Private Equity (PE) firms are increasingly eyeing cheap Nigerian assets for deals as oil majors pull back from Africa’s largest oil producer, amid falling crude prices and threats of militant attacks.
Energy experts say the country stands a better chance of benefitting through such investments as PE firms are poised to deploy capital into the global oil and gas sector with 25 percent planning acquisitions before the end of the year and 43 percent by the first half of 2017.
“Nigeria is a beneficiary of the cautious but quiet investments in the oil and gas sector. For example, Helios Investment Partners and Vitol made a 49% equity stake in Oando Marketing Limited,” said Claire Lawrie, Ernst and Young (EY) Africa Energy Lead, in response to BusinessDay questions.
Lawrie told BusinessDay that the NASD OTC market (where secondary market trading of securities of unquoted public Nigerian companies occur) has enabled more equity capital raising through private placements, adding that about ten oil and gas companies are currently listed on NASD, of which nine are downstream companies and one upstream.
“The NASD listed companies can get private equity funding and also find it easier to graduate to the main board of the Nigerian Stock Exchange and foreign exchanges,” Lawrie said.
Analysts say access to financing is the biggest challenge facing Nigerian oil and gas companies, with traditional bank funding drying up, following a spike in nonperforming loans and distressed borrowers, as oil prices collapse from over $100 a barrel to below $50.
Greater consensus over the oil price future and more favourable asset valuations are however improving the conditions for PE, and analysts expect to see an uptick in deals before the end of the year.
Private Equity firms had about $971.4b of dry powder from June 2016 still to be deployed, EY’s survey, titled Capitalising on opportunities: Private equity investment in oil and gas,reveals.
According to the survey, because of the debt burden of many PE-backed oil and gas companies, creative capital structures are on the rise.
Of the 71 percent of respondents exploring new capital structures, 62 percent cite joint ventures (JVs) and drill companies and 59 percent cite contingent pricing as the most popular options.
PE-backed companies are looking to joint ventures to help them cut costs, while others hope contingent pricing will offer much-needed price stability, the report stated.
When it comes to where capital is being deployed, the EY survey findings reveal increased attention to rising energy demand in emerging economies.
Claire Lawrie added: “There is an anticipation that deal making will grow in Africa, with 80% of survey respondents believing activity will increase. Investors are being drawn by the promise of new infrastructure initiatives across the continent, opening up new trade routes and enhancing regional integration,”
With regard to industry subsectors, PE firms are set to become more involved in the midstream and upstream segments in the next two years.
An equal share (44%) of respondents sees these two sectors as their best opportunity for return on investment.
In today’s low oil price environment, analysts say PE firms are well-positioned to provide short-term and long-term financial solutions across the oil and gas sector, with 63 percent of PE firms surveyed saying they will provide value to corporates through growth capital.
In his own observation, Andy Brogan, EY Global Oil & Gas Transaction Advisory Services Leader, says: “Declining crude prices coupled with an uncertain outlook, challenged transactions in 2015. Now, with greater consensus around a ‘lower for longer’ outlook shrinking the valuation gap between buyers and sellers, we’ll likely see more deals come together this year. Companies that have shown resilience amid US$40 to US$50 per barrel of oil are beginning to face insurmountable distress as the price sinks below US$40. All signs point to a more opportunistic market for M&A activity.”
OLUSOLA BELLO
