The intention of Forte Oil Plc (FO) to sell off its upstream services and power businesses in Nigeria and divest from its Ghanaian operations has raised some concerns among investment researchers in Nigeria, who have decided to place the shares under review.
A company update by United Capital research analysts obtained by our correspondent on Wednesday, suggests that there are possibilities of unsavory implications of the potential sale.
Whilst the investment researchers express that FO’s asset sale announcement came as a surprise, the also noted that they “believe that it has far-reaching implications on FO’s future cashflow.”
Explaining the divestment they said “given that the company had been exploring partnerships and joint ventures across the energy value chain. We can make sense of the company’s intention to divest from its Ghanaian operations – considering its insignificant 0.9% revenue contribution.”
“FO’s total investment in AP Oil and Gas Ghana Limited sums up to 1.1bn, yet the company has impaired up to N735.5m from the operation in the past two years. Looking over to its power business, it has been a “point of pride” to the company, given the succour it has brought to revenues, amid an underwhelming performance from the company’s core business.”
The note revealed that “FO’s power business has become increasingly germane to the company’s cash flow, recording an impressive revenue CAGR of 85.2 percent over the past 5 years. FO owns a 57 percent equity in Amperion Power Distribution Company which owns 51 percent Equity in Geregu Power Plc – effectively, FO technically owns a 29 percent stake in Geregu Power Plc.
Expressing their view on the deal, the researchers noted that “Though downstream players continue to grapple with capped margins, the power sector is also plagued with structural problems across the electricity supply chain, from gas supply shortages to depressed collection rates. Any potential upside from these sectors, in the long run, remains tied to the deregulation of the downstream sector, as well as bold policy reforms that can address the shortfalls of the power sector. Moreover, we believe that the depressed state of the power sector would likely make the negotiation/sale more complex and difficult. Consequently, we suspend our buy rating on FO and place the ticker under review.”
Nigeria November 15, 2019