Daunting Times for Quoted Oil Firms

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Goddy Egene writes that low oil prices, security risks, huge receivables from government and rising inflation have combined to make it difficult for Nigeria’s quoted oil companies to deliver the usual mouthwatering results

The current economic challenges is biting hard on all operators in the economy. However, one sector that is suffering seriously is the oil and gas. Before now, the sector was the darling of all, the government, investors and other stakeholders. For many years, the sector has been the mainstay of the Nigerian economy, providing the over 80 per cent federal government’s revenue.

But the situation is changing very fast following the decline in oil prices at the international market. Against this development, the government has intensified efforts to diversify the economy and look beyond oil as the major source of revenue. Oil companies have also been hit hard.

Their revenues are not only falling but the situation is worsened by the foreign exchange crisis that has made importation of products by marketing firms, a tough business.
Recently, PricewaterhouseCoopers (PwC), a global professional services provider, in a report highlighted some of the challenges facing oil and gas industry in Africa.

PwC’s Africa Oil and Gas Advisory Leader, Chris Bredenhann, said: “The complexities and challenges facing Africa’s oil and gas industry have become daunting. As uncertain regulatory frameworks, taxation requirements and corruption continue to rank at the top of industry’s challenges in Africa, it is also high time that governments made significant changes.”

According to him, oil companies identified the price of oil and natural gas as the most significant factor that would affect their businesses over the next three years. Respondents to the PwC survey expect oil prices to reach $52 by the end of 2016, $60 by the end of 2017, and $69 by the end of 2018.
“As a result of these developments, investor confidence remains low, although there has been some recovery in oil prices in the international market. PwC said oil market fundamentals are still down and a significant recovery does not seem to be on the horizon. This has led operators to defer FIDs (final investment decisions) on over $300 billion of projects. Globally, mergers & acquisitions (M&A) activity has also dipped and it is expected that this trend will continue,” PWC said.

Expectedly, oil and gas companies listed on the Nigerian Stock Exchange (NSE) have been impacted negatively by these challenges. Forte Oil Plc, Mobil Oil Nigeria Plc, MRS Oil Nigeria Plc, Oando Plc, Seplat Petroleum Development Company Plc and Total Nigeria Plc are the major oil firms listed on the NSE. A review of their financial performances showed a volatile trend, reflecting the economic headwinds. However, the two firms that have major stakes in the upstream sector of the industry, Oando Plc and Seplat are worst hit.

Oando Plc

Oando Plc is regarded as the leading indigenous integrated energy company and having its shares listed on the NSE and Johannesburg Securities Exchange (JSE).
The company, which recorded a revenue of N650 billion in 2012, experienced a decline in 2013 to N449 billion, and further down to N92.9 billion in 2014. However, revenue improved to N161 billion in 2015. Bottom-line followed similar trend, with profit of N10.7 billion in 2012. It fell to N1.0 billion in 2013 before slipping into loss of N145 billion in 2014. The loss was reduced to N49.6 billion in 2015. One of the major factors that affected Oando Plc’s performance was its huge borrowings used to finance its expansion drive and importation of petroleum products. While the expansion was well intended, the challenging economic situation domestically and internationally affected its plans. As result, the cost of those funds maintained an upward trend. For instance, finance cost that stood at N10.2 billion in 2012, rose to N15 billion in 2013, N36.5 billion in 2014 and N47.5 billion in 2015.
Although the company is making efforts to reverse the negative bottom-line, that efforts are expected to yield the desired results at the end of the current financial year.

The company had ended the period to June 30, 2015 with a loss. But the Group Chief Executive of Oando Plc, Mr. Wale Tinubu assured stakeholders that the resolve to return to profitability at the end of 2016 remains intact.
Oando Plc reported a revenue of N212 billion for the H1 2016, showing an increase of 18 per cent above N180 billion recorded in the corresponding period of 2015. Gross profit decreased by 49 per cent from N37.1 billion in 2015 to N19 billion in 2016. However, the company recorded one-off unrealised foreign exchange loss of N28.6 billion from dollar denominated liabilities as a result of currency devaluation. Consequently, it ended the H1 with a loss after tax of N27 billion in 2016, as against a loss of N35 billion in H1 of 2015.

Commenting H1 results, Group Chief Executive, Oando Plc, Mr. Wale Tinubu, said: “The first half of the year has revealed how challenging the oil & gas environment is in Nigeria, having experienced a 25 per cent decline in production volumes arising from the increased disruptions from militant activities, we however benefit from the implementation of the oil price hedge, which has helped to calm the effects of the disruption of production activities.” According to him, now that the dollar liquidity position in the country has improved, “we have converted 60 per cent of our dollar denominated obligations to naira, while restructuring our debt through the N108 Billion medium term note, thus managing any future currency volatility. We reiterate our forward looking business model of a focused upstream and export trading businesses, which will drive profitability through consistent dollar earnings.”

He noted that as part of plans to return the company to profitability by year-end 2016, Oando is in the concluding phase of its five-pronged strategic group initiatives, 67 per cent of its non-producing asset disposals and 50 per cent of refinancing target have been concluded.
The company successfully restructured its debt through a N108 billion Medium Term Note with lower capital costs circa 15 per cent and a renewed five year tenor in the first quarter of 2016 as well as the full divestment of its upstream services business, reducing the group’s debt profile by 32 per cent.

Seplat Petroleum Development Company
Just like Oando Plc, Seplat, which is an independent indigenous Nigerian upstream exploration and production firm, suffered a loss at the end H1 of 2016. The company was listed on the NSE and London Stock Exchange (LSE) in 2014. The first year of its listing, Seplat posted a revenue of $775 million, which fell to $570 million in 2015. Profit before tax (PBT) fell from $252 million in 2014 to $87 million in 2015, while profit after tax fell from $52 million to $65 million. The company recorded huge finance costs, which rose from $49 million in 2014 to $83 million in 2015.
In H1 2016, Seplat recorded a revenue of $143 million, which is lower than $243 million in the corresponding period of 2015. The company ended the period with a colossal loss of $63 million, as against a profit of $34 million in 2015.

Speaking on the H1 results, the Chief Executive Officer of Seplat, Mr. Austin Avuru said: “The shut-in and suspension of oil exports at the Forcados terminal since mid-February means we have faced significant challenges in the first half of the year. However, our underlying fundamentals remain strong and we continue to invest to grow our gas business at a rapid rate.”

He explained that the first half results have been heavily impacted by events outside of the company’s control at third party operated infrastructure.

“We expect the second half to see a resumption of exports via the Forcados terminal and concurrently a regular offtake schedule established via the Warri refinery jetty, which in turn will also help ensure gas sales into the domestic market are deconstrained. Meanwhile, Phase II expansion of the Oben gas processing plant remains on track and is set to increase our gross processing capacity from the current 300MMscfd to a minimum of 525MMscfd by year end. Although 2016 to date has proven challenging, we remain committed to our long-term strategy of maximising production and cash flows from our operated blocks,” he added.

Forte Oil Plc

Forte Oil Plc has performed relatively better over the years due to its less exposure to the upstream sector, and recent diversification into power generation.
Revenue that was N90.1 billion in 2012, improved to N128 billion in 2013. It rose further to N170 billion in 2014 but fell to N124 billion in 2015. The company attributed the 27 per cent decline in 2015 to reduction in pump price for most petroleum products largely driven by the incessant decline in crude oil prices. In addition, the company also decided to manage its foreign exchange and subsidy exposure by reducing the importation of petroleum products for the year 2015.

PBT that was N1.2 billion in 2012 jumped to N6.5 billion in 2013, stabled at N6 billion in 2014 before improving to N7.0 billion in 2015. In same trend, PAT rose from N1 billion in 2012 to N5 billion in 2013, declined to N4.4 billion in 2014 before rising to N5.7 billion in 2015.

Finance cost took significant toll on the bottom-line of Forte Oil Plc during the review period. It paid N1.721 billion as finance cost in 2012, which fell to N254 million. However, it jumped to N2.1 billion in 2014 and N1.67 billion in 2015.

Speaking on the performance of the company for 2015, Group Chief Executive Officer, Mr. Akin Akinfemiwa, said; “This result in a testing economic climate which we operate, is the reward from the investments made by the company in its core business and its people. It also clearly demonstrates the resilience of our business. Furthermore, our vision to diversify into power generation has proven to be very successful not just in the near term but in the long term and we see tremendous growth opportunities in that space.”

The company started 2016 on positive note, posting a revenue of N84 billion for the H1 of 2016, up from N79 billion in the corresponding period of 2015. However, PAT fell from N2.5 billion to N2.2 billion, driven by higher income tax payment.
Akinfemiwa said gross margins increased by 48 per cent to N12.3 billion, from N8.32 billion largely due to aggressive drive and focus on higher margin products, efficient product sourcing and sales through profitable channels.

He explained that the power business contributed five per cent to revenue of the group and 15 per cent to PBT as a result of low generation due to on-going overhaul project and gas supply constraints due to the security challenges in the Niger delta region.

Looking ahead, the Forte Oil boss said the company would focus on high margin products, fully exploit LPG business particularly, LPG retailing, bottle refilling, optimize and expand Geregu Power Plant Asset, diversify into upstream space through profitable acquisition of upstream assets and uptmising working capital structure.

MRS Oil Nigeria Plc

A look at MRS Oil Nigeria Plc showed that revenue was N79.7 billion in 2012. It improved to N87.7 billion in 2013 and N92 billion in 2014. The revenue fell to N87 billion in 2015. PBT was N378 million in 2012, jumped to N1.407 billion in 2013, fell to N1.28 billion in 2014 before rising to N1.46 billion in 2015. Like the trend in the industry, MRS Oil Nigeria Plc expended significant amount on finance cost as the companies have to source for funds to import products.

It spent N1.35 billion as finance cost in 2012, N785 million in 2013, N1.428 billion in 2014 and N1.88 billion in 2015. Despite the challenging operating environment, the company has raised investors’ hope for a better performance in the current year having begun the year with improved results in H1. Its revenue stood at N53.8 billion 2016, up from N36.9 billion in the corresponding period in 2015. PBT rose from N64 million to N1.53 billion, while PAT jumped to N909 million, from N37.5 million in 2015.

Indications for the improved H1 performance first came in the first quarter (Q1) ended March 31, 2016 when it posted a profit of N363 million, compared with loss of N919 million in 2015.
Assessing the Q1 results, analysts at ARM Research, said the Q1 16 PBT and PAT beat their expectations of N163 million and N101 million, respectively, with deviation primarily due to higher than expected product sales, strong other operating income and benign finance charges.

“Q1 16 sales rose 17.5 per cent to N25 billion—9 per cent ahead of our estimate—on the back of strong premium motor spirit (PMS) sales of N21 billion (+25 per cent) which offset decline in Automotive Gas Oil Lubricants (AGO)-6 per cent) and Aviation Turbine Kerosene ATK (-38 per cent ). The upswing in PMS receipts reflects solid volume growth of 242 million litres (+26 per cent) and, perhaps, affirms our view that major marketers were less impacted by petroleum products shortage experienced in the latter part of period. In particular, despite forex shortage, MRS’ import finance facilities remained elevated at N15 billion (FY 15: N16 billion) suggesting the company utilised most of its 30,000 metric tonnes Q1 16 PMS allocation,” they said.

However, they said MRS Oil’s operational efficiency remained below industry average, noting that core operating profit of N240 million (-4 per cent YoY) which is in line with our estimates, implies related margin of 1.0 per cent, 250bps below industry average.

The analysts noted that despite the stronger than expected Q1 16, they remained cautious on MRS Oil’s outlook.
“Our cautious stance is hinged on somewhat blurred industry outlook, but more pertinently, MRS Oil’s volatile and below peer operational efficiency. On the industry, the abolition of fixed retail pricing for PMS for price modulation—which allows quarterly adjustment of PMS prices in line with changes in input costs—has not gone as planned as petrol prices remain fixed despite the rebound in oil prices,” they said.

Mobil Oil Nigeria Plc

Mobil Oil Nigeria, which plays majorly in the downstream sector of the industry, posted a revenue of N81 billion in 2012. However, it has witnessed a decline in revenue in 2013, falling to N78 billion. It ended 2014 with a revenue of N79 billion in 2014 and N64 billion in 2015.
PBT that was N4.1 billion in 2012, improved to N5.1 billion in 2013, N8.4 billion in 2014 and fell to N6.9 billion in 2015, while PAT rose from N2.9 billion in 2012 to N3.5 billion in 2013, N6.3 billion in 2014 but declined to N4.8 billion in 2015.

Although the company recorded a decline in 2015, its performance for H1 2016 has shown some improvement, beating analysts’ estimates.
For instance, analysts at ARM Research said the Q2 16 result where earnings of N2.6bn (+81.1 per cent) came in ahead of their estimates of N1.6bn. According to them, strong earnings reflect sharp recovery (+80 per cent) in revenue to N27 billion which beat their estimate by 31.8 per cent and knocked-off the negative surprise in input cost and the opex line (31 per cent and six per cent ahead of their estimate).

“We believe strong sales reflect the May 2016 hike in PMS prices (+67.6 per cent to N145) as well as robust volumes growth. On the latter, Mobil benefited from the inability of the smaller independent marketers to keep outlets wet due to forex shortage. Unlike the smaller marketers, Mobil, like other majors marketers, is able to access forex via a special window at (N285/$1) and thus enjoyed ample product supply over the period,” they said.

The analysts said the going forward, despite performance exceeding they expectation, they remain conservative on Mobil profitability in FY 16E relative to its strong H1 16. “Consequently, we retain our earnings expectation of N18.75 per share (+38.1 per cent). Gross, EBIT and PBT margin are forecast to expand to 17.8 per cent (+70bps), 12.3 per cent (+140bps) and 12.3 per cent (+154bps ),” they said.

Total Nigeria Plc

The performance of Total Nigeria Plc has followed industry trend in the review years. Revenue was N217 billion in 2012, improved to N238 billion in 2013, and N241 billion. But fell to N208 billion in 2015. PBT that stood at N7.1 billion in 2012, improved to N8.1 billion in 2013. Fell to N6.8 billion in 2014 and further down to N6.5 billion in 2015. PAT trended in a similar pattern, beginning with N4.7 billion in 2012, rose to N5.3 billion in 2013 but fell to N4.0 billion in 2015. Finance cost was N1.57 billion in 2012, N1.98 billion in 2013, N2.6 billion in 2014 and N1.79 billion in 2015.

For H1 2016, Total Nigeria posted revenue of N145 billion, up from N112 billon in 2015. PAT jumped to N8.9 billion, from N2.4 billion in the corresponding period of 2015.
Commenting on the Q2 performance, FBN Quest said access to forex for imports and an inventory load-up of relatively cheap stock were the primary drivers.

According to them, in Q2, while sales grew 65 per cent y/y, PBT and PAT were both up 169 per cent and 211 per cent.
“Sales from service stations (retail), which accounted for around 70 per cent of the group’s topline, were up by 69 per cent to N60.3 billion. Additionally, sales for the Aviation and General Trade segments were also up 90 per cent and 36 per cent respectively to N11.7 billion and N13.6 billion respectively. A gross margin expansion of 445bp to 16.3 per cent and a 75 per cent y/y reduction in net finance charges led to the PBT growth of 302 per cent. Sequentially, sales, PBT and PAT were all up 44 per cent, 137 per cent and 116 per cent respectively. Compared with our estimates, while sales beat by 69 per cent, PBT was ahead significantly,” FBN Quest said.

Conoil Plc
Unlike other oil firms, Conoil Plc is yet to report its 2015 financial performance. However, a look at the financial results of the company showed that it recorded a revenue of N149 billion in 2012, which fell to N159billion in 2013. The revenue fell further to N128 billion in 2012.
Profit before tax rose from N1.148 billion in 2012 to N4.575 billion in 2013 but dipped to N1.532 billion in 2014. Profit after tax followed same trend. It improved from N715 million in 2012 to N3.1 billion in 2013 but fell to N834 million in 2014.

The last results filed by Conoil Plc was for the nine months ended September 30, 2015. The results showed a decline of 42 per cent revenue to N60 billion, from N104 billion in the corresponding period of 2014. PBT and PAT declined by 16 per cent from N2.098 billion to N1.76 billion and N1.427 billion to N1.196 billion in 2014 to 2015 respectively.

The company explained that its performance was impacted by unprecedented challenges arising from unpaid government debts, tight credit conditions and weak naira among several other issues.
“We returned a good performance notwithstanding the difficult operating environment due primarily to the efficient product procurement process put in place in the second half of the year. This efficiency translated to high profit margin on product sales. The profit for the period would have been much better save for the high finance cost, consequent upon the long outstanding large receivable from the Petroleum Support Fund,” Conoil said