Dangote Refinery Reveals Why Falling Crude Prices May Not Hurt Its Profits

• Dangote Refinery has assured prospective investors that a possible decline in crude oil prices after the US-Iran conflict will not directly determine its profitability, saying its earnings are driven mainly by refining margins.

The Dangote Petroleum Refinery has assured prospective investors that a possible decline in crude oil prices after the end of the ongoing US-Iran conflict will not directly affect the refinery’s profitability.

Vice President of Dangote Industries Limited, Devakumar Edwin, gave the assurance on Friday during a media tour and briefing at the refinery amid concerns about the potential impact of falling crude prices on the returns investors may receive from the company’s ongoing initial public offering.

According to Edwin, the refinery’s profitability is driven primarily 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,” Edwin explained.

He said the same principle applied to the refinery’s operations, noting that changes in crude prices would generally be reflected in the prices of refined petroleum products.

“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 US-Iran conflict and its eventual resolution on global crude prices, as well as what that could mean for the refinery’s profitability and returns to shareholders.

War May Temporarily Boost Refinery Margins

The Dangote executive, however, said the ongoing geopolitical crisis could temporarily increase the refinery’s profitability because of disruptions to the global supply of refined petroleum products.

He explained that some refineries had been unable to operate at full capacity because of difficulties obtaining crude, while refineries in the Middle East had also been unable to supply their usual volumes of petroleum products to international markets.

“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,” Edwin said.

He added that disruptions to supplies from the Middle East could create additional margins for refiners during the period.

“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,” he stated.

However, Edwin acknowledged that the additional margins created by 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.

Dangote Promises Dollar Dividends

Edwin also told prospective investors that dividends from the refinery were expected to be paid in foreign exchange, citing a commitment made by Dangote Industries President, Aliko Dangote.

Responding to concerns about the refinery’s current N525 share price and whether its value could decline after listing, Edwin said the company expected shareholders to benefit from both dividends and potential changes in share value.

“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 generate the foreign exchange required to support the proposed dividend payments.

Edwin said about half of the refinery’s current production was already being exported, while the planned expansion would significantly increase the volume available for export.

“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,” he added.

Why Dangote Is Taking the Refinery Public

The assurances came as the Dangote Group seeks to attract millions of Nigerians as shareholders through the refinery’s ongoing IPO.

Edwin said the company deliberately chose to offer shares after the refinery had been completed, commissioned and operated, rather than raising equity while the project was still under construction.

According to him, the approach means prospective shareholders are investing in an operating business with an established financial record.

“So what we are achieving is that none of the shareholders is taking any risk,” he said.

However, Edwin also urged individuals considering the IPO to conduct their own assessment before committing their money.

He noted that the company had already released its first six months of operational results, which investors could examine when evaluating the offer.

“But you, as an individual, when you are putting your money, you can always do your own evaluation,” he stated.

Refinery Expansion to Take Three Years

Edwin also disclosed that the ongoing expansion of the Dangote refinery was expected to be completed within three years, although he said the project could be delivered earlier.

He explained that the cost of the expansion was expected to be slightly lower than the original refinery project because several major infrastructure facilities were already available.

These include the granite quarry, welding gases plant and port facilities, which would not need to be constructed from scratch.

The company is also seeking to reduce engineering and design costs because much of the expansion would replicate infrastructure and processes already established at the existing refinery.

“But at the same time, we are also adding petrochemical sites, we are adding linear alkyl benzene, and we are adding 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,” Edwin stated.

He said the necessary licences had been obtained, basic engineering had been completed and almost all detailed engineering work had been concluded.

According to Edwin, most of the equipment required for the expansion had already been ordered, with contracts signed and advance payments made.

“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.

Refinery Explains Blending Strategy

Edwin also explained the refinery’s approach to blending intermediate petroleum products.

He said the facility could blend intermediate products when spare processing capacity was available, but would generally prefer to process crude directly when doing so offered better margins.

Using naphtha as an example, he said the refinery could convert the product into gasoline by using available capacity in some of its processing 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 exclusively for blending would not make commercial sense if the refinery could produce the same 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 blending would be used where the refinery had spare capacity that could make the process 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.

Dangote Targets 10 Million Shareholders

Edwin said another reason for taking the refinery to the public market was the Dangote Group’s desire to spread ownership of the business among Nigerians.

The company, he said, had set a target of attracting at least 10 million shareholders, which he described as an unprecedented level of participation in the stock market.

“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 had been set at N5,250 to make participation accessible to Nigerians across different income levels.

Edwin also disclosed that employees of the Dangote refinery were given the 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.

The comments come as prospective investors assess the Dangote Refinery IPO, with the company highlighting its refining margins, export capacity, planned expansion and proposed dividend structure as part of its investment case. Investors, however, are expected to assess the company’s financial results, risks and offer documents before making investment decisions.