The Dangote Petroleum Refinery has assured prospective investors that a drop in crude oil prices after the end of the ongoing US-Iran war will not directly affect its profitability.
The Vice President of Dangote Industries Limited, Devakumar Edwin, gave the assurance on Friday amid concerns that a fall in crude prices could weaken the returns on investments in the refinery’s ongoing initial public offering.
Edwin spoke during a media tour and briefing at the refinery, where he explained that the company’s profitability was driven by refining margins rather than the absolute price of crude oil.
“The crude price will not directly have an impact on profitability. Because, let us say, you are a trader. You are importing stationery and selling. You want to have a 20 per cent profit margin. Whatever your import price is, you will add the 20 per cent and keep your profit margin.
“So, your import price is not going to affect your profit margin because you are focused on your margins. So, the same way, when the crude price goes up, our product’s price will go up. When the crude price comes down, the product’s price will come down,” he stated.
Edwin was responding to concerns over the possible effect of the end of the US-Iran conflict on crude prices and, consequently, the profitability of the refinery and returns to shareholders.
He, however, said the ongoing geopolitical crisis could temporarily boost the refinery’s profitability, not because of higher crude prices but because of disruptions to the supply of refined petroleum products.
According to him, some refineries were unable to operate at full capacity because they could not obtain enough crude, while refineries in the Middle East were also unable to supply their usual volumes of products.
“But, during the war, there could be a little bit of extra profitability now. It is not because of crude, but because product movement is affected. So, irrespective of the crude price, the product price still goes higher because of a shortage in the market.
“Some of the refineries in the Middle East are not able to operate fully because they are not able to get enough crude. Also, all the products that used to come out from the Middle East are not getting into the market. So, there will be an extra profitability for this period,” Edwin stated.
He said the additional profitability from the supply disruption would eventually decline. “The extra profitability will go down. But when we made the investment of $20bn, we made our own calculation. How much is going to be our profit? How much will our returns be? So, we are on target as far as that is concerned,” he said.
Dollar dividends
The Dangote executive also assured prospective investors that the company’s president, Aliko Dangote, had declared that dividends from the refinery would be paid in foreign exchange.
Contrary to fears that the current N525 share value could drop after listing, Edwin said there would be value appreciation. “As a company, we believe that there is going to be a very good value appreciation. There will be very good returns in terms of dividends. And my president has even declared that the dividends will be in foreign exchange, in dollars,” Edwin said.
He explained that the refinery’s export earnings would provide the foreign exchange needed to support the dividend commitment.
“As I said, 50 per cent is going into exports. Now, the new refinery will let 100 per cent go for export because we are already exporting half of our production. As for the new refinery, practically everything will have to be exported. So foreign exchange generation is going to be huge. That is why he was able to give the assurance that we will be paying in dollars,” Edwin added.
The assurance came as the refinery seeks to attract millions of Nigerians as shareholders through the IPO. Edwin said Dangote Industries had deliberately chosen to offer shares in the refinery after the facility had been completed, commissioned and operated for some time, rather than raising equity while the project was still under construction.
He said this approach meant that investors were buying into an operating company with an established financial record. “So what we are achieving is that none of the shareholders is taking any risk,” he said.
Edwin noted that the company had released its first six months’ operational results, which prospective investors could examine before committing their funds. He said the Dangote Group had historically followed a policy of completing major projects, commencing operations and generating profits before going public.
The executive also urged individuals considering the IPO to conduct their own assessment before investing. “But you, as an individual, when you are putting your money, you can always do your own evaluation,” he stated.
Edwin also disclosed that the ongoing expansion of the refinery was targeted for completion within three years, although the company could finish the project earlier.
He said the cost of the expansion would be slightly lower than the original refinery project because several major infrastructure facilities were already in place. He listed the granite quarry, welding gases plant and port facilities among infrastructure that would not have to be built from scratch.
He added that the company was also seeking to reduce engineering and design costs because much of the expansion would replicate the existing refinery.
“But at the same time, we are also adding petrochemical sites, we are adding linear alkyl benzene, and we are adding up a propane dehydrogenation plant. So that will be the additional cost. But overall, there will be a slight reduction in cost compared to the first strike,” he stated.
Edwin disclosed that all the necessary licences had been obtained, while basic engineering had been completed and almost all detailed engineering work concluded. He said most of the equipment had already been ordered, with contracts signed and advances paid.
“We are at that stage where we have practically gone very far. So we are targeting three years. And probably we may be even doing faster than that,” he said.
On fuel blending, Edwin said the refinery could blend intermediate products where it had spare processing capacity but would rather process crude directly when that was more profitable.
He cited naphtha as an example, saying the refinery could convert the product into gasoline using spare capacity in some of its units. “If I have an extra capacity sitting idle. I can bring naphtha and then convert it to gasoline. So, I am adding value by filling that gap,” he said.
However, he said importing products solely for blending would not make economic sense if the refinery could produce the products directly from crude.
“If I am going to bring products only exclusively for blending, by cutting down my operation, it will be foolishness, because I will be losing money. I would rather produce my products from crude, because my production margins will be more profitable,” Edwin stated.
He added that the refinery would use blending where spare capacity made it commercially viable. “But where I have some extra capacity, I will take advantage by blending. But those refineries that are more closely focused on blending, they have no other alternative,” he said.
Edwin said the decision to take the refinery to the public market was also driven by Dangote’s desire to spread ownership of the business among Nigerians. He said the group had set a target of attracting at least 10 million shareholders, describing it as an unprecedented level of public participation.
“That is why we went a little bit faster, and our focus was to bring in at least 10 million shareholders, which has never been done in the history of the stock market in the world,” Edwin said.
He explained that the minimum subscription threshold was deliberately kept at N5,250 to make it possible for people across different income levels to participate. Edwin also disclosed that Dangote refinery employees were given an opportunity to acquire shares during the private placement.
“Almost all the people in the refinery who know what it is, they all become shareholders, including me,” he said.
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