Forte Oil Contends with High Financing Cost

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With N4.3bn spent on financing cost in 2016, Forte Oil urgently needs a fresh dose of equity capital injection, writes Goddy Egene

 Forte Oil Plc last week announced its financial results for the year ended December 31, 2016, making it an early filer of audited results. The results reflected the challenging operating environment laced with shortage of foreign exchange (forex), devalued naira, and high inflation.  Although stakeholders in the capital market expect the above factors to impact the bottom-line of many companies, they may be in for many disappointments. Already the shareholders of Forte Oil Plc have seen the first shocker as the company did not declare any dividend due to the decline of 50 per cent in profit after tax (PAT).  One thing the results of the company has reflected is the need for shareholders to urgently inject equity funding so as  to reduce the high financing cost that  has eaten  deep into the company’s bottom-line.

 

Corporate history

Incorporated on December 11, 1964 as British Petroleum Nigeria Limited, Forte Oil, changed its status from a private limited liability company to a public liability company 14 years in operation. In 1977, 40 per cent 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.

 

Way to low bottom-line

The low bottom-line posted by Forte Oil for the 2016 full year was seen coming when the company reported its nine months ended September 30, 2016.  Ironically, the company had raised investors’ hopes for positive performance   for the year when it posted a growth of 31 per cent in profit before tax (PBT) for the half year to June 30, 2016.

However, while stakeholders had expected that Forte Oil would maintain a steady growth for the nine months, its bottom-line fell by 34.7 per cent in PAT for that period.

Although the company’s top lines showed growths, higher cost of finance and tax expenses compressed the bottom-line.

Forte Oil Plc recorded 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 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.

The company had posted a growth of 31 per cent in PBT for the half year (HI) ended June 30, 2016. Explaining the HI performance Group Chief Executive Officer (GCEO) of Forte Oil, Mr. Akin Akinfemiwa, had attributed it to aggressive sale drive, strategic retail acquisition, and prudent approach to cost containment.

According to him, HI 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 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 had said the company would focus on high margin products, fully exploit LPG business particularly, LPG retailing, bottle refilling, optimise 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.

Full year results

Contrary to the optimism and enthusiasm exhibited by the GCEO, the 2016 full year performance came in below expectations. Forte Oil Plc posted a  revenue of N148.6 billion, up by 19.3 per cent from N124.6 billion in 2015. However, profit before tax fell by 24 per cent to N5.3 billion, from N7.0 billion, while profit after tax declined by 50 per cent to N2.9 billion, compared with N5.8 billion recorded in 2015.

An analysis of the results showed that cost of sale rose by 20.5 per cent from N106 billion in 2015 to N128 billion in 2016, while operating expenses declined by 2.9 per cent to N13.3 billion compared with N13.7  billion in 2015. Other income fell by 42 per cent from N4.1 billion to N2.3 billion. But net finance cost soared by 154.9 per cent from N1.7 billion to N4.3 billion, a development that affected the bottom-line.

Gross profit margin reduced from 14.7 per cent in 2015 to 13.9 per cent in 2016.Net margin weakened from 4.7 per cent to 1.9 per cent. However, debt to equity ratio rose from 82.1 per cent in 2015 to 114.1 per cent in 2016, indicating that Forte Oil tilting more to debt financing than equity funding. Total borrowing of the company stood at N49.4 billion in 2016, up from N38 billion in 2015.

Forte Oil Plc had last year raised N9 billion bond under its  N50 billion bond issuance programme, to refinance existing short term commercial bank loan obligations and to finance  its  retail outlet expansion.

The Group Chief Executive Officer, Forte Oil, Mr. Akin Akinfemiwa  had said: “With the raising of this initial capital which has been fully underwritten shows the confidence the investing public has in Forte Oil Plc as an investment of choice. This bond programme being the first in the downstream sector, is testament to Forte’s position within the downstream sector and allows the company to actualise the vision of the Board to continue to provide value to its shareholders regardless of the economic climate.”

Similarly, the   Group Executive Director, Finance and Risk Management, Forte  Mr. Julius Omodayo-Owotuga  said: “This series provides us with the necessary liquidity to actualize our growth strategies and positions the company for the years ahead. The pricing of this debt instrument demonstrates the markets’ belief in us and the pricing would help reduce our borrowing cost and increase profitability in the short and long term.”