Running on empty: Oil firm on verge of collapse

KenolKobil, Kenya’s second largest oil marketer, is on the verge of collapse unless the government and its agencies change their stance on the once politically connected company in the country.

The oil marketer, controlling about 21 per cent of the oil market, has been locked out of the only two avenues of importing oil products in the country — the open tender system (OTS) and allocation through Kenya Petroleum Refineries Ltd (KPRL).

According to an insider who sought anonymity due to the sensitivity of the matter, this has forced the oil marketer to buy oil products “from here and there” to keep its outlets in operation.

“The company is still not allocated fuel products from the refinery and it cannot participate in the OTS as well. This has forced it to survive on purchasing fuel from other marketers, leaving very little profit margin, if at all there is any,” the source told Smart Company on Friday.

The company has operations in nine countries — Kenya, Uganda, Tanzania, Rwanda, Zambia, Ethiopia, Burundi, Zimbabwe and Mozambique.

Contacted, KenolKobil’s newly appointed group chief executive officer David Ohana declined to comment on the matter.

The company is associated with former powerful Cabinet minister Nicholas Biwott. Last Friday, its share price closed trading at Sh8.65, having shed 35.93 per cent since January, making it the worst performing stock on the bourse over the period.

Smart Company has learnt that the oil marketer’s problems emanate from an unresolved dispute with the state-controlled refinery, a matter currently in court, which has been going on despite several attempts by the Energy Regulatory Commission (ERC) to arbitrate.

Resolve the issues

On Friday, ERC summoned KenolKobil, KPRL, and officials of the Ministry of Energy and Petroleum to try and resolve the issues, but little is known of what the meeting agreed on.

In an amended suit filed at the Milimani Commercial Court on June 12, KenolKobil says that between August 1, 2012, and April 2013, the refinery had denied it access to oil products worth Sh840 million. The company prayed that the court gives judgment for the sum it said it needed to use in its business as working capital.

“It is unlawful, oppressive, and inequitable for the defendant (Kenya Petroleum Refineries Ltd) to unjustly enrich itself by converting to its operational use the plaintiff’s dead stock and sludge and thereby deprive the plaintiff of the said products or the fair value thereof in the sum of Sh840 million from August 2012, which sum of money the plaintiff needs to use in its business as working capital,” reads part of the suit.

This is not the first time the company is locking horns with the refinery since its conversion from a toll- to merchant-operating mode.

In the past, it has written to the then energy permanent secretary, Mr Patrick Nyoike, demanding Sh119.3 million from KPRL as compensation for losses incurred following failure by the refinery to issue a letter of credit for the import of crude oil in August last year that led to the eventual cancellation of the tender.

A few months back, Mr Nyoike banned the oil marketer from participating in the OTS, citing an unresolved dispute between it and KPRL.

Mr Nyoike’s action was also informed by the fact that KenolKobil is yet to clear a Sh1.2 billion debt owed to the refinery in payment for products collected.

The oil marketer, however, says it will not pay, insisting that the refinery owes it over Sh2.2 billion.

KenolKobil’s claim is based on findings by a forensic audit carried out by Deloitte Consulting Ltd, commissioned by the industry players and sanctioned by the Ministry of Energy which revealed that oil marketers suffered a collective Sh7 billion in product losses due to inefficiencies at the refinery.

Faced with a freeze on product allocation from the refinery and already barred from participating in the OTS, KenolKobil’s operations are almost grounded.

Though the company has the option of importing its own refined petroleum products for sale, pursuing this option would mean even greater losses as it does not own enough storage space to take in the entire product that is normally imported under the OTS.

“It will not be economical for the company to make a private import as it will not be able to charter a big vessel so that it can enjoy economies of scale,” said a company insider.

It is understood that KenolKobil owns about 5,000 tonnes of storage space for diesel in Mombasa. Under the OTS, where marketers share the costs of importing fuel by having one or two importing on behalf of the entire industry, a vessel bringing in diesel would have an average capacity of 33,000 tonnes, which is shared out among the various marketers.

Last year, KenolKobil posted a net loss of Sh6 billion, which it blamed on a “tough” operating environment characterised by price regulation by ERC. The recent problems are a hint that the company may face tough times financially if the stalemate is not resolved quickly.

Beyond impacting negatively on its profitability, the woes facing the oil marketer put it in an awkward position even as it shops for a strategic investor to help it expand its business in the region.

Mid last year, the company announced that it had commenced a due diligence process that would culminate in a takeover by Switzerland-based Puma Energy in a transaction estimated to be worth Sh25 billion.

 The deal has since collapsed after opposition by the company’s employees. A section of the employees even went to court, seeking to have the company restrained from going ahead with the process until concerns on their employment were addressed.

Had the deal succeeded, Puma Energy would have acquired more than 75 per cent of KenolKobil’s stake, leading to its delisting from the Nairobi Securities Exchange.

Aside from the case involving its employees, KenolKobil’s image has also been tainted by a number of pending court cases that could have made Puma Energy rethink its interest in the company.

For instance, at about the time the takeover transaction was in progress, the company was ordered to pay Sh2 billion to the Kenya Pipeline Company, a decision which KenolKobil challenged in the Court of Appeal.

In another suit, the oil marketer was also facing off with rival Total over joint ownership of depots. The latter claimed the right to buy out KenolKobil before the takeover bid was concluded.

Although the company officials have chosen to remain silent on the progress made in the bid to have a strategic investor on board, recent developments point to a possible buyout by a local oil marketer. Sources familiar with the progress have told Smart Company that the company is in talks with one of the leading local oil marketers for a possible buyout.

Last week, the company’s board announced the retirement of Mr Jacob Segman as the group chief executive officer and appointed Mr David Ohana, who was KenolKobil’s general manager for Kenya, to replace him, a move that has been seen as being aimed at breathing new life into the company.

Until last March, when he was stripped of the position of board chairman, Mr Segman served in both capacities. He is said to be worth more than Sh200 million in shareholding of the company. Most of the court cases have occurred during his tenure as chief executive officer.

It remains to be seen the direction the company will take in the hands of Mr Ohana, who is also the chairman of the oil industry supply coordination committee, the umbrella body that is concerned with lobbying for better terms for industry players from the Ministry of Energy and Petroleum and the ERC.

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Exit of firm’s strongman a sign of things to come?

“I have reached a stage in my life, my family’s, and in my capacity as CEO of KenolKobil Ltd for the past 16 years, to realise that time has come to hand over to the younger generation of KenolKobil, retire, and have more time for myself and my family,”

This is a part of a farewell note by Mr Jacob Segman, former chief executive officer of KenolKobil, written on July 4, 2013, to the company’s staff.

Last week, the firm’s board announced that Mr Segman was proceeding on retirement and that Mr David Ohana, who was the company’s general manager for Kenya, had taken over the position.

Mr Ohana has been in the public eye because of his role as the chairman of the oil industry supply coordination committee, which at times works like an umbrella lobby group that pushes for a favourable operating environment for players in the oil industry. 

Mr Segman has served the company for 23 years, having joined KenolKobil on January 1, 1990, when it was known as Kenya Oil Company, and served as the chief executive officer for the past 16 years.

The company has grown to be a mid and downstream player in 10 countries across the region, holding more than 410 service stations in the countries it operates.

Most disappointing year

In his farewell note, Mr Segman notes that 2012 was the most disappointing year when, after much growth and financial strength, the company encountered challenges including financing costs, forex losses, and “restrictive” policies from the Government of Kenya.

But that is not all that Mr Segman could possibly call his lowest moment. Last year, during his tenure, the company posted a Sh6 billion loss after a long period of profit-making.

Last year, also during his tenure at the helm of the company, a major takeover deal estimated to be worth about Sh25 billion that could have seen Puma Energy take over more than 75 per cent of KenolKobil, failed due to opposition by the company’s employees.

At an investor briefing last year, Mr Segman had told investors and shareholders that it was important for the company to bring on board a strategic investor to inject financial muscle into KenolKobil to enable it to spread its reach in the region.

During his tenure, Mr Segman has seen KenolKobil take on other companies, some of which are believed to be part of the reason Puma Energy declined to proceed with the takeover bid.

For instance, at about the time the takeover transaction was in progress, the company was ordered to pay Sh2 billion to the Kenya Pipeline Company, a decision which KenolKobil challenged in the Court of Appeal.

In another suit, the oil marketer was also facing off with rival Total over joint ownership of depots and the latter had claimed possession of rights to buy out KenolKobil before the takeover bid was concluded.

As he exits, Mr Segman leaves KenolKobil caught up in a court battle with the Kenya Petroleum Refineries over a loss of Sh840 million that the company says it incurred due to failure by the refinery to allocate it products.

Mr Segman will also remember his exit from KenolKobil as being at a time when the company has locked horns with the Energy Ministry, which consequently suspended it from participating in the central oil procurement system, thereby forcing it to purchase fuel products from other marketers to beat a possible supply hitch.

Mr Segman’s retirement last week came just three months after he was stripped of the position of board chairman, a role he doubled up with that of chief executive.

Being a big shareholder worth more than Sh200 million, he will be retained in the company as a special adviser to the board of directors.

— Immaculate Karambu