By Ejiofor Alike
The plummeting price of crude oil has posed a threat to both the low cost producers, like the Saudi Arabia and its Gulf neighbours, as well as the operators in high cost producing environments like the North America and Nigeria. Ejiofor Alike writes on the imperatives of mergers and acquisition (M & A) in the survival of the Nigerian independent companies
Before the current wave of divestments of onshore assets by international oil companies (IOCs) started in 2010, Nigerian independent companies were restricted to marginal assets due to funding and technical constraints. For them to be able to manage the marginal fields relinquished by the IOCs, the federal government had to force some of them into a marriage of convenience to pool technical and financial resources together.
These forced marriages recorded very limited successes because of the 24 marginal fields awarded to these indigenous entities in 2003, only less than ten are on producing, apparently as a result of what industry stakeholders described as marriages between strange bedfellows.
As IOCs with funding capacity and technical expertise were producing bigger acreages, the independent companies were struggling for marginal assets because their Chief Executive Officers were not favourably disposed to mergers and consolidations, so as not to relinquish their plum positions.
Instead of accepting to become a small fish in an ocean, the Nigerian CEOs would rather be a big fish in a very small river, a mentality that hampered the growth of indigenous producers for several years.
So, with only marginal oilfields as their producing assets, Nigerian independents had accounted for only less than five per cent of Nigeria's daily crude oil output.
The situation has since changed as more Nigerian companies have now realised the need for mergers and acquisitions in a global business such as oil.
A landmark consolidation that took the independent Nigerian companies to the next level was witnessed in 2009, when Platform Petroleum Limited, an entity controlled by Mr. Austin Avuru and Shebah Petroleum Development Company Limited, controlled by Mr. ABC Orjiako, formed an independent company.
This consolidation produced Seplat Petroleum Development Company, an independent oil and gas exploration and production company incorporated and operating in Nigeria.
Before this deal was consummated, Avuru was managing Platform Petroleum, which was one of the few companies that put their marginal fields on production.
Founded precisely in June 2009, SEPLAT was established to facilitate the acquisition of Oil Mining Leases (OMLs) 4, 38 and 41 from Shell, Total and ENI.
The establishment of SEPLAT marked a turning point in the operations of the Nigerian independent companies as it became the first Nigerian company to hit a production capacity of 70,000 barrels per day, which is more than the combined production capacity of all the marginal fields.
In July 2010, Etablissements Maurel et Prom became a 45 per cent shareholder in SEPLAT, thus splitting the ownership between Shebah Petroleum and Platform Petroleum Joint Ventures Limited, both holding 55 per cent and MPI S.A. with 45 per cent.
At the same time, SEPLAT acquired a 45 per cent participating interest in OMLs 4, 38 and 41 from SPDC, Total and Nigerian Agip Oil Company (NAOC) and also became the operator of these three onshore producing oil and gas leases located in the prolific western Niger Delta basin of Edo and Delta states.
The three leases cover Oben, Ovhor, Sapele, Okporhuru and Amukpe fields. However, the stakes of the founding shareholders of SEPLAT have since reduced following the sale of stakes to Quantum Capital, MPI S.A; Mercuria Capital Partners and investment funds managed by Blakeney Management and Quantum Power International Holdings Limited..
But the founding shareholders and entities controlled by them remain the three largest shareholders in SEPLAT as the only other significant shareholder, five per cent or more in SEPLAT is Mercuria Capital Partners.
The formation of SEPLAT and their successful acquisition of OMLs 4, 38 and 41 encouraged other Nigerian companies to form consortia to position themselves financially and technically viable to acquire bigger acreages being relinquished by the IOCs.
Buoyed by the success of SEPLAT in the OMLs 4, 38 and 41 deals, more Nigerian independent companies came together to synergise among themselves and in some cases, with foreign entities to bid for the acreages sold by Shell, Total, Chevron, Eni and Agip.
For instance, First Hydrocarbon Nigeria (FHN), the indigenous Nigerian upstream oil and gas company, in which the United Kingdom-listed Afren Plc holds a 45 per cent interest, acquired OML 26 in Delta State from SPDC, Total and Agip.
Shoreline Natural Resources established by Kola Karim's Shoreline Nigeria Limited and Tony Buckingham's Heritage Oil acquired 45 per cent stake in OML 30 from Shell and partners.
ND Western consortium, made up of indigenous company, Niger Delta Petroleum Resources (NDPR), Petrolin International and First Exploration & Petroleum Development Company Limited, acquired OML 34 from Shell and its partners.
NDPR is owned by Niger Delta Exploration and Production Plc (NDEP), which company operates the marginal oil fields - Ogbele Field, located in the NNPC/Chevron Joint Venture's OML 54 and Omerelu in OML 53.
Petrolin operates in Africa and the Middle East and already owns a 12.45 per cent interest in NDEP.
For OML 40, Starcrest Nigeria Energy Limited, controlled by Emeka Offor's Chrome Group and Eland Oil & Gas Limited formed Elcrest Exploration and Production Nigeria Limited that successfully acquired 45 per cent interest in the lease.
For OML 42, Kulczyk Oil Ventures Incorporated, an international upstream oil and gas company, and Ernest Azudialu's Nestoil, a local entity, formed Neconde Energy Limited that acquired OML 42.
Recent divestments
In the most recent divestments of onshore assets comprising of OMLs 18, 24, 25 and 29 by Shell, Nigerian independent companies also formed consortia with local and foreign entities to raise the required technical and financial capacity to clinch the assets.
For instance, the Aiteo-led consortium acquired OML 29 along with the 60-mile Nembe Creek trunk line sold by Shell and its partners in a $2.562 billion deal. Other members of the consortium include Tempo Energy Resources - promoted by Timi Aladetimi, who is also the owner of Ankorpoint Energy - which has a 10 per cent stake, while Taleveras, owned by Igho Sanomi, holds five per cent equity in the consortium.
According to the shareholding structure, total number of shares of the consortium is 2.7 billion units, with Aiteo Energy Resources Limited, owned by Benedict Peters, holding a total volume of 2,294.999,999 billion shares. Tempo with its 10 per cent equity holds 270 million shares, while Taleveras with a total of 135 million shares which represents its 5 per cent equity participation.
Erotron consortium that won OML 18 is made up of Canada's Mart Resources and its partners - Midwestern Oil and Gas Limited and Suntrust Oil.
Pan Ocean Corporation Nigeria Limited clinched OML 24; while Crestar secured OML 25.
Crestar consortium consists of a local content vehicle, Crestar Integrated Natural Resources Limited with 55 per cent interest and a Canadian firm, James Bay Resources, with 45 per cent stake.
However, the transaction involving OML 25 was halted by the NNPC, which invoked its powers from the Joint Operating Agreement (JOA) between it and the JV partners.
However with the success recorded by the consortia of Nigerian independent companies in the acquisition of these 12 onshore assets relinquished by Shell and its partners, there is no doubt that with mergers and acquisitions (M &A), Nigerian companies will grow to compete with the IOCs for large acreages.
Dwindling crude oil prices
As crude oil prices tumble to a five-year low, there are strong indications that Nigerian independent companies may adopt the option of mergers and acquisitions, including the companies involved in the recent acquisitions of oil blocks, to wade through the stormy waters.
Oil and gas companies worldwide are adversely affected by the unprecedented drop in oil prices, with companies pulling back on investment spending, laying off workforce, suspending payment of dividends, and buying back their own shares.
Globally, investors are selling their energy stocks following the plunge in the prices of crude oil, with shareholders bracing for a wave of dividend cuts, share-repurchase delays and worldwide reduction in capital spending.
Though the plummeting prices of crude oil is affecting operators in low cost producing environments like the Saudi Arabia and the Gulf States, its most adverse effects is felt in the high cost producing countries like the North America and Nigeria.
Even Royal Dutch Shell and Total's track record of paying dividends could not sway investors as over $30 billion in market capitalisation was said to have been wiped off in one fell swoop in Europe at the peak of the slump in oil prices.
The price of Brent, which hit $115 per barrel in June 2014, has witnessed a steeping decline to less than $60 per barrel, fueling concerns that over $100 billion of new investments would be put on hold this year.
As the oil and gas producing- companies face cash crunch, oil service companies are also not left out as the shares of even the biggest oil services provider by market capitlisation, Schlumberger Limited, dropped by over 20 per cent within the past few months.
Halliburton, which was in the process of acquiring rival service provider, Baker Hughes, also slumped by over 30 per cent.
The falling oil prices has also began to take its toll on Nigerian independent companies, including those that recently acquired assets from Shell and its partners as most of the transactions were structured on the basis of an oil price of $100 per barrel.
With the price falling down to less than $60, it is not clear how the companies and the financial institutions that funded the acquisitions would restructure the repayment terms.
SEPLAT, which was simultaneously listed on the Nigerian Stock Exchange and the London Stock Exchange last year, was also hit as its shares, which was listed on April 14 at N576 per share and later appreciated by 25 per cent to N720.56 on July 6, at a point recorded 34 per cent capital loss.
The Chief Executive Officer of a Nigerian company told THISDAY that under the intoxicating sway of high oil prices, Nigerian companies fought each other to secure producing assets and in most cases, paying premiums just to get their hands on them.
"Asset owners such as Shell and the other IOCs were able to play bidders against each other in a frenzy of deal activities that engulfed the upstream sector over the last few years. What's more, leverage deals were the norm with banks and trading companies throwing money at buyers," he said.
"Now, things have calmed down with the recent slump in oil prices. Since very few of the buyers and their financiers thought it prudent to even hedge their exposures to the oil prices, this slump has even put a greater stress on their financing covenants," he added.
"But it is not all bad news. Some companies with less leverage and stronger balance sheets see this as the perfect time to grow by making offers for their less well capitalised smaller competitors. As the equity markets have dried up, small companies are thinking they too are better off being taken over by larger companies or combining/merging with their peers," he said.
THISDAY gathered that several such transactions are being discussed in the deal rooms.
It was also learnt that smaller companies that have acquired their assets more cheaply have within them better growth prospects and smaller management teams, thereby making them easier to absorb.
A top official of one of the IOCs, however, told THISDAY the current drop in the prices of crude oil was an opportunity for the new investors that acquired oil blocks to "drill new wells and build pipelines and wait for high price regime before going into production."
"Oil price always go up and down. So, it is left for investors to work out the project economics. When the price goes up, the materials become cheap and this becomes an opportunity to develop the assets. It takes over one year to develop these assets and before the end of one year, the price may go up again and that is a good time to start production. If they wait for the price to go up before developing the assets, the price may come down before they go into production and that will be a loss," he explained.
SEPLAT, Afren in talks
Having successfully emerged as the largest Nigerian independent company through consolidation, SEPLAT initiated another landmark acquisition in the industry when it recently confirmed that it made preliminary approach to Afren Plc for a possible business combination.
Afren, which is also listed on the London Stock Exchange (LSE) had also announced the move by SEPLAT regarding the merger talk but said it was still at preliminary stage.
SEPLAT has formally notified the Nigerian Stock Exchange (NSE) regarding the plan.
"SEPLAT has, in accordance with the provisions of Section 10 of the Amended Listing Rules of the NSE, notified the exchange of the announcement by Afren Plc) dated 22 December 2014. SEPLAT confirms that it has made a highly preliminary approach regarding a possible combination with Afren. SEPLAT however notes that there can be no certainty that an offer will be made or as to the terms of any offer," the NSE had said in a statement.
According to the NSE, SEPLAT acknowledged that in accordance with Rule 2.6(a) of the UK City Code on Takeovers and Mergers, by no later January 19, 2015, it must either announce a firm intention to make an offer under Rule 2.7 of the code or announce that it does not intend to make an offer, in which case the announcement will be treated as a statement to which Rule 2.8 of the code applies.
SEPLAT added, however, that this deadline can be extended with the consent of the UK Takeover Panel in accordance with Rule 2.6(c) of the Code. The company noted that further details could be provided at this stage due to the highly preliminary status of events but assured that further announcements would be made as soon as there is the need.
The discussions between SEPLAT and Afren had continued following an extension granted by the United Kingdom Takeover Panel to January 30, for the companies to make final decision.
"By this time SEPLAT must either announce a firm intention to make an offer for Afren or announce that it does not intend to make an offer for Afren, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies. S SEPLAT notes that this new deadline can be extended with the consent of the Panel in accordance with Rule 2.6(c) of the Code," the NSE quoted the company as saying in the notification.
SEPLAT had successfully refinanced its existing debt facilities with a new $700 million seven year secured term facility and $300 million three year secured revolving credit facility. The $700 million seven year secured term facility was facilitated by a consortium of Nigerian banks comprising First Bank of Nigeria Limited, Stanbic IBTC Bank Plc, United Bank for Africa Plc and Zenith Bank Plc.
On the other hand, the $300 million three year revolving credit facility made possible by a consortium of eight international banks, which include Bank of America Merrill Lynch, Citibank, JP Morgan Limited, Natixis, Nedbank Limited, Rand Merchant Bank, Standard Bank and Standard Chartered Bank. SEPLAT, which lost out on the assets that Shell divested in October 2014, has been on the hunt for acquisitions in Nigeria, encouraged by falling oil prices. Afren has been plagued by high-level corruption that resulted in the dismissal of its founder and chief executive, as well as a recent slashing of resource estimates at a Kurdistan oilfield.
There is no doubt that the SEPLAT-Afren deal has the potential to fuel a round of consolidation among Nigerian independent companies, that have witnessed significant growth in their capacity and capability in the past few years through the acquisition of assets from the IOCs.
The Chief Executive of Officer of Shoreline Natural Resources Limited, Mr. Kola Karim told Bloomberg recently that small oil-producing companies in Nigeria, facing slumping prices and rising debt, may need to combine to survive.
"We don't have that much leverage, the rapid drop is unprecedented for the country's small producers," he said.
"The reality is there have to be mergers in the industry because it is difficult in a down market when you're a small producer trying to weather the storm alone." According to him, most of the smaller companies obtained financing based on a price of $70 a barrel, compounding difficulties from the fall in the price of crude while they struggle to keep production steady in the face of pipeline attacks and oil theft.
"Already at $50 a barrel, we are under water," Karim said. The financial pressure is compounded by the security threat, he said. "You face the devil on all sides."
"I foresee a huge combination of mergers in the local market, we're also looking for opportunities," said Karim. "You are better being part of a bigger player, so you can save on your cost and make good margins," he added.