By PETER EGWUATU

Oando Plc has reaffirmed its commitment to creating value for its shareholders as it continues to adopt proactive measures that would enhance profitability and returns for stakeholders. Despite the fall in oil prices which threatened to wipe out more than $1.6 trillion in earnings for oil producing companies and countries, Oando Energy Resources (OER), has realized a cash windfall in the sum of $234 million due to the proactive fiscal measures put in place prior to the slump in oil prices.

The substantial gain made by the company has reaffirmed its positioning for success as it will boost investors’ confidence in the company. The management of OER   has reaffirmed its commitment to take proactive measures to boost shareholders’ value. The company has steadily navigated the ups and downs of the cyclical oil & gas market by adapting quickly and being fiscally innovative to enable its business operations run as normal.

The downturn in global oil price has led to most upstream exploration and production players restructuring their 2015 plans including making redundancies, cutting capital expenditure and an expectation of lower revenues and operating cash flows. Local oil and gas firms have not been immune to the effects of this slump; the pressure on the naira and general uncertainty – elections and Boko Haram – has and will continue to have an adverse effect on local players.

The income realised by the company , according to the management of OER will be applied towards a $238 million loan pre-payment, thereby substantially reducing the company’s total debt for the acquisition of ConocoPhillips Nigeria (COPN) from $900 million to $615 million today.

It should be noted that last year, the total market capitalisation of the banking sub-sector had declined by 24.5 percent from N2.219tn to N720bn as seen by their collective adverse performance on the Nigerian Stock Exchange (NSE), yet a consortium of financial institutions including FBN Capital, First City Monument Bank Limited, Zenith Bank, and Fidelity Bank bought into Oando’s long-term vision for regional domination within the energy sector starting with its game-changing acquisition.

The COPN deal was funded with a 50/50 debt-equity mix, and the pre-payment of $238 million to local and international lenders on the debt portion implies a reduction on the net purchase price to $1.2 billion. OER successfully realized $234 million by resetting its crude oil hedge floor price from an average of $95.35 per barrel to $65.00 per barrel on 10,615 bbls/day for the next 18 months and another 1,553 bbls/day for a further 18 months until January 2019. The company will pay an additional $4 million from its cash reserves.

Hedge positions are investment decisions often taken by companies with the intention of offsetting potential losses/gains that may be incurred, especially during a global downturn.

Pade Durotoye, CEO OER said: “The decline in global crude oil prices led to a substantial gain for our company.”

and we have 10,832 bbls/day average production hedged for the balance of 2015 and 8,000 bbls/day for 2016. 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.

With 50% of our Oil Production hedged and 65% of our production being gas committed to stable long term priced contracts, we are well positioned with strong cashflow to meet our obligations and aspirations through this current oil price down cycle.” The more leveraged a company is the greater its financial risk, by taking the proactive step of having hedging tools in place and significantly reducing its leverage profile OER is optimising its balance sheet for increased earnings which could translate to rewards for shareholders in the mid to long term.