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African oil explorer Lekoil struggles with problems of its own making

By David Whitehouse
Posted on Thursday, 20 June 2019 13:00

A lawyer walks through the compound at the Federal High Court in Ikoyi district in Lagos, Nigeria, May 8, 2018.REUTERS/Akintunde Akinleye

Results from Lekoil, the oil explorer with interests in Nigeria and Namibia listed on London’s AIM market, published June 19 show a company struggling on the fringes of viability.

Auditors Deloitte & Touche state that material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Lekoil says it may seek funds from the equity or debt markets in the year ahead.

The company is embroiled in a legal dispute over a 22.86% stake in license OPL 310 off Nigeria which it bought from Afren Oil & Gas in 2016. Nigeria’s federal high court has ruled that the purchase is invalid given failure to secure ministerial consent.

  • Lekoil says it’s engaging with its partner Optimum Petroleum and the regulator to resolve the matter.

It’s tempting to see the story as another example of the inhospitable regulatory environment in Nigeria.

Lionel Therond, director at Blue Oak Advisory in London, doesn’t expect quick progress on that front. “There’s no real prospect of things changing quickly,” he says. President Buhari “didn’t do much for the oil sector the first time round and there’s not much chance of anything happening quickly in his second term.”

  • But Therond questions why Lekoil failed to secure the necessary authorizations in the first place. He argues that Nigeria’s courts are “usually quite good and not corrupt. It’s surprising that the company could get itself in such a big mess. It looks like they haven’t delivered.”

Hair-shirt time

The real problems are more of the company’s own making. Executive pay is among them.

  • The company’s annual report shows a base salary for CEO Lekan Akinyanmi of $787,950 for 2017.
  • Bonuses and shares lifted that to total compensation of $1.7m.

It’s nice work if you can get it.

  • In research published on Smartkarma on May 22, Simply Wall Street calculated the average total CEO compensation for a sample of companies worth less than $200m.
  • With a current market value of £16.5m, Lekoil is right at the bottom of that spectrum of companies.
  • Yet the average total CEO compensation of $315,000 is a fraction of Akinyanmi’s earnings.

Some of that money might have been spent on hedging against oil price declines. Therond says he’s surprised that the company has no hedging in place against falling oil, other than that required by lenders for debt service.

The company has announced a target of a 25% reduction of general and administrative costs, including board remuneration. That may be a case of too little too late. Therond sees Akinyanmi’s pay as excessive for a company that produces so little oil. “It’s completely unthinkable,” Therond says, adding that he “fails to see any positive aspects in the company’s outlook.”

Bottom Line: Investors who may be tapped for fresh cash by Lekoil should look for Nigerian regulatory authorisations, a full hedging policy and realistic executive pay before coughing up.


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