Drilling into upstream oil/gas firms’ debt levels

It is generally accepted that firms that have huge debt in their capital structure may have incurred such loans for the purpose of assets acquisition aimed at aggressively expanding operations, and also for market penetration.

It must be noted that cash flows are expected to be generated from investment outlay in order to pay interest on and eventually retire such loans.

However, when such debt piles up, especially when the assets or outlays are not generating cash flows to service the loans, and the company is unable to go to the market and raise equity capital to retire debt, then it is said that the company is highly geared and thus susceptible to stress.

We are analysing the debt profile of four dominant players in the upstream oil and gas industry – Oando Nigeria plc, Seplat Petroleum Development Industry, Afen Oil Limited, and Seven Energy International Company Limited.

Of the four firms, according to our analysis, Oando, in the third quarter (Q3) of 2014, was the most indebted to lenders as total borrowing in the balance sheet stood at N351.71 billion ($2.093bn) while debt to equity ratio, which measures the proportion of debt in the capital structure of a company, was 163.38 percent, highest among its peers. The company’s interest expense or finance cost surged by195.60 percent.

It would be recalled that the company incurred these debts as a result of the acquisition of ConocoPhilips for a consideration of $1.5 billion.

Seven Energy Limited, in Q3 of year, recorded total borrowings of N131.31 billion ($781.65m) in its balance sheet, while debt to equity ratio and debt to assets were 104.19 percent and 34.60, respectively; finance costs increased by a single digit 7.88 percent in the review period.

Afren plc, another industry giant, in Q3 of 2014, recorded a debt to equity ratio of 58.26 percent while debt to assets ratio was 27 percent. Total debt in the balance sheet was N193.40 billion ($1.15bn). Its finance costs however reduced by 5.9 percent in the review period.

Seplat Petroleum Development Company is the most ungeared company of the four as its has a debt to equity ratio of 2.97 percent and a debt to asset ratio of 1.77 percent, while total borrowing in the balance stood at N6.48 billion ($38.63m).

The threat of unpredictable operating environment

The recent devaluation of the country’s currency by the CBN may spiral the dollar denominated debt of these firms, although they are naturally hedged by way of their dollar earnings from oil exports.

Another operating and environmental challenge we see befalling these firms is the dwindling oil price at the international level. At the moment, oil price has fallen below $60, a situation that calls for urgent focus strategy on the part of the management of the four companies.

 

BALA AUGIE