Forte Oil profit up 7% on reduced borrowing costs

Forte Oil Plc, an integrated energy group has made a remarkable leap forward in profits buoyed by a reduction in borrowing costs, increase in other income from ordinary activities as the company continues to overcome the gloom caused by delay in subsidy payments.

For the first nine months through September 2015, Forte Oil’s net income increased by 7 percent to 4.28 billion from N4.04 billion the previous year.

The growth at the bottom was as result of a 74.43 percent reduction in borrowing costs to N292.71 million in 2015 as against N1.14 billion last year. Debt to equity (D/E) fell to 42.44 percent in the period under review compared with 55.32 percent the previous year. Total loans in the balance also dipped by 20.46 percent to N24.53 billion.

Industry experts attribute the company’s impressive performance to its well diversified portfolios across a wide spectrum and its aggressive expansion plan such as the acquisition of 49 percent of the Geregu Power plant.

Forte Oil said the power asset is aimed at optimizing and increasing its generation capacity from 414MW to 434MW (with an estimated completion date for H1, 2016).

This business segment of Forte Oil Plc remains its key growth driver and would contribute about 40 percent to Group PBT in the near future.

The plant contributed 56 percent to Group PBT as at half year 2015 exceeding the 40 percent target set by the company. Revenue wise, the plant generated 7.02 billion in the period under review.

In 2010, the plant generated 7 percent of earnings after tax (EAT) which was N500 million while it contributed 12 percent of total PBT of N720 million.

While Forte Oil has been striding amid tough operating environment, the company’s revenue fell by 25.26 percent as the supply of PMS which is a major revenue driver of the firm was extremely inadequate in the first half of the year. The company said the delay in subsidy payment was the major reason for the dip in sales.

The company added that the subsidy arrears resulted in inability to import products as the banks were unable to finance LCs for importation due to huge exposure to subsidy.

Petroleum fuel marketers locked horns with government over $1 billion subsidy arrears they claimed hindered them from financing the importation of petroleum products. Subsequently, this caused scarcity of the products that nearly brought commercial activity a halt as banks had to close branch earlier than usual. Commercial flights were also canceled as aviation fuel became inaccessible.

“We operate in a difficult sector that is the downstream petroleum industry,” said Akin Akinfemiwa, the Group Chief Executive Officer of the company, at the closing bell of the Nigeria Stock Exchange NSE.

We had outstanding payments from the federal government which resulted in fuel scarcity because marketers lost their appetite in terms of their fuel supplies,” said Akinfemiwa. “The operations of the Boko Haram have stifled our operations in the north part of the country”

Akinfemiwa also added that the economic lethargy caused by the more than 50 percent fall in the price of oil that forced the central bank to devalue the naira has stunted growth of the sector.

Since the devaluation of the currency, the naira has been hovering between N198 and N199 at the interbank market. Oil account for over 2/3 of government revenue and 90 percent of foreign exchange earnings. Economic growth has slowed to 2.8 percent from 6.34 percent as the corresponding period as the World Bank and IMF say Nigerians are getting poorer in a decade.

Analysts say the new government should intensify on reforms that will re-position the oil industry for better performance as such policies they say will increase investors’ appetite for a sector that is paramount to the power sector. Some industry players are calling for the implementation of the PIB and the removal of subsidy.

“I think the way forward is to deregulate the sector. So petroleum products can sell at a free market. Other developing countries such as Indonesia and Malaysia have recently deregulated the sector due to tight federal revenue squeeze which Nigeria is facing now,” said according to Esho Temilade, an oil and gas expert at Renaissance capital in a recent emailed note. 

While government has earmarked N430 billion for subsidy payment in its 2016 budget, analysts say the new government is only subsidizing the high income earners and that such monies should have been invested in infrastructure.

Africa largest economy Nigeria needs as much as $300 billion in the next 10 years to breach its infrastructure deficits. The country also has between 17 million to 20 million housing deficits.

“We are only subsidizing the rich and the middle class that have cars, said Laoye Jaiyeola, Chief Executive officer, The Nigeria Economic Summit Group (NESG) in an interview with BusinessDay.

“The impacts of these payments are not being felt by the common man in the rural areas who uses bicycle. Removal of subsidy will benefit the common man if invested in Agric. This will lead to more creation,’’ said Jaiyeola.

Further analysis of  Forte Oil balance sheet showed  total assets fell by 5.56 percent to N131.26 billion in 2015 from N139 billion as at  December 2014 as the company received partial payment on some outstanding subsidy payments from previous periods which reduced the group’s trade receivables. These funds were also applied in paying off trade finance liabilities.

The company’s cost of sales reduced by 28.04 percent to N78.63 billion in 2015 from N109.38 billion in 2014. Gross profit dipped by 2.40 percent to N13.30 billion in the period under review as against N13.29 billion last year. Operating expenses were up by 29.17 percent to N10.05 billion in 2015 as against N7.78 billion last year. Net margin a measure of profitability and efficiency increased to 4.26 percent in 2015 as against 3.26 percent last year.  Forte Oil share price closed at N275.50 on the floor of the exchange while market capitalization was N358.83.

BALA AUGIE