Femi Otedola: From FO to Geregu

Wednesday, June 19, 2019 9.30PM / Teslim Shitta-Beywith Saheed Kiaribe, Proshare Research / Header Image Credit: Femi Otedola and Geregu Power Plc

Oil entrepreneur, Femi Otedola, today June 19,2019, finally sold off his majority stake in indigenous oil company, Forte Oil.In a move that trails a series of announcements concerning his decision to backaway from the downstream oil business, Otedola has switched business focus tothe power sector, in particular, the Geregu gas and power project.

Otedola’s market action follows the completion of the saleof 75% of his investment interest in FO, which is reported to be around N64bn. Indivesting from the company Otedola, in a release issued today June 192019 noted that, “A few yearsago, my team and I embarked on an arduous task of transforming a moribundpetroleum marketing business, African Petroleum Plc (formerly BritishPetroleum) into Forte Oil Plc; a leading integrated solutions provider withsolid footprints in downstream petroleum marketing, Upstream Services and PowerGeneration and one in which we built intrinsic value to the benefits of ourshareholders.”

He pointed out that in line with his tried and tested principle ofbusiness focus, “we have divested fromour marketing and upstream businesses and shall from now on focus andconsolidate on the gains of our power generation business, Geregu Power Plc. Wewish our successors the very best and urge them to build on our legacies whichhave been established since 1964.” By leaving the FO turnaround legacy, Otedolaattempts the challenge of running a profitable and scalable power franchise.

TheGeregu Power Up

The move into the power sector is a strong strategicrealignment of business objectives with national pain points. By migrating fromthe Oil business, Otedola has made a bold statement concerning hisinterpretation of the changing local business environment where the power sectoris likely to appear more sustainable and profitable.

Proshare Nigeria Pvt. Ltd.

Source Ayodele Oni / Bloomfield

Otedola’sGeregu power strategy is expected to attain the following defining objectives:

Improve domestic power supply by at least 400additional megawatts
Operate a power plant that would be suppliedfeedstock from a SIEMENS 3 x138MW V94.2 Gas Plant. The gas plant would increase the domestic use of gas andserve to improve the power output value chain, but with a likely review ofdomestic gas supply costs being advised to ensure optimization of the powerproduction process
Partly bridge the current power supply gapbetween consumer demand and national grid supply which would be partiallyoffset by the full operation and future expansion of the plant
Create a more efficient nexus between the power generationvalue chain and the retail power market, which has been characterized by difficultconversations between generating companies (Gencos), distribution companies(Discos) and the regulatory authorities, the Nigerian Electricity RegulationCouncil (NERC).
Create a smoother generation framework throughintegrating feedstock production and power generation, thereby relieving thepower value chain of challenges that regularly occur between gas suppliers andenergy providers. Nigerian GasCompany (NGC) will still supply gas to Geregu, but with its storage and gasinfusion plant in play the energy process is cheaper based on economies ofscale, this may be a significant game-changing move for Otedola against thebackdrop of the Dangote 650,000bpd Lekki Oil refinery coming into contention in2020

FightingPast the Pain

Nigeria’s power sector has been in a complicatedmuddle for years. The nexus between generation and retailing has been adverselyaffected by a series of problems ranging from pricing to cost recovery andconsumer payment defaults. The inability of the value chain to createpredictable cash flows across the production and consumption cycle may prove adifficult but surmountable proposition for the Geregu project.

Otedola’s known tenacityand clarity of purpose may prove useful in meeting head-on the perceivedobstacles to the power business in Nigeria. By selling off its downstream operations in Nigeriaand its operations in Ghana, the company increased its liquidity, reducedshort-term debt to equity ratio and upscaled its operations in mining and gas.The move means the company has exited the high turnover low margin end of theoil business and settled into the capital intensive but operationally moreprofitable upstream activities. The strategic decision will effectively changeFO’s operational life cycle and business risk.

The upstream activities may need tosee a tightening of business protection risk as a lot will ride on the outcomeof trade relations amongst major global trading partners and the pace of developmentof alternative energy sources. FO’s gas business is likely to subsistprofitably for another decade, but the same prognosis may be difficult toascertain for its Oil activities.

FO’sOngoing Strategy Rework

Femi Otedola’s cashingout of FO has not stopped the company from restrategizing and setting upforward-looking targets for itself (see CardinalStone's report ForteOil Plc - Business Repositioning Signals New Dawn – May 17, 2019).

FO without Otedola may begin to build a stronginstitutional brand devoid of the brand equity of its original majorityshareholder; this could prove to be a boon or a bane depending on how stronglyit improves corporate governance, strengths internal control processes, cuts down operatingcosts and ramps up working capital. FO’s downstream refocusing is consistent witha general shift in incomes once the Aliko Dangote Refineryand fertilizer plants become operational within a year.

The Dangote Refinery may squash margins furtherfor oil retailers as petroleum subsidy benefits will virtually disappear. Theabsence of government subsidy in white oil products such as PMS and DPK wouldmake downstream Oil operations precarious.

The upstream operations will equally not bewithout its problems of falling global Oil demand and persistent oversupplythreats from Shale Oil producers; the higher the price of Crude Oil ininternational markets, the more the commissioning of new rigs and growingproduction from marginal fields.

FO’sInvestors Prospects

So far, FO’s market performance in 2019 has beenflat. The stock’s price moved within a trading channel of between N25 per shareand N30 per share from January 2019 to the middle of May 2019 when news of theOtedola near financial exit spurred a spike in price. From May 17, 2019, thestock gradually declined to its 12-week norm before rising sharply again onJune 19, 2019, when the new owners of FO crossed equity interest with theprevious majority shareholder (see Proshare Chart 1 and Table 1below).

A totalof 970,166,694 units of Forte Oil Plc were done as off-market trades today atN66.25 in five deals. These deals were negotiated deals between Stanbic IBTCstockbrokers as a buyer while APT Securities and Funds Ltd, WSTC Securities Ltdand Quantum Zenith Securities Ltd were sellers.

Chart 1 FO Week-on-Week SharePrice and Traded Volume Movements 2019

Proshare Nigeria Pvt. Ltd.

Source: NSE/Proshare Markets

Table 1 FO W-o-W Share Price andTraded Volume Movement

FORTE OIL PLC. W-O-W SHARE PRICE AND TRADED VOLUME MOVEMENT
Date	Price (Naira)	Volume Traded	Price Chg	Volume Chg
4-Jan-19	29.60	661,455
11-Jan-19	29.00	703,550	-2.03%	6.36%
18-Jan-19	30.00	657,452	3.45%	-6.55%
25-Jan-19	29.50	135,066	-1.67%	-79.46%
1-Feb-19	29.50	109,150	0.00%	-19.19%
8-Feb-19	29.70	629,311	0.68%	476.56%
15-Feb-19	28.00	765,572	-5.72%	21.65%
22-Feb-19	28.00	111,695	0.00%	-85.41%
1-Mar-19	28.00	42,955	0.00%	-61.54%
8-Mar-19	28.00	117,795	0.00%	174.23%
15-Mar-19	28.00	17,159	0.00%	-85.43%
22-Mar-19	27.70	1,678,225	-1.07%	9680.44%
29-Mar-19	27.70	40,183	0.00%	-97.61%
5-Apr-19	27.40	717,227	-1.08%	1684.90%
12-Apr-19	26.95	143,798	-1.64%	-79.95%
18-Apr-19	26.95	46,943	0.00%	-67.35%
26-Apr-19	29.20	615,315	8.35%	1210.77%
3-May-19	34.95	82,081	19.69%	-86.66%
10-May-19	34.95	3,774	0.00%	-95.40%
17-May-19	28.35	387,435	-18.88%	10165.90%
24-May-19	27.80	151,594	-1.94%	-60.87%
31-May-19	27.50	377,232	-1.08%	148.84%
7-Jun-19	25.75	702,692	-6.36%	86.28%
14-Jun-19	29.40	491,242	14.17%	-30.09%
19-Jun-19	34.65	3,085,479	17.86%	528.10%