Orjiako: The Cost of Capital is Killing Businesses in Nigeria

INTERVIEW

The Chairman of Seplat Petroleum Development Company Plc, Dr. ABC Orjiako spoke to Eromosele Abiodun on plans by the London Stock Exchange to help Nigerian companies access investible funds in Europe, the ongoing reforms in the oil and gas sector, and on the Nigerian economy. Excerpts:

I would like to start by first of all congratulating you on your appointment to the London Stock Exchange (LSE) Advisory Group for Africa. One can say your appointment into the group was made possible by you listing on the LSE, what other benefits have been accrued to Seplat since listing on the LSE?

To start with, you know that Seplat is the largest hydro carbon indigenous Nigerian Oil and Gas Company and arguably the biggest African Independent. And listing on the London Stock Exchange (LSE), we are the first company to do that and we pioneered that and became the first in both the LSE and the Nigerian Stock Exchange (NSE), we had a very successful IPO, oversubscribed and what this means to the company is to bring the company visibility and this also made it an immediate global brand, therefore it makes the company able to have access to the largest possible pool of investable capitals especially in the equities place. That is really very differentiating when you look at what is happening to us and the competitors. So in terms of advantages, it’s made us a global brand, gives us access to investable capital, gives us easier access to funds compared to the competition.

Let’s look at the African Advisory Group, what are your roles or what will you be doing on the board?

The LSE Advisory Group for Africa was initiated by the CEO of the LSE, Xavier Rolet. I think it is a very novel approach, it is very innovative, and it is a strategic move. What this sets out to do is to bring senior African business persons and institutions that would sit down, interact, articulate and formulate policy frame work towards growing the African capital market which has been variously challenged over the years and this would mean that this advocacy group would have regular interactions. They are going to be the ones that will act as an advocacy group that will cut across regulatory bodies as well as the institutions for investments as well as the investors themselves. So part of the things we will be doing, will be regular interactions, formulation of approach to regulations and begin to look at ways to address the challenges that face the African capital market as well as look at ways to tap all the enormous opportunities. The ultimate goal really is to encourage prosperity in the African continent.

There are corporates who have seen your achievement over the last one year or so since you’ve been on the LSE and want to take this step to be listed on the LSE, what advice do you have for them and what do you think they can do to be listed on the LSE

I think one of the things that we did in Seplat was not just about us listing and being a global brand with all the opportunities and competitive advantage, we have also managed to open a window of opportunities to other corporates to follow suit. Since we listed on the LSE, I am aware that quite a number of Nigerian companies have been making enquiries towards this listing. It’s not just to be listed on the exchange, one of the things we did is that our listing is actually on the main board. So we are beginning to see companies from Nigeria that are making enquiries to do this and this is encouraging it will help them in the Nigerian capital market, it will also encourage more African corporates particularly from Nigeria to also have the benefits of having access to a very large pool of investable capital.

What are the major difficulties facing African Capital Market?

The African Capital market is facing a lot of challenges, this was why the LSE Advisory group for Africa was put together to tackle these challenges. I think the challenges of the African capital market is very wide ranging. It ranges from very low financial capacity and debt to very low liquidity levels. And in between this spectrum, you get other things like sparse interior sectorial involvement and the rest of it. Now if you look at how these are impacting Africa that means that the volume of businesses that can be done in Africa that will have attraction to international investors is very low. If you look at the African continent, there are 54 countries but only about 25 of them have stock markets. Now when you look at that, only about four maybe five are active; South Africa, Nigeria, Kenya, Egypt and Morocco. The rest of them are still at the rudimentary level. Now this poses a challenge, it means that various companies and entrepreneurs in the African continent who have great ideas that can go places are unable to tap investable capital, the reason being that they are listed. Remember what I said, low capacity, finances, and low liquidity. Not being listed on the exchange means that they don’t have visibility that is required for capital flow. So this is one area that the London Advisory Group will be advising. We are an advocacy group as it were to champion bringing together likely African corporates face to face with global investors. There are trillions of investable capital looking for opportunities and Africa is a major frontier for growth but if these companies in Africa do not have the visibility, and the easiest way to have this visibility is to be listed in any of the exchange. Now, that is one. The second one we stress about is the fact that we have many companies that even if they are looking out do not know how to go about it. One of the things we are going to be doing is to have serious cooperation between the London Stock Exchange and the various countries in Africa. We are looking to have three levels, one is at the country level, and the other one is regional level and then global Africa level. Also we are looking at the possibilities of how we can have intra Africa growth and integration such that you can have a corporation in West Africa for example. We want to do this so that where you do not have visibility of stock exchange in any particular country, they can aggregate around a more visible one like the Nigerian Stock Exchange in the West African region and you can see the Kenya Stock Exchange in the East African region. South Africa is the biggest market in the south and in the North you can look at Morocco and Egypt. The real view is that a lot of entrepreneurs can latch unto this, make themselves visible. The LSE will create opportunities for investors to have all of these. Now one of the things we’ll look at very strongly is to look at one of the models the LSE has developed. We have what they call the 1000 companies to inspire Britain. This was championed by Xavier Rolet himself and what it has done is that it has created visibility for about 1000 SMEs in Britain and what it has done is to bring them together with investors. Some of them are growing at the rate of over 50 per cent annually but have no real experience with the investors. Some of them are family businesses so that what this has now done is help some of them grow themselves through making themselves investable for equity capital. And when that happens a good number of them, are now migrating to become listed securities, in that process you have succeeded at making real entrepreneurs have access to capital and grow the company. Even in Europe this is a major advantage because there is still quite a high level of unemployment and this mechanism has been proven to help create jobs through entrepreneurship growth. Another thing we looked at is to see how we can replicate this in Africa. Part of the things the advocacy group is looking to do is to have a 1000 companies in Africa to inspire growth in Africa. So we are looking at ways to adapt this method. In doing that, we also exchanged a lot of ideas about what we are already doing. If you look at a case like Nigeria, we are very clear in our minds that the informal sector in this country is wider than the organised private sector. Now we have the Director General of the National Pension Commission (PENCOM), Chinelo Anohu-Amazu as a member of the LSE Advisory Group for Africa. We also have the CEO of the Nigerian Stock Exchange as a member of the advisory group, one of the things that came out is that both of these have programs that are addressing the informal sectors as well as the SMEs in Nigeria. So, if we can adapt and collaborate with the LSE to see what they have done with the 1000 companies in Britain we will see how that would help. Another thing we spent quite some time doing is to listen to Sir Gilfold, I think he is the lead of the Commonwealth in the emerging market, part of the presentations he made was the Nigeria-UK co-operation. I think, in that, he had the president of the Nigerian NSE council, Aigboje Aig-Imoukhuede, as a member of his team. It all shows that these kinds of co-operations will enable growth of the capital market not just in Nigeria but in the African continent.

I understand you’ll be having your inaugural meeting, I don’t know if some of the points you highlighted are the discussions you will be having, can you just let us know what you will be discussing?
The inaugural meeting already happened on the 21st of March and all of these things I have been telling you have been addressed. We have already looked at using the UK-Nigerian co-operation of the capital market as a model that can spread to other parts of Africa. We made a strong point and the group recognised what Seplat did being an indigenous company and then took a view in developing the African capital market ecosystem. A company like Seplat will need to play a leadership role, being a mentorship company for the rest of the companies as they come, making sure that the Seplat example can be replicated and encouraging others to participate. The other thing we did was to look broadly at those challenges facing the African capital market. I have talked about the debt of financial levels, I have talked about the liquidity issues, and I talked about the sectorial intensity so that the cost of business in the African capital market is encouraged. In that way we will reduce the barriers between the investing capital and the companies.

Tell us about your experience so far on the London Stock Exchange

Our experience is that in any thing you do, transparency and corporate governance is key. If you don’t govern the companies very well, if you don’t take the flagship of best practices, the company will not go far. Two, you will get exposure, good exposure to a very large pool of investable capital and what you do with that opportunity is key to your growth. My experience has been that investors who are very sensitive about what you do, very sensitive of the promises you make. So before we make promises, we are sure we are able to deliver on that promise, and are looking very closely at what you do, your track record, the structure of your organisation and how you can deliver on those promises, all of these things are key. And that is one of the reasons why we have continued to distinguish ourselves from competition. We have kept our promises, we have remained very transparent, remained very strongly governed and in best practice, and that is still why we are where we are. So when we look at the growth in our business, it is because the fundamentals are right, our number one is corporate governance and best practice.

Companies across all sectors of the Nigerian economy are suffering the foreign exchange crisis, what should government do to resolve this crisis?

I am not a financial expert but there are clear indices of what is happening to the economy that surrounds the Foreign Exchange. I think obviously Nigeria is facing a lot of challenges because of the foreign exchange rate. It is affecting investors and quite a lot of people who are doing businesses. It is affecting even the small and medium enterprises that are doing businesses. But having said that, I think this is a wakeup call for everyone both government and the corporates. I think this is the time for Nigerians to number one, Look inwards and see what we can do especially from the manufacturing point of view. It is the time for us to look at local raw materials to grow our manufacturing companies. It is the time for us to look very strongly towards agriculture. It is not every agricultural implement that requires foreign exchange because at the end of the day the exchange on the value of the Naira will be dependent on the level of productivity in the country. So we should begin to look inwards, into those things that will encourage growth that is why when I was speaking about diversification. I was speaking to the fact that once you grow power infrastructure, you are bound to create opportunities for manufacturers to create jobs, you are bound to create entrepreneurs. Luckily Nigerian demographics speak to a young labour force; we need to tap into this and do something local. When I talked about diversification, it’s about we looking very strongly into agriculture. If you look at the way the Nigerian population growth is going, we have a lot of mouths to feed. These are all the areas we need to create jobs and prosperity in the country. If you look at agriculture and even look at the agro based industries, quite a lot of things can be done. In the oil and gas business when I talked about gas to industry, we look at ways to create jobs in the petro chemical industries. Not just the humongous ones but even from petro chemical products we can create quite a lot of entrepreneurs. So this is the general message to the Nigerian population, where people will begin to reap in what they are doing and encourage internal increase in production. Having said that, I think government on the other hand should also look at some of the policy decisions they are making. I think it is very difficult for the country and the financial systems to manage three aspects all together. One is inflation, inflation is now double digit, I think it is creating its own challenges. Foreign exchange, even if you do not devalue the availability is an issue that needs to be addressed. The other point is interest rate, the cost of capital is challenging. Double digit cost of capital, it is very difficult for the manufacturing sector to grow. In terms of policy framework, government should look for how to balance all of these. All these are bringing quite a lot of pains to the populace. So these are the areas where government needs to look at how to tighten the policy framework that will be beneficial to the populace.

The Minister of State Petroleum and GMD of the Nigerian National Petroleum Corporation is making effort to reform the oil industry in Nigeria and the reforms are going on without the passage of the PIB. What do you have to say about this?

The reforms I think everyone has been talking and this is the time to walk those talks. I think what the current administration is doing and the Minister for State Petroleum and GMD of NNPC, Dr. Ibe Kachikwu has demonstrated is to take decisive steps towards the long awaited transformation and reforms on the NNPC. I think that is commendable. I think we have seen real seriousness in those structuring. I think what would be wrong is not taking those steps, the good thing is that he is taking the steps. He would then see the permutations, where there are mistakes, he would correct it. So we are happy about that move that he has made. We are also looking forward very eagerly to see the reforms in the PIB coming to effect. We took strong interest in what he said. We will take the bill, look at the fiscal component of that bill, look at the regulatory component and bring the operators and regulators together so that you have a win-win for everyone. My advice is that in passing the PIB, there is need to have solid engagement amongst all stakeholders so that the final outcome will definitely propel growth in the oil and gas industry.

Seplat is just five years, it’s like it’s been existing for a long while like some multinational oil companies, what is responsible for this exponential growth?

The exponential growth has been planned for, as we say internally is not by chance. It is based on a carefully planned, well thought out, long term vision. It is a combination of strong entrepreneurial spirit, a combination of strong corporate governance and best practices that is driving everything you see in our track record. We have a strong management team, very diverse and a strong board that basically propels all the growth objectives that we have outlined. So there are two major things that distinguish us when you look at Seplat. One is our corporate governance; corporate governance distinguishes us and the competition. The second one is the Seplat model of community engagement in the Niger Delta. These are the real fulcrum of our growth and achievement over the past five years.

Oil prices have taken a beaten, nobody knows when it will get better and Seplat seems not to be affected by it, your results are fantastic. What are you doing that others are not doing?

Well, first of all as I spoke earlier on, I did say that when you have your long term goal plan well set out, when you have very strong management professionals, when you set off from get go to be innovative in business you are bound to weather the storm. What you have seen in the oil and gas industry today is a circle, we have seen it before. Being a commodity, the oil price is bound to face the vagrants of the commodity market and that’s what has happened. We have seen that the oil price is at the lowest point of that circle. Now, obviously many things are responsible for it but as a company we have always been prepared for things like this because we set out to do our business on a long term. So you see, at Seplat , we have done is to keep a very close eye on our costs, we pride ourselves to be a low cost operating company. When the oil price circle began going south, we then became even more prudent. We looked at our carpex and we made sure that we focused on essential capex especially when it has to do with gas and we made sure that our operating capex remained low. We are at the lower end of OPEC’s per barrel in the industry and this is very important for us in terms of growth. Now when we look at the overall performance of the company, yes you are right, we are profitable. When we were in the market, we promised the investors profitability, we promised them value added and that is what we have continued to do. Such that even when the revenue goes down, we compensate them in various ways and the ways we have done this is by cutting costs, making sure we maintain average production level. We promised that we were going to be going organically by increasing our production and we are doing that. We have achieved everything we said we would in that regard. We promised that we would be growing by acquisition; we have demonstrated that, we have done other acquisitions. We promised that we were going to grow by gas commercialisation, our gas development has been compensatory in terms of revenue. So all of these put together has made the company robust, strong balancing profitable company. Delivering to investors what we said we would do, being growth in investment as well as in dividend paying, those are the things that distinguish us.

You talked about the gas commercialisation policy of Seplat. Let’s just talk about the gas policy of Seplat

The gas strategy of Seplat is something we thought out from the beginning and we did this because we are an indigenous company and we know that the Nigerian government past and present administration have stressed the need to encourage power. In 2012 when the last administration launched the gas revolution program which is gas to power, gas to industry, gas to manufacture and then it reduced the price in the domestic market, privatised the Nigerian power companies, unbundled and privatise them. That did two things, one it created demand for gas and made demand for gas soar. We saw the price of gas move from less than 30cents per scf while in 2010 to $1 per scf and today it is $2, $2.15 per thousand scf in the domestic market. We have signed contracts for $3.15 per thousand scf. So, based on this, with increasing demand, we have seen that we are able to meet our domestic gas obligations and we are seeing increasing requests from independent power companies so we also have seen good opportunities between willing buyers and willing sellers. So when you compare this with the transfer price between the domestic price and the transfer price for LNG in the country, it becomes more incentivising to put gas in the domestic market. And as a Nigerian company, we then have keyed into this to contribute our quota in promoting gas development in the Nigerian economy. And what have we done? We have then increased our gas production in the domestic market from about 90 million scf a day in 2010 to the current 300 million scf a day in 2016 and growing. By the end of this year, we have set the stage to take the capacity to over 500 million scf a day. If you look at the gas supply to the power industry in Nigeria, what you see is that about 1.2 billion scf of gas is delivered for the market. If you look at Seplat doing 300 million scf a day you will see that we are supplying 25 per cent of the gas to power in Nigeria and we are growing. So we are the biggest indigenous gas supplier in the domestic market and we are growing gradually. When we look at everything that this country is doing, when we talk about diversification, it is clear in our minds that there is no way this economy will diversify without getting the power infrastructure right. As an indigenous Nigerian company, we are focusing on it, contributing our quota, helping our revenue growth and helping to create prosperity in Nigeria so that is what we are doing and the journey is still far but we are mainly focused on adding our contribution to it.

If we look at the model you are pursuing, the integrated business model in Seplat, given the swings in oil prices. Most of your acquisition was done when oil prices were high and oil prices are low now, how have you been managing the disparity in the cost of acquisition and actual returns on investment
As a company we took a very long term view in everything we have done, our vision was clearly defined, our business growth was clearly defined. So when we say we are going to grow by acquisition we were very clear in saying that the price descent will be accretive. What do we mean by price descent? We took into account the cyclical nature of oil prices, so when we look at any asset regardless of when we did the acquisition, we make sure that we put this into consideration and that is why our company will continue to be profitable, the top line revenue might be lower but we make sure it don’t go below zero.

In what way, if any will the crude oil price affect any of your plans?

Obviously, the low oil price will definitely affect the top line, the revenue and earnings will go down but what we will make sure of is that the bottom line does not go below zero. That is what we were making reference to. When you look at the last quarter result that was released, it is profitable and we are going to be having our annual general meeting (AGM) in May, I believe we will be delivering good results. So this is what is happening, even though revenue is low we are increasing revenue from gas. If you remember what I said earlier on, because we are keeping our eyes on cost, our production capex is not high so that means that our operations remain profitable.

On a personal note, someone told me Orjiako was a trained surgeon. You seem to be better than those who are petro-chemical engineers that have been in the oil and gas industry for a long time. How did this transformation happen?

Well, that is interesting. I have always said that I didn’t set out to do business while I was studying medicine. But I found myself from my background of business people, my family background, I come from a business family and it became a natural thing to do business. But having said that, my passion is very strong in medical practice, I practiced orthopaedic surgery and trauma at the Orthopaedic Hospital for 11 years, I enjoyed it very much and today I am doing oil and gas. Everything I know is by association and I am doing it, that’s all I can say.

As a group where are you going? Don’t tell me you want to take over from shell or ExxonMobil, where is Seplat going?

Seplat’s vision is a very, very far destination. We have set out defined growth patterns, talked about the acquisitions, having pioneered acquisition of divested assets by the International Oil Companies, we set the pace, and we became the only ones that had operatorship. We have built on that, we’ve grown organically during this period and we are still growing. We are commercialising gas and that is a very, very long term thing. What we are doing today is to consolidate on all of those gains and the leadership position we have while also thinking out of the box to see what opportunities exist. Now when you look at it this way, we are focusing not just on acquisition of assets but ultimately we will be seeing acquisition not only at the assets level but also a possibility for us that will encourage geography and locational diversification. So the company remains focused, this notion seems very far away but we know that we are on the right track.

The industry because of the price, the profit lens appeared to have shifted downstream where a lot of refiners are having huge profit, taking advantage of the low oil prices as well, and given the huge supply gap in the country here; big players leading indigenous players like yours are expected in localising the downstream benefits of it.

Like I said, commodity prices are cyclical depending on the part of the circle you are. You found that it is either that the refining margins are high or that it is too low so whereas today we are looking at the crude oil price being low, refining margins are higher than margins in the upstream amongst the producing companies. That is only in a particular stage of the circle when you move to the other circle the margins also remain low so it is not a case that you jump from being upstream to downstream just because they have a momentarily increase in revenue. But even then it is not all downstream firms that are making money. I think the way to look at it is to make sure that your long term plan remains steady, remains robust and strong.