Borrowing costs dampen Forte Oil’s profit

Nigerian downstream oil and gas firm Forte Oil plc has had full year 2014 profit dampened by huge borrowing costs, analysis of the company’s financial statement shows.

Forte Oil’s full year December 2014 results showed profit after tax (PAT) fell by 10.95 percent to N4.45 billion from N5 billion, the same period of the corresponding year (FY) 2013, while sales increased by 32.88 percent to N17.02 billion.

The sluggish growth at the bottomline was due to a 937.13 percent surge in finance costs to N2.13 billion in 2014 from N254.50 million the preceding year, while total borrowings in the balance sheet spiked by 65.57 percent to N41.03 billion.

Analysts say the huge debt in the capital structure of the firm costs exposes it to currency risk as the devaluation of the naira may spiral borrowing costs, hence denting the bottomline and affecting dividend paying abilities.

Firms operating in the downstream sector of Africa largest economy have so much debts in their capital structure due to delay in subsidy payment as most of them borrowed for the purported importation of petroleum products.

The value of presently outstanding subsidy payments was put at N300 billion, with the Federal Government committing to clear about half of this amount before the end of the year.

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Analysts say that hard times lie ahead for the downstream sector as bills of laden executed before the devaluation, the subsidy repayment will be based on the pre-devaluation exchange rate and only bills executed after the devaluation will be refunded using the devalued exchange rate.

Further analysis of Forte Oil’s financial statement showed cost of sales ratio was as high as 89.14 percent, leaving a low net profit margin of 2.61 percent, making the company susceptible to currency devaluation.

Direct costs attributable to projects were effectively managed as gross profit increased by 50.60 percent to N18.46 billion as against N12.26 billion last year, while gross profit margin remained flattish at 10 percent.

Operating expenses reduced by 5.25 percent to N11.72 billion compared with N12.37 billion the last year while operating expenses margin fell to 6.88 percent in 2014 as against 9.57 percent as at December 2014. Total assets were up by 33.02 percent to N139.24 billion in 2014 from N104.67 billion as of December 2014.

Current ratio, which measures the ability of a firm to meet short-term obligation reduced to 1x as 236.25 spikes in bank overdraft surges current liabilities.

Forte Oil’s operation of the 414MW Geregu plant, which was handed over to it in November 2013, is expected to be the main revenue driver of growth.

The speedy payment of subsidy money will boost the cash flow position of firms operating in the downstream and also enable them settle money owned to lenders.

Forte Oil’s return on average equity (ROAe) was 10.26 percent, while the return on average assets (ROAa) stood at 3.65 percent. The company’s share price closed at N220.40 on the floor of the exchange, while market capitalisation was N238.09 billion.

BALA AUGIE