• Tuesday, March 05, 2024
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Nigeria’s downstream oil firms keep most assets in liquid form

Nigeria’s downstream oil firms keep most assets in liquid form

In a drive to stay afloat, some firms in Nigeria’s downstream oil and gas sector prioritised liquid assets over fixed ones in the first nine months of 2023.

BusinessDay analysis of the financial statements of Total Energies Marketing Nigeria Plc, Conoil Plc, MRS Oil Plc, and Eterna Plc shows that out of their total assets of N637.3 billion in the first nine months, liquid assets accounted for 85.2 percent (N543.1 billion).

A liquid asset is an item that can be safely sold within a restricted timeframe, allowing for the conversion of its value into cash such as cash and cash equivalent, trade receivables, inventories, etc.

It serves as a financial buffer to address any emergent needs during the firm’s operations.

Fixed assets are tangible assets such as property plant and machinery, utilised in the day-to-day operations of a business, contributing to sustained financial advantages.

Etulan Adu, an energy analyst, said the factors that could have led to the prioritisation of liquid assets over fixed assets were unstable foreign exchange rates, inflation, fluctuations in crude oil prices and regulatory bottlenecks.

“Volatile market conditions, including fluctuating currency rates and crude oil prices, can create instability in downstream oil and gas operations,” he said.

“This instability arises from the risk of fixed assets like storage tanks, pipelines, and retail stores becoming outdated or underutilized during periods of low demand.”

He added that the country’s oil and gas sector is subject to stringent laws that govern the use and upkeep of assets.

He said: “For smaller downstream companies, the upfront investment and ongoing maintenance costs linked to fixed infrastructure such as tank farms, depots, trucks, retail stations, and pipeline networks can pose financial challenges.

“In contrast, liquid assets are more flexible in managing working capital and cash flows and are subject to less regulation.”

The downstream sector comprises activities such as refining, storage, transportation, and marketing of petroleum products. These activities are crucial for ensuring a steady supply of fuel and other petroleum products to consumers and businesses.

Rather than tying capital to long-term fixed assets, the downstream firms are holding a significant portion of their resources in liquid forms such as cash, marketable securities, and short-term investments.

The sector encounters various risks, such as theft, vandalism, and regulatory compliance issues, Adu said.

“Unlike liquid assets, which can be swiftly relocated or transferred in response to changing conditions, fixed assets are more vulnerable to these dangers. As a risk mitigation strategy, downstream companies may lean towards holding a higher proportion of liquid assets,” he added.

“It is simple to sell assets like cash, bank accounts, and short-term investments to satisfy urgent financial demands or seize business possibilities,” he said.

Ayodele Oni, partner, Bloomfield Law Practice, noted that the cash and cash equivalents assets of downstream oil companies grew above their fixed assets last year and may be attributed to the receipt of advances from their customers and an increase in trade and other payables as a result of subsidy.

In President Bola Tinubu’s inaugural address on May 29, 2023, he declared the removal of the petrol subsidy which resulted in a surge in petrol prices from N184 to N617.

Further analysis of the companies’ financial statements showed that TotalEnergies recorded the most assets amounting to N426.58 billion, followed by Conoil (N89.51 billion), Eterna Plc (N70.39 billion) and MRS Oil (N50.83 billion).

Oni said both liquid and fixed assets serve different purposes and that it is advisable to maintain a balanced portfolio that includes a combination of both liquid and non-liquid assets.

“This will help maintain both short-term financial stability and long-term growth potential,” he said.

Regarding the future preference of downstream firms for liquid assets over fixed assets, Adu noted that if the existing challenges, including volatility in crude oil prices, unstable foreign exchange rates, political and security concerns, inflation, and infrastructure challenges, intensify, companies might adopt a risk management strategy by prioritising liquid assets.

“This approach aims to safeguard cash flows and maintain financial flexibility.”

However, he noted that focusing on liquid assets also poses potential long-term strategic risks.

“Companies leaning towards current assets over fixed assets may be less inclined to fully invest in research and development programs or capital expenditures. Such a choice could result in losing market share, revenue, and a diminishing competitive advantage over time,” Adu said.

Firms analysis

TotalEnergies Marketing Nigeria

The firm’s total assets rose from N314.1 billion in the first nine months of 2022 to N426.58 billion in the same period of last year.

Liquid assets amounted to N370.72 billion, including trade and other receivables (N190.19 billion), cash and cash equivalents (N118.98 billion), inventories (N59.88 billion), and prepayment (N1.67 billion).

Fixed investment totalled N55.86 billion. Fixed assets consist of property, plant and equipment (42.63 billion), right-of-use assets (7.76 billion), intangible assets (147.9 million), trade and other receivables (5.32 billion).

Conoil

The firm reported total assets of N89.51 billion in the first nine months of 2023, up from N57.5 billion in the first nine months of 2022.

Its liquid assets totalled N86.38 billion, comprising trade and other receivables (N49.77 billion), inventories (N27.01 billion), prepayment (N103.9 million), and cash and bank balances (N9.49 billion).

Fixed assets were N3.13 billion, including deferred assets (N2.20 billion), property, plant, and equipment (N0.846 billion), investment property (N12.41 million), and intangible assets and other financial assets (N10,000 each).

Eterna

The firm witnessed an increase in total assets from N54.88 billion to N70.38 billion.

Liquid assets accounted for 79.4 percent, totalling N55.89 billion, with trade and receivables (N27.01 billion), inventory (N20.76 billion), cash and cash balances (N7.888 billion), and prepayment (N215.13 million).

Fixed assets amounted to N14.50 billion, comprising property and equipment (N12.24 billion), rights of use assets (N1.66 billion), other investments (N575.3 million), and intangible assets (N24.05 million).

MRS Oil

The firm recorded a total asset of N50.83 billion, up from N36.71 billion.

Liquid assets included trade and other receivables (N11.79 billion), inventories (N9.75 billion), cash and cash equivalents (N8.38 billion), prepayment (N166.6 million), and withholding (N39.32 million).

Fixed investment comprised property, plant, and equipment (N19.70 billion), rights of use assets (N0.754 billion), and intangible assets (N0.239 million).