According to recent media reports, the President of the Federal Republic of Nigeria, as part of the 2019 budget has directed the Nigerian National Petroleum Corporation (NNPC) to reduce its share in various joint ventures (JV) with international oil and gas companies (IOCs) to 40 per cent in the 2019 fiscal year. The NNPC currently owns a 55 per cent stake in its JV with Shell and 60 per cent stakes in the JVs with other IOCs. This Presidential directive is consistent with the recent presentation of the Minister of Budget and National Planning to the National Assembly in March 2019, where he disclosed plans by the Federal Government to sell a portion of the FGN’s stake in the JV assets to improve its revenues.
While there are concerns over the size of the recurrent expenditure in the national budget, this strategy seems to be aligned with the government’s 2017 Economic Recovery and Growth Plan which included a proposal for “restructuring” the FGN’s stake in JV assets. We see reduction of government’s equity stake in the JVs as a practical way to mitigate cash call funding shortfalls to the JVs and maximise FGN royalties and taxes receipts for other pressing national needs.
OUTLOOK
Reactions to the presidential directive have been mixed as potential IOC divestments are expected. The investors in the sector can also look forward to a possible FGN marginal fields bidding round in the near future. These coupled with several leases/ licenses renewals in the last year mean that the sector will require significant funding in the coming months either for acquisitions or for funding existing operations/new discoveries. We expect a lot of pressure on the limited local funding sources. Uncertainty in oil prices as a result of increased supply by the US will mean that international banks will fund markets like Nigeria cautiously. In the case of Nigerian banks, a number of them still have huge exposure to the oil and gas sector and it is not expected that they will have significant appetites for further loans to the sector. In addition, the lack of clear legal and fiscal regimes is a disincentive to both Nigerian and international funding sources.
We envisage that a significant portion of the funding required for the acquisition opportunities highlighted above will come from alternative financing sources. We expect financing structures ranging from debt, equity to other hybrids i.e. prepays by commodity traders, and deferred payment arrangements with service providers. The key funding sources are likely to be private equity firms, sovereign funds, strategic investors, international banks, large service providers and trading companies with global operations and access to foreign funds.
