Directors of integrated energy giant, Oando Plc, on Monday reported a turnover of N586.619 billion for the year ended December 31, 2011, making the biggest revenue earner among the companies presently listed on the Nigerian Stock Exchange (NSE).
The company’s board however failed, for the first time in four years, to recommend a dividend for its shareholders to approve when they meet on a date and at a venue to be announced later, following a slowdown in profit after tax, arising from a N9.625 billion one-off exceptional charge contained in its profit warning made some weeks ago.
The 2011 turnover represented an increase by about N207.694 billion or 54.81 per cent from the N378.925 billion reported in the corresponding period of 2010.
The bulk of the revenue however went into keeping the capital intensive business growing, following which cost of sales rose from N324.797 billion to N518.178 billion, representing a growth of about N193.253 billion or 59.49 per cent; and the N20.346 billion or 68.49 per cent rise in total expenses, which rose to N50.051 billion from N29.705 billion.
Profit before tax dropped by N12.837 billion or 51.46 per cent to N14.928 billion, compared with N24.318 billion; while the net profit was further hampered by the growth in tax from N9.943 billion in 2010 to N11.481 billion. Net profit therefore fell by N10.928 billion or 76.02 per cent to N3.446 billion, from N14.374 billion. The group had in the years ended 2008 to 2010 distributed a dividend of 300 kobo per share to shareholders.
The profit warning by the management of Oando showed that the exceptional items was booked in the fourth quarter of 2011, providing “some outlook on its business for first quarter and 2012 as a whole,” according to analysts at FBN Capital Limited while reacting.
The exceptional charge, the management had told investors was “made up of project expenses of N3.5 billion, termination charges for technical and managerial services of N5.3 billion and impairment of assets of just under N900 million.”
Following the warning, Oando’s management had projected a PBT of N7.3 billion for the 2011 fourth quarter, while FBN Capital expected a net loss of about N3.5 billion for the quarter.
The N3.5 billion project expenses is comprised of a “N1.1 billion charge relating to the cost of the transaction concerning Shell’s divestiture of its assets in 2009/10 which for Oando is still an ongoing process, capital market expenses of US$5.6 million aimed at securing a GDR listing, US$3.4 million transaction cost for the local listing of Oando Marketing Limited and another US$2 million for the listing of Oando’s E&P assets on the Toronto Stock exchange. These capital market activities have not yet crystallised.
“The termination charge of N5.3 billion relates to an agreement Oando had with Ocean and Oil. According to management, this charge represents a stop-loss measure which was negotiated downwards.
“The company disclosed that after a technical assessment of its fifth swamp rig, it was decided that the asset be cannibalised and used for spares as the estimated cost to refurbish the rig was not economical. This explains the “under N900 million” impairment charge,” FBN Capital said in its report.
Separately, management has pushed out its target of attaining a 2,500 barrels per day (bpd) increase in production from its existing E&P assets to Q3 2012 from Q1 2012. Oando currently produces about 5,000bpd. We had assumed an end-Q2 2012 timeframe in our model given the missed targets in the past. The target for Oando’s fourth rig (OES Respect) coming into operation has also been pushed out by two quarters to Q4 2012. This will not affect our model as we had assumed only three rigs will be operational in 2012, again because of missed targets in the past.
On a positive note, Oando expects a minimum guaranteed additional revenue of N10.4bn in 2012 (vs 2011) from two of its assets that are operating for their first year: N5.4bn from its recently deployed third rig (OES Passion) and N5bn from the East Horizon Gas Company (EHGC). EHGC currently supplies 22mmscf/day to cement manufacturer UNICEM, with the option of an additional 22mscf/day which UNICEM has shown the desire to exercise. Management expects to contract the excess capacity (70mmscf/day) of EHGC by Q2 and sell the same in Q4 2012. The Nigerian government as well as a private power company have been identified to take up the excess capacity. Given the recently missed targets, we would expect the market to discount the outlook for EHGC as far as the take-up of the excess capacity is concerned.
Oando also released Q2 2012 forecasts today. It expects Q2 PAT of N3.6bn; a Q1 2012 PAT forecast of N3.0bn had been released previously. The H1 2012 forecast implies that PAT will be down by just over 1% y/y. We have a published forecast of 16% y/y growth in PAT in 2012. We expect consensus estimates to be revised down on the back of today’s announcement.
The market’s reaction to today’s announcement was muted. Oando shares closed up 0.05%. The H1 2012 outlook, though not that inspiring, may have helped as well as the fact that the shares have lost 14% ytd, underperforming the ASI by around 15%. We would expect them to be volatile over the coming weeks as the market digests the profit warning and the outlook statements for 2012. Ultimately, we believe that for Oando shares to see a meaningful re-rating, the market will need to see a marked reduction in the risk of negative surprises on targets.