Conoil Plc: Records contraction in profit despite reduced costs

Conoil is one of the most formidable names in Nigeria’s downstream petroleum industry. The company is engaged in the marketing of refined petroleum products and also in the manufacturing and marketing of high-quality lubricants and chemicals for domestic and industrial use. The company is reputed for its unwavering commitment to excellent products and service delivery for maximal customer satisfaction.

As the first and largest indigenous oil marketing company in Nigeria, Conoil have over the years gained a unique understanding of research and quality control, which they continuously apply in all their businesses in order to offer the best propositions to customers. Conoil has also developed innovative means of manufacturing and distributing its products through our wide network of outlets.

The company invests it’s financial and technical resources in the development of high-performance products and in the provision of services that match or even surpass international standards, paying strict attention to the finest details of health, safety and environmental best practices.

REDUCTION IN INPUT COSTS AS SALES SHRINKS

For the nine months through September 2014, the company’s revenue reduced  by 14 percent to N104.22 billion from N121.80 billion the same period of the corresponding year (Q3) 2013. The slow growth  at the top line level could be attributed to a slight drop in sales of the company’s lubricants and specialized segment products that have been offering crucial support for industrial growth.

However, cost of sales reduced by 14.73 percent to N93.42 billion in the review period from N109.57 billion the preceding year. It should be noted that firms operating in the downstream oil and gas sector usually have high cost margins and low profit margins because of their inability control  cost of production and fixing selling price;  selling price are usually fixed by the government who pay oil marketers money for the importation of refined crude. Gross profits were down by 11.70 percent to N10.79 billion from N12.22 billion the preceding year signifying the company’s inability to control direct costs attributable to projects

DROP IN PROFIT DESPITE REDUCED OPERATING AND FINANCE COSTS

The company’s distribution and administrative expenses in the review period was reduced slightly by 3.17 percent to N7.33 billion as against N7.57 billion the preceding year. It should be noted that the company’s expenses may spike in subsequent years  due to its expansion in retail network across the length and breadth of the country with a view to ensuring that its products reaches a spectrum of customers across the  country.

Despite the slight reduction operating expenses in the review period, profit before tax  (PBT) reduced by 32 percent to N1.42 billion in the period under review from N3.08 billion the preceding year.Similarly, profit after tax (PAT) fell by 32 percent to N1.42 billion compared with N2.08 billion despite a 32.60 percent in income tax expense.

Finance costs reduced by 9.52 percent to N1.52 billion in the review period from N1.68 billion as a result of partial settlement of subsidy payments.

Firms in the oil and gas downstream sector have huge debt in their portfolio, as they borrow money from banks to finance the importation of refined crude into the country. The delayed payment of subsidy arrears made it practically impossible for the oil marketers to settle banks thus leading to copious debts in their capital structure.

MODERATE GROWTH IN BALANCE SHEET AS DEBT MODERATES

Conoil’s total assets were up by slightly by 1.22 percent to N94.48 billion as against N82.37 billion the preceding year despite a 63.63 percent increase in trade and other receivable to N62.46 billion from N38.17 billion the preceding year. Although we are yet to receive any explanation from management of the company on the spiraling receivables, we will advice management to tighten its debt collection policy so as to expedite prompt payment from customers; by so doing, the company will boost sales and profitability.

The company was able to reduce the proportion of debts in its capital structure as debt to equity ratio reduced to 61.80 percent in the review period from 65.57 percent while total borrowing in the balance sheet fell by 12.69 percent to N10.32 billion compared with N11.82 billion the same period of the corresponding year (Q3) 2013.

Current ratio, which measures the ability of a firm to meet its shot term obligation as at when due reduced to 1.16x in 2014 from 1.20x the preceding year though these figures are lower than the 2.1x industry average. Fixed assets was 110.31 times in the current year, lower than 147.86 times recorded last year which means the firm’s ability in utilizing assets in generating sales and then profits has reduced.

As a result of the drop in profitability, the company’s return on equity (ROE) reduced to 8.83 percent in the period under review compared with 11.55 percent the preceding year while the return on assets (ROA) was fell to 1.50 percent from 2.52 percent last year. Furthermore, total equity dipped by 10.81 percent to N16.08 billion compared with N18.03 billion the in 2013 caused by a 9.74 percent drop in retained earnings to N12.51 billion as against N13.86 billion.

CONSISTENTLY REWARDING OWNERS OF THE BUSINESS

Conoil has been giving returns to shareholders in form of steady dividend payment. It is generally accepted that a firm that consistently pays dividend will attract a cornucopia of investors.  Furthermore, investors and shareholders will perceive Conoil as being financially string because of its dividend payment abilities.

In spite of the harsh operating environment witnessed by the downstream petroleum sector, Conoil paid declared a dividend of N4.00, translating to N2.78 billion cash payment for 2013 financial year. With its stellar reputation of giving returns to the owners of the business analysts anticipates bumper dividend in the 2014 year end.

CHALLENGES FACING PETROLEUM PRODUCT MARKETERS

Petroleum product markers in Africa largest economy Nigeria are facing operating challenges emanating from the harsh and unpredictable business environment they operate in. Precipitous policies by government like the hike in interest rate makes cost of borrowing from banks  very high and thus spiraling interest expense in the balance sheet of these firms.  The Central Bank of Nigeria (CBN), the banker’s bank lifted the benchmark rate by 100 basis points to a record high of 13 percent while cash reserve requirement on private sector deposits by 500 basis points to 20 percent.

The devaluation of the country’s currency may see downstream oil and gas firm have their dollar denominated debt swell. As mentioned earlier, these firms borrow money from banks to finance the importation of refined products. The CBN also moved the naira’s official peg to a midpoint of 168 per dollar, from 155, and widened its trading band to 5 percent either side from a previous 3 percent.

This policy the Apex said will protect the foreign reserve as revenue from oil continues to dwindle due to increase crude production from the United States.

Incessant pipeline vandalism and ruptured pipelines, as also been identified as one of the impediments to the growth of downstream oil and gas sector. This insecurity of pipelines disrupts the transportation of crude to existing refineries because of pipeline vandalism. The limited number of trucks for product haulage and the bad road network leaves most marketers with no choice than to use the same truck to convey products that are insupportable, such as Premium Motor Spirit and Dual Purpose Kerosene

According to the Nigerian National Petroleum Corporation, NNPC, the country is losing about 150,000 barrels of crude oil per day each time the pipelines connecting the country’s oil export terminals were shut down as a result of vandalism. This means that oil theft swooning affected the country’s ability to meet the 2013 budget target.

Other challenges are Multiplicity in reporting and compliance requirements with various government agencies; high dependency on deplorable road infrastructure and inadequate road networks for effective products distribution as a result of poor pipeline integrity.

The passage of the petroleum industry bill is expected to drive growth in the downstream oil and gas sector however; it is still trapped in the National Assembly.

The bill, when passed into law will  create a conducive business environment for petroleum operations, enhance exploration and exploitation of petroleum resources in Nigeria for the benefit of the Nigerian people. It should be noted that the optimization of domestic gas supplies particularly for power generation and industrial development is also part the benefits of the intended bill.

The PIB when passed will establish a progressive fiscal framework that encourages further investment in the petroleum industry while optimizing revenues accruing to the Government. It will also    establish Commercially Oriented and Profit Driven Oil and Gas Entities; It will also deregulate and liberalise the downstream petroleum sector while creating an efficient and effective regulatory agencies. 

BALA AUGIE