Downstream oil and gas firms to record weaker profit this year
The honeymoon will soon be over for firms operating in the downstream oil and gas sector as analysts expects earnings to falter on the back of a weak naira and higher oil prices since the liberalization of the industry.
These firms have been recording stellar performance since the announcement of a new price regime in May last year that
saw oil price move to N147 from N86.
The adoption of a flexible exchange rate regime by the central bank in order to enhance liquidity in the system saw the naira loss 40 percent of its value against the U.S currency.
This means the landing costs of imported petroleum product will spike with its attendant effects on bottom lines.
“Downstream performances in 2017 will be weaker than last year. In 2016, some downstream companies reported record profits due to the liberalization of the PMS pricing which allowed them to increase margins” said Pabina Yinkere, head of research at Vetiva Capital Management Limited.
“However, since the liberalization in May, oil prices have risen whilst the naira has depreciated – the combination of these give higher landing cost and since prices have remained fixed, margins have shrunk,” said Yinkere.
Firms operating in the industry are one of the best performers among companies that have released results on the website of the Nigerian Stock Exchange (NSE).
The growth is due to increased sales, a strong profit margin and management abilities to utilize the resources of owners in generating a higher profit.
The cumulative full year net income of four dominant player in the sector, Total Nigeria Plc, Mobil Nigeria Plc, Forte Oil and MRS Nigeria Plc increased by 69.50 percent to N61.60 billion as against N36.34 billion the previous year.
Combined sales were up 72.95 percent to N643.28 billion, the highest since 2013, based on data collated by BusinessDay.
While Forte oil’s finance costs spiked by 156.28 percent to N4.28 billion in the period under review, the company is not burdened by debt expense as times interest cover of 2.28 times earnings is within the industry benchmark of 1.5 times.
Forte oil’s N11 billion relates to long term financing for acquisition of Geregu Power Plant through its subsidiary Amperion Power Distribution Company Limited.
Nipco acquired 60 percent of Mobil Oil Nigeria from ExxonMobil in na deal valued at $500 million. Experts say the divestment is positive for the downstream operators.This is because investment in operational expansion and operational profitability has declined significantly over the past three years.
While robust earnings means these firms can either pay a higher dividend or plunge back into the business for future expansion, a possible slump in profit could damp such strategic move.
“Plus, many companies stopped importing from Q4’16 as these developments happened and now only source products from the NNPC. It is unlikely they will report near the profit levels seen last year,” said Yinkere.