Government scrutiny hinders Nigeria oil and gas mergers

Shareholders of Oando plc hoping for a quick conclusion of the deal that would have seen the Nigerian energy company purchase ConocoPhillips’ assets in the country might have to wait a while longer as government scrutiny of the transaction lingers.

“The Conoco-Oando transaction is still going through due diligence by officials at the Department of Petroleum Resources (DPR),” said Diezani Alison-Madueke, minister of petroleum resources, last Friday at the World Economic Forum (WEF) Africa in Abuja. “The deal has not got to the minister’s table yet, but we are on it.”

Oando recently announced that it had extended the completion date for the acquisition from April 30, 2014 to June 30, 2014. It said the extension was to enable the companies involved to satisfy all closing conditions, including the anticipated consent of the minister of petroleum resources in Nigeria, according to a filing at the Nigerian Stock Exchange (NSE).

The delayed transaction highlights the risks and legal uncertainty hindering the growth of the Nigerian oil industry.

“The majority of transfers of ownership of oil and gas licences need government consent, a requirement that has caused unprecedented delays to what should be straightforward transactions,” said Constantine Ogunbiyi, one of the founders of Afren, an indigenous oil company.

ConocoPhillips’ holdings in Nigeria include interests in oil-production leases and stakes in offshore prospects. 

Oando agreed to buy the assets for $1.65 billion in December 2012 as it sought to move into the higher margin oil exploration and production business. 

The company paid a $435-million initial deposit and announced in January 2014 that it had secured all financing required to close the deal, of which the estimated net purchase price payable to complete the acquisition is about $1.05 billion.

The delayed transaction has weighed on Oando’s stock, which is down -34.02 percent year to May 12, 2014, underperforming the NSE All Share Index (ASI), which has lost -6.71 percent in the same period.

The successful completion of the acquisition was expected to boost production of Oando’s upstream subsidiary, Oando Energy Resources, to about 50,000 barrels per day from about 5,000 bpd currently.

Analysts say there is increasing demand for assets in the Niger Delta, which holds a large portion of Nigeria’s 37 billion barrels of oil reserves, spurred by divestments from international oil majors with total completed deal size of over $6.7 billion between 2010 and 2013. The light sweet crude grade mostly found in the area is relatively easy to drill, and some Nigerian companies, such as Seplat which recently raised $500 million from a dual London/Lagos IPO, have said they can better handle the security challenges faced by the foreign oil majors.

While Nigerian assets are currently offered at a significant discount to global assets, this discount is narrowing as asset bid prices rise, according to CBO Capital, a research and investment firm.

“On average, assets are sold at up to a 45-percent discount compared to global prices and this makes Nigerian assets among the most attractive investments, considering the huge upside potential on the reserve profile of the assets,” said CBO Capital in a November 2013 report.

Deals in the sector are, however, often fraught with complications, such as the legal battle that Chevron is currently embroiled in with Britannia-U over the sale of its Niger Delta blocs worth up to $1 billion, or more cynically by political considerations.

“Do not believe everything the government proffers as the reason for holding up the Oando transaction,” one oil industry source told BusinessDay. “We are currently in pre-election mode where everything in Nigeria historically slows down, and may have to wait to get more clarity on this deal after the vote.”

PATRICK ATUANYA