Sale of Petrobras Nigerian oil assets not going according to plans

While international oil trader Vitol has quit a consortium planning to buy a stake in two Nigerian oil fields from Brazil’s Petrobras, its former partner, Africa Oil, said it would conclude the $1.5 billion purchase alone, but the company is scrambling for cash, a factor that may yet further delay the sale.

An analysis of the 2019 second-quarter report to shareholders shows the company may not have enough cash to complete the transaction.

Prior to Vitol and Delonex’s exit from a consortium that agreed a year ago to buy 50 percent stake in Netherlands-based Petrobras Oil and Gas B.V. (POGBV), Canada-based Africa Oil had anticipated it would raise adequate cash to complete the proposed acquisition of an effective 12.5 percent ownership interest in assets.

The primary assets of Petrobras are an indirect 8 percent interest in Oil Mining Lease 127, which contains the producing Agbami Field with 250,000 barrels per day (bpd) capacity, operated by affiliates of Chevron Corporation, and an indirect 16 percent interest in OML 130, operated by affiliates of TOTAL S.A., which contains the producing Akpo and Egina fields.

Consequently, it had agreed a $250 million loan facility with BTG Pactual, Brazil’s largest independent investment bank, which owns the other 50 percent stake in Petrobras Africa hoping to fund the rest with available cash.

If cash was tight when the company was part of a consortium hunting for 12.5 percent stake, it’s an uphill climb now that it has become the sole acquirer of the 50 percent interest in Petrobras’ assets.

“We remain committed to completing this acquisition and look forward to working with Petrobras and all stakeholders to accomplish that goal,” Keith Hill, Africa Oil president and CEO, said after his partners walked on account of delays and uncertainties.

But there is not enough financial power to back this optimism. The firm’s net cash from operating activities stood at $1.07 million in the period (same as its free cash flow) compared to a net outflow of $526,000 a year before. It had a cash and cash equivalent of $341.33 million, about 7 percent lower than it did in the same period of 2018.

For the acquisition of $1.4bn, Africa Oil Corp in the nine months already reported does not seem to have generated enough cash from its operation for the proposed acquisition and would have to seek external financing whether debt or equity.

Africa Oil has a debt to equity less than 0.03x, which means almost all the capital that funds the business is from shareholders equity.

The debt to equity ratio shows that Africa Oil Corp has enough room to raise debt capital given its total equity of almost a billion dollars.

In fact, raising the entire $1.4bn needed for the acquisition from borrowing would raise its debt to equity to around 1.53x, which might not be a bad level, but there are concerns on the potential impact on the bottom-line.

In 2018, the company made a net loss of $66.71 million compared to $4.5 million in 2017. As at six months ended June, Africa Oil had a loss of $9.97 million, a significant improvement over $48.17 million last year but a loss nonetheless.

Depending on the terms and duration of its debt finance, it remains to see if the cost of funds would pressure future earnings should Africa Oil chart the unfamiliar terrain of debt financing.

This, however, further exposes the poor capacity of the Nigerian National Petroleum Corporation (NNPC) and its subsidiary the Nigerian Petroleum Development Corporation (NPDC) to acquire oil assets disposed of by foreign oil companies.

Yusuf Matashi, the company’s managing director, said in 2017 that NPDC was poised to grow its equity production from 180,000 barrels per day to 300,000 bpd by 2018 and by 2019 and 2020 its production is expected to hit 400,000 bpd and 500,000 bpd.

In NNPC’s July 2019 financial and operations report, the company continues working back on its target. The report said the “NPDC is projected to ramp up production level to 250,000bp/d in the near future”.

 

ISAAC ANYAOGU & SEGUN ADAMS