Indigenous producer, Oando Energy Resources (OER) has made an early repayment of some of its loan facilities in spite of the crash in oil prices, silencing critics of its mammoth acquisition of the ConocoPhillips Nigerian oil and gas business last July.
OER released a statement recently to confirm it had made a $238 million payment of certain loan facilities. This was made possible, the company said, “by the optimization of its crude oil hedge program.”
OER secured the facilities for the $1.5 billion acquisition, which has seen its production rise from 4,500 barrels of oil equivalent per day (boe/d) pre-acquisition to 53,161 boe/d for the month ending January 31, 2015, making it the second largest indigenous company by production, although the largest by reserves currently.
The company was able to realize $234 million out of the $238 million by resetting its crude hedge floor price from an average of $95.35 per barrel to $65 per barrel on 10,615 barrels of oil per day (bpd) for the next 18 months. Another 1,553 bpd is hedged with the same floor price for a further 18 months until January 2019. The company was able to add another $4 million from cash in hand.
Critics of the size of the acquisition had predicted that Oando was biting off more than it could chew. At the date of acquisition on July 30th 2014, OER had a total debt of approximately $900 million, including a $100 million structured facility provided by Afrexim. But now, not even a year following the acquisition, and at a time when crude oil prices are at their lowest in years, the company has been able to reduce some of its loan facilities using the proceeds of the hedge unwind and reset.
In the first instance, OER applied $188 of the $238 million towards an early repayment of part of its $415 million Reserves Bas Lending Facility. The balance of this lending is now nearly halved to $415 million. In addition, OER applied $51 million of those proceeds towards a $338 million corporate facility lending reducing the outstanding balance to $287 million.
Oando’s move to reduce its lending from its hedge proceeds is bound to stimulate confidence in industry financiers and investors. Nigerian banks that participated in the financing will also be immensely relieved. About 7 Nigerian independent exploration and production companies are said to owe Nigerian banks about $5 billion. The failure of any of those independents will take at least one or two banks down. It is therefore encouraging to see one of those making a move that will inject some optimism into the current depressive scenario.
Commenting on the repayments, Pade Durotoye, CEO Oando Energy Resources said, “The decline in global crude oil prices led to a substantial gain for our company and we have 10,832 bpd average production hedged for the balance of 2015 and 8,000 bpd for 2016.”
Continuing, Durotoye said: “Cashing out some value from this hedge will enable us reduce our outstanding loans and leverage by $238 million, saving the company $65 million in interest payments over the remaining term of the loan facilities, whilst preserving a floor of $65 per barrel.”
OER has about 50% of their oil production hedged. That, coupled with 65% of gas production committed to stable long term priced contracts, makes the company comfortable that it has the cash flow to meet its obligations going forward. As a result of the early repayments, Oando’s debt has now been reduced from $900 million to $615 million, after taking account of previous amortizations.
