Forte Oil: Interest expenses undermine profit performance in final quarter

A rapid growth in interest expenses prevented Forte Oil from converting any revenues generated in the final quarter into profit. The oil company therefore lost its profit growth momentum in the final quarter and closed the year with profit virtually unchanged from the third quarter position.

While the company generated sales revenue of over N27.50 billion in the final quarter, profit failed to grow from the N2.80 billion it posted at the end of the third quarter. Net finance cost grew from N2.23 billion at the end of the third quarter to N4.28 billion at full year and claimed almost all the increase in operating profit during the period.

The company closed the 2016 financial year with half of its preceding year’s profit – the lowest profit figure in three years. It registered some recovery in sales revenue from a sharp fall that brought its sales to a three-year low in 2015. The growth momentum also weakened in the final quarter and the full year figure fell short of forecast.

Forte Oil closed the 2016 financial year with sales revenue of N148.61 billion, about 9% below the forecast turnover of N163 billion for the company for the year. That is an increase of 19.3% over the sales revenue figure of N124.62 billion the company posted in 2015. Its turnover had dropped by close to 27% in 2015 from the peak revenue figure of over N170 billion in 2014.

Against the increase in sales revenue, after tax profit dropped by 50% to N2.89 billion at the end of the year, virtually unchanged from about N2.80 it reported at the end of the third quarter. This means the company ended the third quarter at breakeven. The full year profit is a clear 25% off the full year after tax profit target of N3.85 billion for 2016. This is the lowest profit figure in three years after the company registered an impressive growth of over 30% to N5.79 billion in 2015.

The principal factor for the company’s loss of profit capacity is a high rise in net finance expenses, which amounted to N6.17 billion in the year. A sharp drop in finance income against an increase in finance expenses resulted in a growth of over 155% in net finance cost. Between the end of the third quarter and the full year, net finance expenses rose by 90%. Net finance cost claimed a significantly increased share of operating profit from 28% at the end of the third quarter to 44.5% at full year.

The company’s balance sheet debts showed significant increases in the interim reports but the full year position shows only a slight increase in the company’s total borrowings at N40.71 billion. Both short- and long-term borrowings went down from the third quarter closing figures.

Another major cost increase that undermined profit capacity came from tax expenses, which doubled to N2.45 billion at the end of the year. That consumed 46% of pre-tax profit.

Cost of sales grew slightly ahead of sales revenue at 20.5% to N128.02 billion and therefore claimed an increased share of the company’s earnings. That lowered the growth in gross profit to 12%, reducing gross profit margin from about 15% in 2015 to below 14% at the end of 2016.

Distribution expenses and administrative cost moderated relative to revenue during the year but a drop of 42% in other operating income weakened the growth in operating profit. The company lost profit margin during the review period with a strong growth in the cost-income ratio. Net profit margin fell from 4.6% in 2015 to 1.9% at the end of 2016.

Forte Oil generated good cash flow from operating activities during the year but this wasn’t sufficient to meet the increase cash requirements for investing and financing activities. That warranted a short-term borrowing of N7.64 billion and a long-term loan of N12.15 billion in the 2016 financial year.

The company earned N1.99 per share at the end of 2016, a drop from N4.13 in the prior year. It gave out a cash dividend of N3.45 per share to shareholders for the 2015 trading. Dividend was yet to be announced for the 2016 operations at press time.