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Friday, August 12, 2022

Enterprise Value: Oando is Worth N349.09bn Now

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Oando Nigeria Plc, the second largest upstream oil and gas firm in the country, has an enterprise value of N349.09 billion.
That is the theoretical price an investor would pay to acquire the company, based on the market capitalization as at Friday.
Enterprise value (EV) is the market value of the equity plus net debt minus cash and cash equivalents, so unlike EPS it includes debt as well as equity in the valuation.
Many analysts also prefer the EV metrics because it cannot be easily manipulated like Price to earnings ratio. Price to earnings ratio relies on profit that can be manipulated by depreciations and exceptional items.
It is surprising that Oando has not released its 2020 audited financial statement and first quarter earnings season is gradually coming to an end as the markets await half year results.
Of course, the story of Oando is that of debt legacy as it has not recovered from the debt level built up through the 2014 acquisition of oil and gas assets from U.S. giant ConocoPhillips.
The vagaries of the crude oil market are the company’s greatest undoing, and crude oil prices crashed a few weeks after it bought the asset.
There was a moment of respite in 2017 when the price of the black gold rallied on the back of an aggressive output cut by Saudi Arabia and OPEC+.
The advert of the coronavirus pandemic undermined energy prices as countries were under lockdown while strict social distancing was observed.
In April 2020, the United States (US) oil prices turned negative for the first time on record after producers ran out of space to store the oversupply of crude left by the coronavirus crisis, triggering an historic market collapse which left oil traders reeling.
However, oil prices have been rallying since the start of 2021, thanks to gradual reopening of economies and the successful roll-out of vaccines.
Brent crude rose by 0.61 percent on Friday evening to close at $74.44 per barrel, the American Western Texas Intermediate (WTI) rose by 0.65 percent  to close at $72.59 per barrel, the Bonny light crude rose by 0.83 percent to close at $73.26 per barrel, while the OPEC basket rose by 0.95 percent to close at $71.99 per barrel.
There are concerns that the dangerously unstable oil market and the shift towards greener energy could leave Oando on a crossroad, and the highly geared balance exposes it to bankruptcy since the cash flows are pressured.
The company’s operating income cannot cover interest expense as interest coverage ratio of 0.57 times, which is below the international benchmark of 1.50 times.
Interestingly, the oil and gas giant has reduced debt in its balance sheet as debt to equity ratio fell to 66.03 percent in September 2020 from 77.27 percent.
However, it has total debt (long and short term) of about N193.07 billion as at September 2020, and that is 9.83 percent lower than 2019’s N214.14 billion.
A cursory examination of the financial statement of the company shows income tax credit the company has been enjoying for three years is responsible for it recording profit after tax; but such reliefs are exceptional items are one-off events and do not recur too often.
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