which financed the acquisition of Conoco Philips Nigerian assets for a consideration of $1.5 billion had total debt in its balance sheet of N351.71 billion ($2.093 billion), while debt to equity ratio, which measures the proportion of debt in the capital structure of a company was 163.38 percent, the highest among its peers.

Oando’s share price has lost -31.42 percent year to date, while Seplat, which raised $500 m in an Initial Public Offering (IPO) in April this year, at N576 per share, has lost -51.35 percent of its value since the shares started trading.

Both have underperformed the Nigerian benchmark equity gauge which has plunged by -26.22 percent in the period.

Oando has adopted hedging on future crude production, ensuring it is adequately protected over the next few years, if oil prices stay below ~$97/barrel, according to Ainojie ‘Alex’ Irune, Head Corporate Communications, Oando Plc.

“This effectively ensures the company receives income pegged approximately to the above price,” said Irune.

Seplat says it is expanding its horizon outside the production of oil and investing in gas projects which are less risky and volatile.

“The gas business is far more stable than the oil business. You don’t have the disruption like you have in oil,” said Austin Avuru, Chief executive officer of Seplat.

However, lower oil prices mean lower revenues, which could translate to strains in the credit repayment ability of some of the upstream oil companies.

This is where the bankers may feel some stress.

“The loans to the indigenous companies were mostly structured with an assumed oil price of $70-75/bl. In the event that oil prices test the break-even levels, a couple of banks expect these loans to get restructured,” said Adesoji Solake, Renaissance Capital’s SSA banking analyst, in a Dec 01 note.

Brent for February settlement was down $1.79 to $59.42 a barrel on the London-based ICE Futures Europe exchange as of 11:31 a.m. local time yesterday.

Slumping oil prices which are seen trading below $50 next year by analysts, will further crimp the budgets of state governors who are particularly vulnerable.

Oil revenues accounts for up to 75 percent of the Federal budget, however in some states it goes as high as 97 percent.

If the decline of crude oil prices in the global market continues for another three months, states’ economies will collapse, warned Governor Babangida Aliyu of Niger State, at an event on Tuesday.

“Five states are close to bankruptcy and cannot pay salaries as we speak,” said Bismarck Rewane, CEO of Financial Derivatives Company, at the BusinesDay energy conference held in November.

While oil prices may rebound by the end of 2015 as lower prices take out U.S shale producers, there is still the distinct possibility of oil triggering a black swan event, such as a sovereign blow up, as the continued freefall of the Russian Rouble despite a surprise rate hikes signal.

Such an outcome would worsen Nigeria’s already lowered growth prospects for 2015.

Businessday