Shares in Nigerian oil firm Lekoil have declined significantly, after it fell victim to a complex fraud and failed to secure much-needed funding. Here, we answer the key questions.
What is Lekoil?
Lekoil is an independent oil and gas exploration and production company. It operates in Nigeria and Namibia, and was founded in 2010. The CEO is Lekan Akinyanmi, who has over 20 years of experience in the oil and gas industry. Lekoil was listed on the AIM market in 2013.
In the company’s latest results, the following assets are listed – Otakikpo (production, 88% recovery), OPL 310 (appraisal, 70% economic interest) OPL 325 (exploration, 62% economic interest) and OPL 276 (appraisal, 45% participating interest) in Nigeria and Block 2514 B (77.5% economic interest) in Namibia.
What has happened?
On 2 January, Lekoil announced that it had "secured funding for the appraisal drilling and initial development programme activities on the Ogo field within OPL 310". The total loan amount was said to be US$184mn, with a seven-year tenure, to be disbursed in five tranches over 11 months. The first drawdown was due in February.
On 13 January, the company announced that a loan agreement it said it had reached on 2 January "seems to have been entered into […] with individuals who have constructed a complex façade in order to masquerade as representatives of QIA". As a result, Lekoil states that it should "be assumed that none of the funding […] will be forthcoming". The company had incurred costs of US$600,000 related to this transaction, including initial arrangement fees and legal fees.
How have the shares performed?
On 2 January, the shares closed at 7.3GBp, up from 4.65GBp on 31 December. Lekoil shares were suspended on 13 January, but the suspension was lifted earlier today. At the time of writing, the shares were down over 70%, to 2.9GBp. Exactly a year ago, the shares were quoted at 13.0GBp. The current market cap is c£15.6mn.
What are the implications of this news?
This development may have cast doubt on the issuer’s ability to meet obligations related to OPL 310, as the funds were meant to cover the costs associated with this. Lekoil may now need to find alternative sources of funding to cover (a) its share of expenses related to the drilling of an appraisal well and (b) payments due to one of its partners. Lekoil is expected to pay US$10mn to its partner and to pay just over US$12mn, being its share in drilling costs for one appraisal well, bringing the total expected to cUS$22mn. The facility agreement, which has now fallen through, included an arrangement to compensate the CEO. Lekoil has disclosed that this arrangement has been cancelled, and no payments were made to the CEO. Lekoil has set up an investigation committee to look into the facility agreement. For more, see the press release at this link.
What Nigerian banks are exposed to Lekoil?
FBN appears to be the main funding partner. As at end-June 2019, Lekoil had two facilities totalling cUS$11.1mn from FBN. Further, in October 2019, Lekoil announced that it had signed a US$11.5mn debt facility with FBNQuest Merchant Bank. This facility has a four-year maturity, and is repayable quarterly, with a margin of LIBOR+10%. This facility was used, in part, to repay amounts due to Shell (US$4.6mn at end-June 2019), and to pay lease extension fees on OPL 276 and OPL 310 (US$7.5mn due at end-October 2019). Recall that FBN no longer has any eurobonds outstanding. However, the exposure does look quite manageable, based on statements from Lekoil.
What are the highlights from the company’s latest results?
Latest figures are for H1 2019. Lekoil reported an operating profit of US$0.5mn (H1 2018: US$3mn) and net loss of US$5.2mn (H1 2018: US$1.8mn profit) for that period. Gross profit increased yoy, to US$14.1mn from US$13mn, but costs were much higher than in the previous year and finance income declined. Borrowings totalled US$15.8mn at end-June 2019 and cash balances totalled US$7mn at that date. At end-19, Lekoil had cash at the bank of US$2.7mn (after paying the US$600,000 mentioned earlier). FY 19 results are to be published in May.