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Downstream firms’ debt piles to highest in 7 years

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The average debt-to-equity ratio in Nigeria’s downstream sector has hit its highest level in seven years.

Data compiled by BusinessDay showed the average debt-to-equity ratio for Nigeria’s downstream sector stood at 3.31 in the first quarter of 2023, up from 3.17 recorded in the same quarter of 2022.

“The increase in a debt-to-equity ratio is a reflection of higher interest rates and the pendency that comes with a rising prime lending rate, as well as the rising cost of exchange rate differentials before all the intermediation windows,” said Kelvin Emmanuel, energy sector expert, and co-founder/CEO at Dairy Hills.

Emmanuel noted that with the challenges of foreign exchange rates, the decline in GDP during the first quarter, and the capital repatriation happening in the country, companies had no choice but to rely on borrowing or taking on debt to ensure their operations could continue and adjust to the evolving circumstances.

The debt-to-equity ratio is a financial metric that indicates the proportion of debt and equity used to finance a company’s operations. It provides insights into a firm’s financial position and its risk and stability.

It also determines if there’s enough shareholder equity to pay off debts if the company were to face a decrease in profits.

A lower ratio indicates effective financial management, with reduced reliance on debt and improved financial stability, while a higher debt-to-equity ratio often signifies that a company poses a higher risk to its shareholders, increasing the possibility of bankruptcy if profits slow.

Experts said the oil market has exhibited volatility in recent months, making it challenging for companies to generate strong cash flow from their operations.

“Pressures from fuel subsidy removal and access to Forex especially with the recent lifting of Forex restrictions has affected their businesses,” Chinedu Onyegbula, an energy sector expert and director, of Bullox Resources Limited said.

Experts said the removal of petrol subsidies has opened up the market to increased competition, prompting marketers to explore strategic options to maintain or increase their market share.

Emmanuel noted that given the unpegged exchange rate, companies are now turning to the non-exchange derivatives market to manage the increased volatility index associated with Eurobond capital imports in the international debt capital markets.

According to Emmanuel, this approach is expected to alleviate the gearing ratio for downstream oil and gas companies.

“As the government attempts to reflate the economy from the removal of power, FX and pms subsidy as a tool to reduce the FX exposure on durable goods that is due to cost-push inflation, you begin to see a gradual adjustment in convexity for the bond yield curve and lower pendency on existing loans or debt instruments,” Emmanuel said.

Ogbugbo Ukoha, executive director of distribution systems, storage and retailing infrastructure at Nigerian Midstream and Downstream Petroleum Regulatory Authority, said there is a likelihood of mergers and acquisitions taking place among companies.

“It is possible we will see mergers and acquisitions go on. It is possible that retail outlets will be structured in a way that is highly optimised,” he said.

He said deregulation will unlock investment opportunities for pipeline infrastructure, coastal vessels for marine transportation, and reception facilities.

He said it will bring clarity to consumption figures, attract multiple players to the sector and foster competition among various fuels, including Liquefied Petroleum Gas (LPG), Premium Motor Spirit (PMS), and Compressed Natural Gas (CNG).

In the first quarter of 2023, downstream firms recorded a loss of N33.44 billion in their cash from operations, contrasting with a gain of N0.148 billion in the same quarter of the previous year.

During the first quarter of 2023, the total liabilities of these firms amounted to N362.85 billion, reflecting an increase from the N312.67 billion recorded in the corresponding quarter of 2022.

Simultaneously, the total equity for the first quarter of 2023 stood at N109.54 billion, rising from the N98.56 billion recorded in the same quarter of 2022.

Eterna Plc

In the first quarter of 2023, Eterna Plc witnessed an increase in total liabilities, reaching N47.20 billion from N36.12 billion in the same quarter of 2022. However, its equity rose to N14.23 billion in the first quarter of 2023 from N13 billion in the first quarter of 2022.

During the first quarter of the year, Eterna Oil recorded a profit of N1.09 billion.

The firm’s revenue increased by 16.25 percent, reaching N31.18 billion in the first quarter of 2023 compared to N26.82 billion in the same quarter of 2022.

The majority of its revenue, amounting to N26.81 billion, was generated from trading activities.

Conoil Plc

Conoil Plc observed a 48.47 percent increase in total liabilities, reaching N48.82 billion in the first quarter of 2023, compared to N32.88 billion in the same quarter of 2022.

On the other hand, its total equity stood at N28.02 billion in the first quarter of 2023, rising from N22.35 billion recorded in the same quarter of 2022.

Conoil witnessed an increase in net cash generated from operating activities, to N4.83 billion in the current quarter from a higher figure of N3.66 billion achieved in the same quarter of 2022.

Total Energies Marketing Nigeria Plc

Total Energies recorded a 6.17 percent increase in total liabilities, amounting to N238.74 billion in the first quarter of 2023, compared to N224.85 billion in the same quarter of 2022.

However, its total equity stood at N47.32 billion in the first quarter of 2023, up from N46.08 billion in the first quarter of 2022.

The recorded loss amounted to N29.9 billion, a jump from the loss of N4.964 billion recorded in the same period of 2022.

MRS Oil Nigeria Plc

MRS Oil recorded an increase in total liabilities, reaching N28.10 billion in the first quarter of 2023 from N18.82 billion in the same quarter of 2022. However, its total equity stood at N19.97 billion in the first quarter of 2023, rising from N17.14 billion recorded in the same quarter of 2022.

MRS Oil Nigeria Plc achieved a positive outcome in terms of cash generated from operating activities. In the first quarter of 2023, it experienced a gain of N3.92 billion, compared to the loss of N1.30 billion recorded in the same period of 2022.

This favourable result can be attributed to two factors: the receipt of advances from their customers and an increase in trade and other payables.