How NNPC manicured its books to extract N287bn profit

On August 29,2021, Atedo Peterside, founder of Stanbic IBTC Bank, indicted the NNPC in a tweet that there was an allegation the Corporation was dipping its hand into the Federation Account in order to announce bumper 2020 profits.

“They should come clean and publish details of all dividends received by them and tell us which ones they recently diverted from the Federation to themselves,” Peterside tweeted then.

Since the Corporation released its financial statements Wednesday night many doubts have greeted its N287 billion declared as 2020 profit.

To arrive at a profit in 2020, the NNPC declared a net impairment reversal of N713 billion in 2020 compared with a loss of N273 billion in 2019.

Reversal of impairment is a situation where a company can declare an asset to be valuable where it has previously been declared a liability, according to a global body for professional accountants – Association of Chartered Certified Accountants (ACCA).

According to the notes from NNPC’s audited report, “The impairment reversal in 2020 relate mainly to the recovery of strategic alliance receivable amount from the federation and reversal of the full impairment on receivables which are no longer doubtful.”

Financial experts have questioned how the NNPC was able to revalue a whopping N713 billion initially assumed to be doubtful receivables from the federation account.

“These are all exceptional items that won’t happen every year,” Charles Akinbobola, energy analyst at Lagos-based Sofidam Capital, says.

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Another shocking revelation from the audited report is a 153.95 percent increase from the NNPC’s Other Incomes from N266 billion in 2019 to N675.7 billion in 2020.

Three major components of the Other Incomes include a N110.6 billion refund from the federation, N157 billion from sundry incomes (amounts recovered from the federation relating to strategic alliance balances), and a N250 billion from variation in crude stocks, which represents movements in crude inventory, under-lift and over-lift positions.

Kalu Aja, director of finance and operations at a Washington-based Community Foundation of Snohomish County, says the Corporation was able to show positive results due to cash “infusion” from the Federal Government.

“The cash infusion is more than cash generated from the operations of the Corporation,” Aja states, adding, “To be legal and clear, this is correct. The question is should a Corporation that has a negative short-term position post billions in accounting ‘profits’”?

“Would I buy a stock that holds cash in “trust” and posts negative current assets?” he asks further.

Oluwole Adenuga, auditor in Ernst and Young Energy Unit, says no serious analyst would directly rely on the performance for the year without first normalising the earnings – removing the one-off effects of profits or losses that can muddy the picture of the corporation.

“The corporation is still loss-making and the normalised earnings would have better reflected the impact of COVID-19 on their business,” Adenuga says.

Elochukwu Oguebue, head of finance at American International School of Lagos, notes that despite the media hype, NNPC is still a loss-making entity.

“One assumption I can make from the disclosure on the impairment reversal and other notes to the accounts is that the Federal Government must have injected funds into NNPC in 2021. Or what else could have prompted the reversal,” Oguebue states.

“To reverse impairment on receivables, the auditors must have seen a document that convinced them that most of that amount is recoverable,” he notes.

NNPC’s 2020 audited financial statement is the third it has publicly released in its 44-year history. Following the passage of the Petroleum Industry Bill, the NNPC is set to become a commercial firm.

At first glance, the audited report shows that aside from the already announced Profit After Tax (PAT), from a loss position of N1.7 billion in 2019 to N287 billion in 2020, NNPC’s total current assets increased by 18.7 percent compared with that of 2019, while its total current liabilities increased by 11.4 percent within the same period.

The 2020 audited NNPC report identifies under-recovery, crude and pipeline losses, pipeline maintenance as incurred costs, which the Federal Government allowed the state-owned Corporation to take from its revenues before passing the balance to the Federation Account.

For instance, in 2020, the NNPC incurred N102 billion on under-recovery, N16 billion for crude and product losses, N53 billion for pipeline management cost, and N32 billion for deregulation losses, which were payable to marketers as approved by the Presidency.

Exchange loss, which occurred as a result of translation of foreign accounts payable transactions for domestic crude lifting, increased by 100 percent costing NNPC N72.4 billion in 2020, while employee benefit expenses increased by 10 percent to N397 billion within the same calendar year.

NNPC’s total revenue, which came from the sales of crude oil, petroleum products, gas, and other services, including seismic contracts and gas transmission tariffs declined by 24.6 percent to N3.7 trillion in 2020.

The auditors of NNPC, made up of PricewaterhouseCoopers, SIAO Partners, and Muhtari Dangana & Co. raised “material uncertainty” about the group’s current liabilities exceeding NNPC’s current assets by N4.6 trillion.

In 2020, a detailed breakdown showed NNPC recorded group current liabilities of N10.8 trillion, which outweighed the firm current assets of N6.2 trillion.

The report also explained how NNPC had been sustaining recurring losses over the years, culminating into N1.5 trillion as of December 2020.

“These events or conditions along with other matters indicate that a material uncertainty exists that may cast significant doubt on the group and Corporation’s ability to continue as a going concern,” PwC, SIAO Partners, and Muhtari Dangana & Co say in a joint statement.