ConocoPhillips' (NYSE:COP) Nigerian asset divestiture is pivotal to developing its shale oil interests in North America as a newly minted independent E&P company. Nigerian company Oando Energy Resources will in turn acquire the ability to lift 10 times its current rate of 4,500 barrels per day.
There's more to the deal, and its stretches out into 2014. Oando agreed to purchase all of ConocoPhillips Nigerian assets. Included are Phillips Oil Company Nigeria Limited, Phillips Deepwater Exploration Nigeria Limited, and Conoco Exploration & Production Nigeria Limited.
In an amendment to the original deal, Oando and ConocoPhillips further agreed to move the close to January 31, 2014 from November 30, 2013. In consideration, Oando will deposit another $15 million with ConocoPhillips by December 6, 2013.
Raising this amount of capital is no small feat, even for big oil. Oando is a pan-African energy resource company based in Lagos, Nigeria. Oando has already paid $435 million of the over $1.6 billion estimated purchase price.
The key to financing the deal was the $350 million senior secured debenture placed by Nigerian funds FBN Capital and FCMB Capital Markets. BNP Paribas, Standard Chartered Bank, and Standard Bank, in Johannesburg, have committed to over $800 billion in credit.
Venturing into structured finance is a risky game in its own right whatever the placement. For this deal, FBN is participating in a reserve-based lending structure. This bank product requires expert knowledge of the producing reserves of an already developed oil field to back a credit. The main risk is that the oil reserve base, for whatever reason, declines faster than anticipated, and in advance of any balance sheet refinancing clauses.
According to its 2012 annual report, the First Bank of Nigeria Ltd, or FBN, states that investment banking activities like the ConocoPhillips debenture comprise only 2.7% of FBN group revenue. FBN insurance and investment banking subsidiaries have experienced low levels of equity market activity and larger than anticipated insurance payouts due to the ongoing internal security issues plaguing Nigeria. FBN seems to have more experience with project finance than reserve-based lending as it steps into new exposures. This lack of experience will be played out with FNB's marketing of the debentures to institutional investors and subsequent discounting.
Shift to U.S. shale...and China?
Back in December 2012, ConocoPhillips decided to divest its Nigerian interests worth at the time about $2 billion. Volatile oil prices and local Nigerian supply security issues have devalued the deal to about $1.6 billion.
It seems to be focusing its LNG efforts in the continental U.S. in the Bakken and South Texas Eagle Ford shale formations.
ConocoPhillips is also selling Australian exploration interests to PetroChina (NYSE:PTR). In partial return, ConocoPhillips entered into a Joint Study Agreement, or JSA, with PetroChina to explore so-called "unconventional resources" in the Sichuan Basin in China. As is typical with a JSA, the companies will use this time to work out a production sharing arrangement they can take to the banks for project finance and reserve-based lending.
Last May ConocoPhillips had just spun off its downstream assets into Philips 66 (NYSE:PSX) while creating an independent exploration and production company. As the largest independent E&P company, it lifts over 1.5 million barrels per day. Most of the lift is in liquids and commands the higher liquids price and profit. ConocoPhillips boasts a strong geographic diversification and 43 billion barrels proven reserves split into 75% liquids, and 25% dry gas.
Growth like that means building over 400,000 barrels per day in new production each year. The shale oil sites are expected to produce about 25% of that growth over the next 10 years. ConocoPhillips thinks that it will cost about $3 billion to develop these assets, and half of that comes from Nigeria.
The pure play
The current bet on ConocoPhillips then can be summarized as:
- Oil prices maintains a flat $100 per barrel FOB
- Transportation cost is flat and an independent E&P de-risks that issue
- Shale comes in on time (2-3 years) and at only $3 billion with $25 per barrel margins (for a mature field)
- Oando and its banks pay on time and without further discounts
- Expanding Chinese interests start to pay off within five years
All of these factors seem reasonable enough to continue to hold ConocoPhillips as it ventures into its E&P pure play.