Profit capacity lowest in years for petroleum companies

Petroleum marketers faced the challenges of inability to grow sales revenue in 2015 and delays in payment of subsidies by government. The upstream companies were under pressure from the drop in crude oil prices in the international market. For most companies, sales revenues have fallen below the levels attained before the last adjustment of pump prices, which indicates the extent of the difficulties facing the business.

The results of these challenges are high dependence on bank borrowing, resulting in high finance charges and declining profit margin. In the midst of declining sales, petroleum marketers were unable to cut costs, mainly interest expenses. Bank borrowings have become a critical element of the operations in the sector and with declining revenue, companies have to devote increased proportions of revenue to interest expenses. This led to a general decline in profit margin in the petroleum sector in 2015 as per the interim results.

*Full year result

Conoil

Conoil has not been able to grow sales revenue since 2012 and a sharp drop looks very likely for the oil marketer for the second year in 2015. It recorded the highest drop of 42.3% in turnover year-on-year among the petroleum companies at the end of the third quarter. The full year outlook indicates the company will close year with the lowest sales revenue in several years. A drop of 19.5% in turnover in 2014 had brought its sales revenue to the lowest figure in four years.

The company’s profit records have followed a pattern of rise and fall over the past five years. In 2014, there was a big fall of 73% from the five-year peak and a rise is expected in 2015. Despite a drop of 16.1% on year-on-year basis in the third quarter, after tax profit was already standing more than 44% above the full year figure in 2014. This is explained by the fact that the company’s full year profit in 2014 was a significant drop from the third quarter figure.

If the third quarter growth rate is maintained to full year, after tax profit is expected to rebound to the tune of 120% for Conoil at the end of 2015. The strength for a profit rebound after a big drop in the preceding year is provided by a surge of over 1,518% in other operating income and a slight moderation in cost of sales. Profit margin has advanced from 0.6% at the end of 2014 to 2.0% at the end of the third quarter.

Forte Oil

Forte Oil’s full year earnings report shows a drop of 26.7% in sales revenue but a growth of about 30% in after tax profit. This in line with our expectation that the company’s turnover will drop to the lowest figure in three years but a new peak in profit should be expected. The company returned to profit in 2012 and a strong growth followed in 2013. It however failed to sustain the recovery move in 2014 but a new strength in profit performance has been demonstrated in 2015.

The ability to grow profit from a drop in sales revenue came from significant cost moderation during the year. Cost of sales dropped ahead of turnover at 30%, which enabled the company to defend gross profit margin at 14.7%. Another major positive impact on the bottom line came from a drop of 42.8% in net finance expenses in the year. The biggest boost to profit performance is an upsurge of 190% in other income. A drop in non-controlling interest lifted earnings per share from N2.20 in the prior year t N4.11 in 2015.

Mobil Oil Nigeria

Mobil Oil Nigeria has not been able to improve sales revenue for the preceding two years and that weakness intensified in 2015. The company experienced a big windfall in 2014 that led to a rise of 83.6% in after tax profit and obscured the problem of non-growing sales. In 2015, the effect of worsening revenue weakness registered directly on the bottom line.

Sales revenue dropped by 25.3% year-on-year at the end of the third quarter and with that, the company is headed for the lowest sales revenue figure in four years. Turnover is likely to go down to as far as the N62 billion the company earned in 2011.

After tax profit dropped well ahead of revenue at 39.1% year-on-year at the end of the third quarter due to the effect of the windfall that happened in the preceding year. Two favourable developments however helped the bottom line performance as per the interim reports. One is an 82% advance in other income in the third quarter, which pushed that income line above the full year figure in 2014. The other is a moderation of cost of sales, which raised gross profit margin from 13.9% in the same period in 2014 to 18.1% at the end of the third quarter.

The company retains good net profit margin at 8.1% – the highest among petroleum markers. Its after tax profit is likely to drop in 2015 from the 2014 peak though the margin is expected to narrow down to about 20%.

MRS Oil

MRS Oil maintained a three-year trend of growing sales revenue to 2014 but that trend is likely to be broken in 2015. Turnover went down by 6.7% year-on-year in the third quarter and that is likely to bring the full year figure down from the 2014 high. The company shows less volatility in revenue and it is expected to sustain profit recovery for the third year running in 2015.

MRS Oil still has a long way to travel on the road to profit recovery after falling in 2011 from its all time profit high of N1.85 billion in 2010. Progress is however being made with two years of recovery moving into a third. A year-on-year growth of 26.6% in after tax profit is an outstanding record in the petroleum marketing sector. This is expected to accelerate to about 40% growth at the end of the year.

A gain in profit margin is the spur for the outstanding profit growth seen in the third quarter. Net profit margin improved from 0.8% in the third quarter of 2014 to 1.1% in 2015. This follows an increase of 18% in other income and a moderation in cost of sales during the review period. The full year profit outlook is subject to an unexpected rise in finance charges in the final quarter, as happened in the preceding year.

Seplat Petroleum Development Company

Seplat Petroleum Development Company’s third quarter operations ended with drops in both revenue and profit. The full year outlook indicates the company is headed for accelerated drops in revenue and profit in 2015 after losing more than one-half of its preceding year’s profit in 2014. The petroleum drilling and exporting company has come under pressure from the drop in crude oil prices as well as rising cost, which have set profit crashing.

Sales revenue dropped by 29.1% year-on-year in dollar terms in the third quarter, which moderated to a decline of 9.8% in naira due to the impact of the local currency depreciation. The full year projection indicates the margin of decline at the end of the third quarter is likely to be maintained at the end of 2015. It will be a sustaining drop from the company’s three-year peak sales revenue of N136.66 billion in 2013. A sustaining favourable trend for the company is the increasing contribution of gas sales to revenue, which is mildly moderating the decline in crude oil sales.

After tax profit dropped by 61.6% year-on-year at the end of the third quarter, as profit capacity was undermined by a rise of 20.6% in cost of sales and finance charges soared by 135%. The full year outlook indicates after tax profit may drop by as much as 54% from the profit figure of N40.48 billion the company reported in 2014. The profit figure in 2014 was again a fall of 52.6% from the company’s peak profit figure of N85.43 billion in 2013.

The cost-income ratio continues to increase, resulting in a sustaining decline in profit margin. Net profit margin continues to drop rapidly from 62.5% at the end of 2013 to 32.5% in 2014 and further to 16.4% at the end of the third quarter of last year.

Total Nigeria

Total Nigeria recorded a major slowdown in sales revenue in 2014 when only a marginal improvement was recorded and profit dropped to the lowest figure in three years. The revenue constraint intensified in 2015 and the company is likely to move from slowdown to a drop in sales revenue. The company’s turnover dropped by 10.4% year-on-year in the third quarter to N159.30 billion and could drop to the 2012 level in 2015.

Profit fell ahead of revenue in the third quarter and may hit the lowest record in many years at the end of 2015. Increase in operating costs against a decline in sales revenue undermined the company’s profit margin during the period. After tax profit dropped by 19.5% year-on-year in the third quarter.

Increases in two major cost areas, administrative cost and selling/distribution expenses accounted for the drop in profit during the period. The company’s profit is projected to drop by close to 30% at the end of 2015. This will be an accelerated drop compared with the 17% fall the company reported in 2014.

Two major favourable developments in the company’s income statement are an exceptional growth in finance income and a drop in finance costs. These developments enabled the company to make a shift from net finance cost to net finance income, which prevented a more rapid decline in profit during the period.