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Banks financed 80% of oil asset acquisitions – Report

By on February 22, 2015

Nigerian banks financed over 80 per cent of the acquisition of oil and gas assets that were concluded in the past five years, a new report by Ecobank has revealed.

The oil sector, according to the report, will see oil and gas assets divestments of over $10bn in 2015/2016.

Ecobank analysts including Mr. Dolapo Oni, said funding could become a challenge for those indigenous companies seeking to acquire divested assets without equity sources.

“The Nigerian oil industry depends on both local and foreign currency funding from the local banks. The banks have financed over 80 per cent of the acquisitions that were concluded in the past five years,” he said.

He said that as at June 2014, loans to finance these acquisitions accounted for over 24 per cent of the loan book of the banking industry, adding that this could constrain the ability of the banks to lend to the oil sector.

“There’s clearly a structural funding deficiency in the oil sector as it currently depends on the balance sheet of the banking industry rather than equity funding provided by institutional investors,” he added.

The upstream segment is represented by Seplat Plc and Oando Plc on the Nigerian Stock Exchange, but accounts for less than five per cent of total market capitalisation, according to the report.

“Yet there are over 30 indigenous companies involved in segment. This is also due to the preference of other operators such as Mart Resources, Lekoil and Eland Oil to maintain listings only on foreign stock exchanges due to several reasons. The foreign exchanges offer more depth, institutional investors comprise the bulk of the investors on these exchanges and are traditionally more patient with oil companies,” the report noted.

The analysts noted that the lower oil price environment could also sustain the downward trend in the country’s foreign reserves and exchange rate, which are dependent on the foreign currency earned by crude oil sales.

Crude oil exports account for over 90 per cent of exports and remain the key source of foreign currency to the country.

The report noted, “Banks also depend largely on the foreign currency deposits of their oil and gas customers to grant dollar loans and may need to increase Eurobond issuances to meet up with foreign currency lending demands.

“Exploration and appraisal activity will require equity funding, at least equity-linked funding structures. Although equity valuations could be potentially low, combined appropriately with other funding instruments, they could offer the indigenous oil companies, a much needed lifeline to raise oil reserves and in the long run, their share of the oil industry.”

The analysts expect indigenous companies to concentrate their efforts to boost reserves onshore by looking to expand reserves at existing fields and drilling exploratory wells in close proximity to their current fields.

With the sharp drop in oil prices, the country could see a major reduction in oil revenues in 2015 compared to 2014 due to the much lower average oil price anticipated in the year, the analysts said.

The report added, “The country already faces considerable difficulties in selling its crude oil cargoes with a persistent overhang for its crude oil cargoes since December 2014.

“The NNPC has offered further discounts to push sales but increasingly faces lower price differentials. This is expected to redirect government attention to other revenue sources as it seeks to fill the gap in its revenue profile. Receipts from crude oil sales have traditionally provided over 67 per cent of government revenue.”

 

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