Lekoil fights back attempted take-over by South African Coy

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In November, Lekoil received a letter from Strand Hanson of its resignation as nominated adviser, effective November 20. On the day the resignation took effect, South Africa based Metallon Corporation Ltd (which has 15.10% holding of Lekoil’s issued shares) wrote Lekoil requesting an extraordinary general meeting (EGM) where it planned to implement major changes to the company’s management structure and the affairs of LEKOIL Nigeria Limited, Lekoil’s Nigerian subsidiary.

Among other demands which it is proposing to push a the EGM, Metallon is calling for the removal of Lekoil’s chairman (who was appointed less than 12 months ago). It has proposed three new directors, Michael Onochie Ajukwu, Thomas Donald Richardson and George Maxwell to ascend Lekoil’s Board.

Interestingly, Mr. Ajukwu is also on the Board of another South African company MTN, with significant influence in Nigeria, sparking concerns of the rising influence of South Africa on the Nigerian economy.

On the other hand, Mr. Richardson, the current Metallon CEO, was formerly the chief financial officer of Nostrum Oil and Gas Plc from 2016 to March 2020. During this period, Nostrum experienced an approximately 98% decline in share price. Nostrum is currently renegotiating $1.2bn of bonds with its bondholders.

Metallon proposed restrictions on the affairs of Lekoil’s principal subsidiary, LEKOIL Nigeria Limited over governance issues citing the fake loan incident which Lekoil fell into in January 2020.

Among allegations brought by Metallon for proposing the changes include lack of growth in productivity at the Otakikpo fields, unmet market expectations, the Board’s loose interpretation of the dissemination of price sensitive information, lack of desire of the board to accommodate new members to enhance decision making and issues with executive remuneration.

Giving details, Metallon alleged that Lekoil has raised over $264m of equity from shareholders since listing in 2013 and that the company’s shares were suspended on 23 November 2020 with a market capitalisation of $13m (The shares have since resumed trading gaining 40% between 18, November and 27, December).

Lekoil was also accused of spending $129m on general and administrative expenditure and investing $210m into Oil & Gas related activities while delivering no production growth at Otakikpo since first oil in 2017.

Lekoil’s Response

Metallon’s advance and proposition are deemed an opportunistic attempt to take control of Lekoil without paying a premium for the value of the shares and the assets of the company,” Lekoil said in a note to shareholders seen by BusinessDay.

The Board notes that the company has actually raised $275.5m of equity since listing in 2013 but its share price suffered a decline just like other oil companies. For example, Tullow Plc, a London listed oil and gas company with assets in Africa, had a market capitalization of $11bn before 2020 but its market capitalization has declined to $450m because of changes in a number macroeconomic variables which are beyond any company’s influence.

Of the $275.5m equity raised since listing in 2013, $166.2m was invested in capital expenditure for the development of OPL 310, OPL 325 and Otakikpo, with only $73.3m (which represents, 27percent) going towards general and administrative expenditure.

“Lekoil’s performance should be considered against sector wide macroeconomic and structural issues, largely resulting from an oil price decline from $103 per barrel of oil at the time of Lekoil’s admission to trading on AIM to today’s $52 per barrel of oil,” the Board noted.

Oil price has dropped consistently over the 2018, 2019 and 2020 period. In 2020, oil price was negative as a result of Covid 19,” Olalekan Akinyanmi, Chief Executive Officer said in an interview recently.

Lekoil admitted that raising cash to develop promising assets has been difficult yet taking into account all sources of funding for the company (including debt and proceeds from production), general and administrative expenditure would represent in 28% of total funds raised or generated.

However, the situation with funding is consistent with other exploration and production companies but it could worsen with Metallon taking a lead role in Lekoil.

On the issue of production growth at Otakikpo, the board notes that “Were Lekoil able to raise equity capital, the board is confident that it would have reached first oil on OPL 310 and significantly increased production at Otakikpo.”

“As announced on 13 July 2020, the company has entered into project and joint venture agreements with its partner on Otakikpo, Green Energy International Limited and Schlumberger (the “Otakikpo Development Partners”) to drill additional wells to increase production at Otakikpo to 20,000 bopd and create additional evacuation and storage infrastructure. The Otakikpo Development Partners are currently in the process of raising financing to implement the proposals.” the Board notes.

On the issue of the $187m fake loan agreement entered into by Lekoil in January, the Board noted that the incident was an embarrassment for everyone involved from management to the Board.

It noted that like other exploration and production companies, and as a result of the global macroeconomic circumstances including the transition from crude oil to renewables sources of energy, the company has experienced difficulties in raising the capital required to develop its appraisal and exploration assets (in particular OPL 310), forcing it to consider alternative funding sources and often more expensive sources of capital.

Therefore, earlier in 2020, the company discovered that it had signed a loan agreement with certain individuals falsely purporting to represent the Qatar Investment Authority.

“The Board regrets falling victim to this fraud and in response established an independent committee to investigate the origination of the agreement and commenced steps to recover funds paid to an intermediary. A detailed review of the company’s wider corporate governance practices and procedures for the approval of major transactions was conducted, with the Board immediately implementing improvements to the company’s corporate governance procedures.

Furthermore, Metallon stated that it is aware that historically shareholders have tried to strengthen the Board and that Lekoil has continually found ways to avoid the necessary changes needed to ensure the Board is truly independent.
Lekoil in response noted that that insinuation is incorrect. In January the Board appointed two new directors at the suggestion of its shareholders.
Following a letter dated 16 June 2020 from certain shareholders requesting changes to the Board, the company indicated that it was willing to include Mr. George Maxwell and Mr. Michael Ajukwu (two of the three proposed Metallon appointees)

The company sought to undertake customary background checks on Mr. Maxwell and Mr. Ajukwu to support the required disclosure under Aim Rule 17 (and paragraph (g) of Schedule 2 to the AIM Rules). However, Mr. Maxwell declined at that time to continue with the appointment process. Mr. Ajukwu submitted himself for vetting and the Company was in the process of undertaking background checks and preparing a relationship agreement when Metallon took the aggressive step of submitting its letter.
The appointment of three directors to the Board is not necessary to ensure that the Board is truly independent of the CEO. The appointment of one director will result in three new directors in the last 12 months. The Board is unanimously in favour of the appointment of Mr. George Maxwell.

However, the appointments of Mr. Thomas Richardson (the current CEO of Metallon) and Mr. Michael Ajukwu (who has been previously nominated to the Board by Metallon and who the Board believes to be a close friend of Mr. Mzi Khumalo, chairman of Metallon) will only serve to transfer control of the Board of Directors of Lekoil to Metallon and, indirectly, Mr. Mzi Khumalo who is Metallon’s Chairman.

More importantly however, Metallon has a sullied record in countries where it has operated and remains unsuitable to manage the kind of national assets that Lekoil has in its Nigerian portfolio.

Metallon’s record

Established as a private natural resources and infrastructure company in 2002, Metallon has operations in Zimbabwe and South Africa. But the company is sorely troubled with legal and financial battles in Zimbabwe bothering on foreign currency issues and debt issues.

A chieftain of the Africa National Congress, Mr. Khumalo has risen to become a mining magnate but records suggest that his companies aren’t any better run than the ANC. Last year, a British court liquidated his London company Gold & General, founded in 2015, to lead an African expansion, over undisclosed debts.

Metallon’s gold mining operations have fared poorly over the years and contracted from four mines in 2016 to just one at present. In 2018, Metallon was accused of violating foreign currency control regulations in Zimbabwe and suffered a loss for the year of approximately $78 million as indicated in its annual report.

Based on its published financials, Metallon’s short term liabilities were almost twice its revenues in 2018 and at present it faces winding-up petitions from several creditors, including American Express Services Europe Limited and UK’s Her Majesty’s Revenue & Custom.

In April 2019, Metallon filed for business rescue for two of its Zimbabwe based subsidiaries, Goldfields of Mazowe Limited, and Goldfields of Shamva Limited, in order to protect the companies’ assets from being seized by creditors.

Beyond these visible cracks, the company has well documented labour relations issues. According to the Associated Mine Workers Union of Zimbabwe, some 1,400 workers employed at Metallon Corporation’s mines were owed $40million in salaries, benefits and unremitted pensions.

Based on records, it is doubtful that Metallon has the resources to advance the development of critical assets in Nigeria’s oil and gas industry.

Addition, Metallon has no expertise or track record in oil and gas development, prompting analysts to question its suitability to proffer board changes and business strategy for Lekoil, a company that has been in the oil and gas business for a decade.

Next steps

“Your board believes that the Requisitioned Resolutions are no more than an ill-disguised attempt by Metallon and the other members of the Suspected Concert Party, to gain control of your company,” Lekoil’s board and management said in a note to shareholders.

“Rest assured of the board’s continued commitment to engage fully with all shareholders, to promote the success of the company going forward,” the management and Board noted.

The Board is supportive of the candidacy of Mr. Maxwell as a director of the company, it believes that the appointment of three directors by a single shareholder holding 15.10% of the issued share capital provides such shareholder a disproportionate influence over the company and effectively delivers control of the company. The Board does not consider that Mr. Ajukwu and Mr. Richardson would advance the experience and capabilities within the company in a material way.

Nigerian authorities, especially the Ministry of Petroleum Resources, the Department of Petroleum Resources and the NNPC should be vigilant as a company controlled by Metallon is likely to replicate its Zimbabwean experience in Nigeria. This could further depress an industry that has managed to keep its head above water in the past few years.

“We are happy to make compromises and chart a way forward which will be mutually beneficial to all parties” Mr. Akinyanmi said in an interview. “We need to work together at the table to work things out.”

Lekoil continues to be a foremost indigenous oil and gas company in Nigeria with extensive investment in the industry. It is committed to Nigeria’s energy future and has gone a long way to source critical funding to improve productivity in the oil and gas industry.

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