Forte Oil Contends with High Financing Costs

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A major jump in financing costs led to a decline in the bottom-line of Forte Oil for the nine months ending September 30, 2016, writes Goddy Egene

The earnings season is here again when companies declare their corporate results. This time around quoted companies are turning their nine months performance to September 30, 2016. Given the fact the operating environment has been characterised by high inflation, forex exchange challenges, companies are expected to turn in poor results. However, some of the results that have been announced showed high level of resilience on the part of the companies. Some have recorded improved profitability.

Integrated energy firm, Forte Oil Plc is among the early filers of their nine months corporate performance.
Although the company recorded improvement in its topline, bottom-line was impacted by an unprecedented jump in cost of finance, a development that led to a decline of 34.7 per cent in profit after tax (PAT) in 2016.

Corporate background
Forte Oil Plc was incorporated on December 11, 1964 as British Petroleum Nigeria Limited. After 14 years in operation, the company changed its status from a private limited liability company to a public liability company. In 1977, 40% of the company’s shares were sold to Nigerians in compliance with the provisions of the Nigerian Enterprises Promotion Decree of 1977.

A year later 60 per cent was acquired by the Federal Government of Nigeria in favour of the Nigerian National Petroleum Corporation (NNPC). In November 1979 the name British Petroleum was changed to African Petroleum Plc. NNPC’s stake in AP was reduced by 20 per cent in March 1989 after the Federal Government sold the above percentage to Nigerian Citizens, increasing their stake from 40 per cent to 60 per cent. In the year 2000, the federal government under its privatisation programme divested its remaining 40 per cent to core investors and interested Nigerians.

In May 2007, the shareholding structure took a new shape as Incorporated Trustees of NNPC’s Pension Fund divested its stake to Zenon Petroleum & Gas Limited, making it the majority shareholder in the company. As a result, Zenon Petroleum & Gas Limited and his affiliated entities became the core investor in the company. Under the new management, African Petroleum embarked on a rebranding and restructuring programme which led to a name change to Forte Oil Plc in December, 2010.

Forte Oil Plc markets refined petroleum products for automobiles and machines. It operates various services including retail petroleum product marketing; industrial fuels & lubricants marketing, lubricant production and marketing; vendor managed inventory for industries; value added peddling; marine supplies; production chemicals, lubricants and greases among others.

An impressive beginning
Forte Oil raised investors’ hope of an improved full year performance when it recorded a growth of 31 per cent in profit before tax (PBT) for the half year ended June 30, 2016. Forte Oil had reported a revenue of N84.475 billion for the half year ended June 30, 2016, showing an increase of 38 per cent, from N61.168 billion in the corresponding period of 2015. Profit before tax (PBT) rose by 31 per cent from N3.255 billion to N4.250 billion in 2016.

The Group Chief Executive Officer of Forte Oil Plc, Mr. Akin Akinfemiwa, had attributed the impressive half-year performance of the company to aggressive sale drive, strategic retail acquisition, and prudent approach to cost containment.
According to him, revenue grew as a result of ongoing strategic retail acquisitions across the country, increase in pump price of premium motor spirit and increased commercial customer base for both fuels and lubricants.

He explained that 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.

“PBT rose 31 per cent to N4.25 billion in H1, 2016 compared to N2.53 billion in the same period in H1 2015 largely due to our prudent approach to cost containment. Forte Oil’s total assets increased by 12 per cent from N121.8 billion to N136 billion driven by over N10 billion paid so far for the major overhaul exercise at Forte Oil’s 414MW Geregu power plant aimed at optimising and increasing its generation capacity from 414MW to 435MW. This business segment of Forte Oil Plc remains our key growth driver,” he said.

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 ongoing 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.

“Also in the second half of 2016, we shall focus on increased supply of petroleum products imports as full deregulation kicks in and forex availability increases,” Akinfemiwa said.

High cost of finance stunts growth
While investors had expected that Forte Oil would maintain a steady growth for the nine months, considering its H1 results, the company last week recorded a decline of 34.7 per cent in PAT.
Although the company’s top lines showed growths, higher cost of finance and tax expenses compressed the bottom-line.

Forte Oil Plc recorded a gross revenue of N121.1 billion in 2016, showing an increase of 32.2 per cent from N91.6 billion in 2015. An analysis of the revenue showed that fuels accounted for N103 billion,, up from N76.2 billion in 2015. Lubricants and greases recorded N8.188 billion, compared with N5.161 billion in 2015, while power accounted for N7.931 billion as against N7.02 billion in 2015.
Cost of sale rose by 34.3 per cent from N78.6 billion to N105 billion, while profit before tax (PBT) stood at N15.5 billion, showing an increase of 19.4 per cent.

The company was able to keep operating expenses flat at N9.9 billion, against N10 billion in 2015. While other income fell by 13.9 per cent from N2.7 billion to N2.3 billion, net finance cost soared by 663 per cent to N2.2 billion. Consequently, the company ended the nine months with profit before tax (PBT) of N5.6 billion, from N5.3 billion in 2015.

However, tax expenses rose by 182.6 per cent from N1.0 billion to N2.8 billion, hence PAT fell to N2.8 billion, down from N4.3 billion.
A further analysis of the finance cost showed that while the company paid N3.506 billion on loans and overdraft, which was a 3.3 per cent, above the N3.396 billion in 2015, a drastic reduction in other interest income led to the higher cost of finance in 2016.

Total finance income in 2015 was N3.103 billion, it fell to N1.275 billion. In 2015, the higher finance income got a boost from N2.8 billion interest income on petroleum subsidy. However, in 2016, there was no such income and given the N3.509 billion interest on loans and overdraft, the PAT was neutralised.

At the end of September, Forte Oil Plc has loans and borrowings of N44.1 billion, compared to N27.7 billion in the corresponding period of 2015.
The borrowings comprise short term loans of N24 billion to finance letters of credit for petroleum products importation. There is also long term borrowing of N18 billion to fund the acquisition of Geregu Power Plant by Forte Oil through its subsidiary Amperion Power Distribution Company Limited. The high debt has increased Forte Oil’s net debt to equity has increased to 78.7 per cent, from 56.7 per cent.