IF YOU ASK ME-COVID-19 IS RIGHT TIME TO INVEST IN LONG-TERM
A major business transaction in Uganda’s oil industry was recently announced but it did not create the attention we usually see in both legacy media and on social media.
Perhaps the world has been pre-occupied with Covid-19 and some supplementary budgets. To bring you up to speed, Total E&P announced that it had bought out Tullow Oil PLC’s assets for $575m and Uganda is to earn $14.6m in taxes—a significant drop from $167m Uganda was to earn less than a year ago.
Tullow Oil is said to have previously argued that it had invested $617 million in its Ugandan assets, which is 33.33% of oil wells in the Lake Albert Development Project Area.
The proceeds from the sale, Tullow Oil said, was to “reduce its net debt, strengthen the balance sheet, and move the oil company towards a more conservative capital structure.”
Total E&P made the deal when the price of oil is in negatives. Typically, oil producers have to pay their customers to take the oil. It is that bad because the lockdown in many countries across the globe has led to low demand for oil products. Total E&P’s decision to buy at this time is smart.
A significant price drop means that oil assets that were being sold at crazy rates a year ago are now available at far less than they are worth. If it is indeed that Tullow had invested $617m and agreed to sell at a price which is less that they invested, it means that they lost $42m even though the deal allows them “potential contingent payments after first oil.”
Was Tullow desperate to sell? Or they made the best decision because if they hold on, they may get less than what they got today?
If you listen to economists and some finance people these days, they are arguing that this is not the right time to start businesses. That there is no need to invest in capital assets.
They argue that you should keep your money because we don’t know how long Covid-19 will be around and how the economy will react thereafter.
Of course, it would be suicidal to simply invest all your money in capital assets when it is all gloomy. You need to have some money to help pay for certain needs such as housing, food, and medical expenses for at least one year. After that, you should invest because if we are to learn anything from Total E&P’s decision to buy Tullow’s assets in Uganda is that this the right time to buy.
Warren Buffet, the legendary stock market investor, once advised that never buy when everyone is hungry. Once people are not hungry, pounce. Right now, most people are not hungry for capital assets, making the right time ever to buy. You only need to be in it for the long haul.
As businesses go under, there will be many on sale for a song for many reasons, including failure to meet their loan obligations. There are going to be many foreclosures as people cannot pay their mortgages. They will want to cash in.
Bank loans are going to be hard to get. I believe it is difficult already to get a bank loan today as every projection shows an economy that is not going to recover for some time.
Banks are naturally risk-averse; so, they will only lend money when the numbers look good. For people to survive, they will sell off some assets since they will not be able to get loans to stay afloat.
Because the economy will be struggling, there will not be many buyers. This is what they call a buyer’s market where the seller does not fully determine the price of the goods and assets he is selling.
A buyer’s market is the best time to buy. Many goods and assets with few buyers creating an opportunity for those with some cash reserves. If you want to further understand this, look at the price of a tray of eggs today—from Shs 12,000 four months ago to Shs 3,500 in some parts of Kampala. And just to remind you, there is not going to be a stimulus package from the government.
If you are to take advantage of this buyer’s market, be ready to hold for the long term. As the economy recovers, the assets cheaply available today will attract premium rates.
Take for example real estate; the prices are going to significantly drop but, in a few years, they will attract very good prices when you sell.