Expansion leaves small oil marketers without cash to sustain daily operations

An expansion spree by middle tier and small oil marketing companies in a race to grow their footprint and compete with multinationals has left them nearly dry – with less to finance daily operations.

The companies are now resorting to selling or bringing on board strategic investors to enable them stay afloat.

The latest in the string of acquisitions is Hass Petroleum, which last week announced it had sold 40 per cent of its shares to Oman Trading International at an undisclosed amount.

In February this year, Hashi Energy was cleared by the Competition Authority of Kenya to sell its assets to Tanzania based firm, Lake Oil Ltd.

Once the transaction is completed, it will increase Lake Oil’s presence in Kenya’s petroleum industry, where it is only active in the cooking gas segment and is yet to break even.

Other marketers that have sold in the recent past include Gulf Africa Petroleum Corporation, in which India’s Reliance Industries sold its stake to French oil conglomerate Total SA.

The marketer has assets in Kenya, Uganda and Tanzania. Hass Petroleum said the acquisition of a 40 per cent stake by Oman Trading International would enable it embark on a strategic growth and expansion plan across the Eastern, Central and Horn of Africa.

“It will also boost the marketer’s working capital and increase competitiveness in the Open Tender System,”

According to Petroleum Institute of East Africa Chair Powell Maimba, selling all or part shareholding is aimed at enabling them get money to sustain expanded operations. “The whole set up of cash upfront on taxes for the petroleum industry sometimes tend to cause problems for players. The balance between working capital and expansion becomes another challenge,” said Maimba.

“So small players that have been trying to expand experience challenges because they are working with scarce capital and when they get to this point, they will need a strategic investor. By selling stake in their companies, they are trying to boost the working capital and expansion programmes.”

Pricing formula

He observed that while the price capping regime had to an extent levelled the playing field for small oil marketers that now take similar margins as the oil majors, the pricing formula had failed to take into consideration funds for expansion as well as other capital expenditure.

The price capping formula introduced in 2010 allows a wholesale margin of Sh7 per litre and 3.89 per litre for major oil products – super petrol, diesel and kerosene. These are the margins that Maimba said while attractive in the short-term, do not take care of long-term needs of an oil marketer.

“The pricing structure works well for the small players because there is distribution of margins despite the size and economies of scale. Whether big or small, you will operate within this margin. It becomes difficult for you to be oppressed by the bigger guy who can discount at the retail level because of economies of scale,” he said. “In the current regime of price build up, there is no capex recovery. In the short-term looks good but becomes tough in the long term. It is even tougher because banks are not lending that much. So you need another source of financing to keep you going.”

With the middle tier and small players expansion both in Kenya and the region, there is a likelihood that more will sell stakes to both local and international investors.

It is however not a challenge for the multinationals that have support from their parent companies. “Whether we will see more acquisitions depends on expansion deals of individual players. Those that are expanding expect that to happen… it (acquisitions) might continue depending on the strategic plans for the individual players,” he said, adding that small players will likely look for a strategic investor if they want to expand.

This is because borrowing is expensive or have exhausted their financing options. “There are a couple of others that we may see. It is not necessarily that they are struggling. It is just that they want financing to expand or inject working capital.”

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