How local companies are winning in NigeriaMay 29, 2015
The CEO of Lekoil, Olalekan Akinyanmi, speaks to TOGY about the role of investment and returns at a time when local companies are entering Nigeria’s exploration and production sector. Lekoil is a publically traded exploration and production operator with interests in the oil prospecting licence 310 offshore block and the Otakikpo marginal field.
Nigeria is experiencing an unprecedented rate of local participation and contribution in its exploration and production sector. There has been a lot of enthusiasm about the growth of local players in the last few years. However, these domestic companies do not have a fundamental understanding of what drives the sector’s growth, which is access to capital and the ability to consistently produce higher returns for investors and shareholders than their rivals. It is vital for firms entering the market to understand how to attract investors and the attractiveness of their own business model.
BUILDING BLOCKS: Access to capital is fundamental to exploration and production. It is important to not only attract capital but also to attract experienced capital. The biggest hurdle faced by the Nigerian market in attracting investment is the corporate structure of local companies. When an investor is prospecting, the structure needs to be clear and easy to understand. If the structure is too complicated, operations and decision making can become very difficult.
Another challenge is getting investors to feel comfortable with the management. In a young exploration and production company, management will have a material impact on the business. This is contrasted with multinationals, such as Shell, where CEOs can come and go with relatively little impact while the company runs itself. Small companies bear the imprint of their management.
A BLESSING IN DISGUISE: The Central Bank of Nigeria limits the exposure of domestic banks to the oil and gas industry to 20 percent of their loan portfolios. Additionally, the central bank lowered the amount of foreign currency that banks can borrow from 200 percent to 75 percent of shareholders’ funds.
While this policy is controversial to some, it also has some corollary benefits. Expanding the search for investment to international markets should not be seen as a burden, but as an opportunity to bring in valuable stakeholders, good-value capital and the strong management and operational standards that are required to meet investors’ expectations.
Nigerian companies that can no longer source capital from the local banking sector now must learn to conduct due diligence, to build transparent processes and to be professional when dealing with foreign investors and institutions.
PICK AND CHOOSE: While laying the financial and structural foundations in the exploration and production business is important, finding the right asset at the right valuation is perhaps the most critical element to sustainable success. When it comes to making acquisitions, companies must understand how the shareholder or the investor perceives the return on investment, which is what drives future sustainability.
While there are advantages to acquiring already developed assets, it has its own drawbacks. Many of the fields that were awarded during the 2014 divestment round have seen companies acquire significant bases and production capacity overnight.
When a company overpays for an asset, they may eventually enter a downcycle and start to struggle based on their debt-exposure and expected returns that factored in different market prices.
For low-cost developers, low oil prices are a blessing when there is downward pressure on development costs. Building facilities will come at a cheaper rate than in a boomcycle. If you invest in your development and correctly anticipate the market’s return to the upside, you can make a highly competitive return.
DO NOT BITE THE HAND: The integrated oil and gas asset model has gained traction and garnered attention in Nigeria. Certain companies have developed capabilities and infrastructure to produce, transport, refine and market the final product all in one asset. While the integrated model was attractive for some time, many major international oil companies such ConocoPhillips divested out of some downstream segments such as refining as it became clear that businesses outside of the exploration and production segment of the value chain were both less lucrative and not a core competency.
Lessons can be taken from the history of these major international oil companies. The indigenisation of Nigeria’s upstream will provide ample opportunities in the years to come, and while it is important that the midstream and downstream sectors undergo a similar transformation, those operating in upstream should concentrate on developing their capacity and know-how in this niche market.