An under construction oil refinery plant at Dangote refinery in Ibeju Lekki district, REUTERS/Temila
The leverage and hedging strategies against lower prices used by Nigeria’s oil producers will determine their chances of survival – and the size of the hit to their lenders.
“It is clear that some of the most over-leveraged local players in Nigeria will not survive the current price collapse,” said Yann Alix, a partner at Ashurst in London. “This will bring pain to their lenders,” in Nigeria and abroad, he says.
The determining factor will be whether or not producers hedged when oil was above $60, Alix says. A number of “more conservatively managed firms will be dragged into restructuring discussions with their lenders if the current level is maintained beyond a couple of months,” Alix says.
“The financial health of oil and gas companies and their ability to service their debt are extremely important to Nigeria’s banking industry,” adds Michael Famoroti, an economist at Stears in Lagos.
Oil and gas companies accounted for nearly 30% of all banking-sector loans in the third quarter of 2019, and their borrowing accounts for 24% of all non-performing loans in Nigeria, he says.
Lenders with heavy exposure to Nigerian oil producers include First Bank, GTB, Zenith and Access Bank.
The oil price fall – along with that of the naira – has further, indirect effects on the banking industry, Famoroti explains.
“Other banking clients such as power producers and manufacturers may suffer due to a weaker naira, and this would impact their capacity to service loans.”
Indigenous oil and gas companies will struggle as oil prices continue to decline, says Eromosele Victor, chairman at M. E. Consulting. He expects a moratorium on debt repayments to be worked out between banks and producers.
“The oil companies may have to appeal to their lenders that this is a case of force majeure, which could buy them time,” he says.
“Depending on how long this thing lasts, high-cost producers could suffer. If it lasts for a long period, then they will be in trouble because most of them need the oil price to reach above $40 per barrel to break even,” Victor concludes.
Opportunities
Volatility usually brings its own opportunities for those who have avoided excessive borrowing. The oil price crash creates openings for cash-rich and under-leveraged players to pick up “quality producing or near-producing assets at a significantly lower price” than previously, says Alix at Ashurst.
Alix also sees “considerable value” now lying in the portfolios of upstream producers with longer-term hedges.
“They may be able to monetise these positions to create additional short-term liquidity.”
The weaker naira may also provide some relief for lenders.
- “Nigerian banks are probably overweight on the dollar, as they anticipated a currency depreciation at some point. So they will probably make some revaluations from the naira depreciation,” Faramoti says.
- “This will not be as large as the revaluation gains they made in 2016 but will cushion the effect a bit,” he adds.
The impact on banks might be softened by the diversification into consumer loans that some have pursued, says Ebenezer Seun, a private-wealth executive at Barino Investments in Lagos.
But a prolonged lockdown will also affect retail loans sooner or later, he says. “Some lower-tier banks in weak positions will most likely end up being acquired in the wake of this crisis.”
The bottom line: More consolidated and cost-efficient Nigerian oil and banking industries could be a surprise long-term result of the coronavirus and oil price crises.
