Eterna Oil overcomes subsidy gloom as revenue grows

Eterna Oil plc, a downstream oil and gas company, has overcome the subsidy gloom that has been bedevilling its operations as 2013FY revenues grow.

For the year ended December 2013, the company grew revenue by 8.80 percent to N98.29 billion from N89.63 billion in 2012. The turnover growth surpassed expectation as the company was able to grow its top-line, according to Jubril Kareem, a research analyst with investment firm Meristem Securities.

“This is contrary to our expectation of a decline due to fallout from the subsidy payment delay,” said Kareem, in an e-mailed statement to BusinessDay, saying “the subsidy allegation issues seem to be easing as court proceedings continue.”

The company has been enmeshed in a subsidy allegation that rocked the industry in the last two years thereby leading to litigation. As a result of these allegations, subsidy payments were delayed and consequently, companies that collected loans from banks couldn’t service the debt due to shortage of cash flows.

Due to the aforementioned reasons, Eterna was unable to translate the impressive top-line performance to bottom-line growth as huge finance cost in its capital structure hurt profits.

Profit before tax (PBT) slid by 24.11 percent to N1.07 billion in FY2013, compared with N1.41 billion as of FY2012. Earnings per share (EPS) in the review period fell by 26.02 percent to 53k from 73k in 2012.

Further analysis by BusinessDay shows that costs of sales margin were as high as 97.06 percent in 2013, hence gross profits shrank by 4.0 percent to N2.88 billion in the review period from N3 billion in 2012.

“Eterna’s bottom-line took a hit from the increase in cost margin which can be associated with the unfavourable operating environment due to delay in subsidy payment and exposure to debt financing,” said Kareem.

To further show the weak position in profitability, net profit margin slid to 0.71 percent, from 1.05 percent in 2012, while gross margin slumped to 2.88 percent from 3 percent in 2012.

Return on Equity (ROaE) declined to 9.88 percent in 2013 from 14.78 percent in 2012, while Return on Assets (ROaA) jumped to 3.85 percent in 2013 as against 2.84 percent in 2012.

Total operating expenses were down by 6.50 percent y/y to N1.35 billion as against N1.44 billion in 2012.

Finance cost in the review period surged by 45.27 percent y/y to N744.03 billion from N512.15 billion in 2012, while debt to equity ratio stood at 45.50 percent.

The oil marketers borrowed money from banks at high interest rates to finance the acquisition of assets and expansion of their operations, which explains why they had huge finance cost in their capital structure, according to Emmanuel Usaga, controller, subsurface, Peak Petroleum, a downstream oil company.

“High interest rates which led to low earnings were one of the factors responsible for dwindling profits in 2012,” Usaga said, as “the oil marketers could not service their debts to the banks on failing subsidy reforms by government and this culminated into huge finance cost.”

Trade and other receivables dropped by 68.92 percent y/y to N7.92 billion in FY13, compared with N25.49 billion as of FY2103, which explains the rise in revenues.

Inventory as of December 2013, surged by 270 percent y/y to N3.27 billion as against 884.62 million as of FY12.

Eterna’s total assets slumped by 45.056 percent to N18.25 billion in 12M13, compared with N33.21 billion in 12M12.

The share price of the company has increased by 0.30 percent in the past one year to close at N3.80 on April 17, 2014, and market capitalisation was N4.95 billion on the same day.

It also has a price-to-book ratio of 0.77x and a price-to-sales ratio of 0.055x, which is lower than peer rival company Mobil Oil, with a price-to-book and price-to-sales ratio of 6.67x and 0.55x, respectively.

Analysts say that the company has a positive outlook given that Eterna is gradually exiting some of the court cases besetting operational performance.

“We expect a significant increase in earnings for the current year as the company shifts its focus from managing the subsidy allegation to better operational efficiency,” said Kareem.

BALA AUGIE