Forte Oil – Profitability Moderated By Huge Borrowing Cost

Forte Oil Facility

After recording impressive results in 2013, Forte Oil’s bottom-line was still affected by the huge cost of borrowing in 2014, writes Goddy Egene

Investors in Forte Oil Plc enjoyed an unprecedented capital growth in their in 2013 and 2014. The stock recorded the highest capital growth of 1,165 per cent in 2013 and rose by 133 per cent in 2014.

This leap in the share price stemmed partly from the recovery in the fortunes of the company and future prospects. Forte Oil grew its profit after tax (PAT) by 397 per cent in 2013 financial year. The company paid a dividend of N4.00, which was highly commended by stakeholders and increased the demand for the shares.

However, going by the 2014 financial results of Forte Oil released last week, the high demand for the shares is not only likely to moderate in long run, but also profit taking will set in. Although the company declared a dividend of 250 kobo and a bonus one for five, its profit was affected by the high financial charges that came from huge borrowings.

Corporate background

Forte Oil Plc was incorporated on December 11, 1964 as British Petroleum Nigeria Limited. After 14 years in operation, the company changed its status from a private limited liability company to a public liability company. In 1977, 40% of the company’s shares were sold to Nigerians in compliance with the provisions of the Nigerian Enterprises Promotion Decree of 1977. A year later 60% was acquired by the Federal Government of Nigeria in favour of the Nigerian National Petroleum Corporation (NNPC). In November 1979 the name British Petroleum was changed to African Petroleum PLC. NNPC’s stake in AP was reduced by 20 per cent in March 1989 after the Federal Government sold the above percentage to Nigerian Citizens, increasing their stake from 40 per cent to 60 per cent. In the year 2000, the federal government under its privatisation programme divested its remaining 40 per cent to core investors and interested Nigerians.

In May 2007, the shareholding structure took another dimension as Incorporated Trustees of NNPC’s Pension Fund divested its stake to Zenon Petroleum & Gas Limited, making it the majority shareholder in the company. As a result, Zenon Petroleum & Gas Limited and his affiliated entities became the core investor in the company. Under the new management, African Petroleum embarked on a rebranding and restructuring programme which led to a name change to Forte Oil PLC in December, 2010.

The company has Femi Otedola as chairman. Akin Akinfemiwa is the Group Chief Executive Officer and Julius Omodayo-Owotuga as the Group Financial Officer.Other members of board include: Mrs Grace Ekpenyong; Layi Bolodeku; Christopher Adeyemi; Philip Akinola; Korede Omolaja (directors) and Akinleye Olagbende (company secretary/legal adviser).

2014 financial performance

Forte Oil recorded a revenue of N170 billion in 2014, showing an increase of 32.8 per cent above the N126 billion posted in 2013. Cost of sale rose by 31 per cent from N116 billion to N152 billion. Other income dipped by 78 per cent from N6.388 billion to N1.39 billion. The company was able to reduce distribution expenses by 15 per cent from N2.93 billion to N2.482 billion. Similarly, administrative expenses fell marginally by two per cent from N9.44 billion to N9.22 billion.

Operating profit went up by 29 per cent from N6.27 billion to N8.13 billion. However, net finance cost soared from N254 million to N2.13 billion. This led to drop of seven per cent in profit before tax, which fell from N6.5 billion to N6.0 billion. Profit after tax fell by 11 per cent from N5 billion to N4.45 billion. Earnings per share fell from 430 kobo to 220 kobo, hence the directors recommended a cash dividend that is lower than what was paid in 2013. Considering the price of the company, dividend yield in 2014 stood at 1.13 per cent.

As against net finance income of N254.49 million in 2013, finance cost rose to N2.13bn in 2014. Forte Oil’s short -term borrowing grew by 191 per cent from N9.9 billion in 2013 to N28.8 billion.

Liquidity

In the 2014 financial year, the company total assets appreciated 33.02 per cent to N139.2 billion, from N104.7 billion recorded in 2013. This is attributed to the company increase in its current assets, which rose 67.3 per cent in the review period to N82.4 billion, from N49.3 billion recorded in 2013. Inventories, stood at N12.2 billion, from N10.6 billion in 2013, while other assets, trade and other receivables, cash and bank balances were up 34.3 per cent, 70.2 per and 136.6 per cent to N572 million, N53.6 billion and N16.06 billion respectively.

The company non-current assets marginally appreciated 2.54 per cent in the review period due to decline in its investment in property and intangible assets. But the pension of its staff was increased, standing at N16.4bn in the year, while deferred tax assets dropped to N120m, down 86.9 per cent from N920m recorded in the same period of 2013. On the whole, total non-current assets stood at N56.8 billion in 2014, from N55.4 billion in 2013.

In all, the company borrowings soared by 146 per cent to N12.3 billion in 2014 financial year, from N4.98 billion in 2013, while bank overdraft rose 236 per cent to N16.5 billion, from N4.91 billion 2013. Current tax liabilities and total liabilities increased to N845 million, N52.5 billion, from N570 million and N36 billion recorded in 2013 respectively. Total current liabilities now stood at N82.1bn, from N46.7bn in 2013. Total non-current liabilities dropped to N12.8 billion, down 18.6 per cent from N15.7 billion recorded in the 2013 financial year.

Positive impact of restructuring

Addressing capital market operators last September, the CEO of Forte Oil, Akinfemiwa said they were very pleased with the half year results, as at June 30, 2014, which he explained exhibited consistent and sustainable growth for both revenue and profits. “This performance is an affirmation of the resilience of our businesses and a true test of our business transformation strategy despite the adverse impact of petroleum product scarcity experienced in the first quarter of the year.

Superior contributions from our power and upstream services divisions continue to strengthen our market dominance in our quest to be the foremost energy solutions provider. As we enter the final phase of our business transformation we are confident of building a long term successful company and making Forte Oil PLC the investment of choice through positive actions that boost investor confidence at all times,” he said.

Highlighting some of the milestones of the restructuring programme , Akinfemiwa said it had led to increased profitability, capital reorganisation exercise, resumed dividend payment to shareholders, efficiency in processes and improved corporate governance and made the company a consistent early filer of reports as required by listing requirements of the NSE.

He said the Geregu Plant would be overhauled to achieve installed capacity of 414 megawatts, which was performing at 60 per cent. According to him, the contract for the overhaul has been awarded for $90 million.

He had disclosed that Forte Oil would also diversify into the upstream space through acquisition of upstream assets to further enhance profitability going forward.

He said the company would improve on downstream logistics through the acquisition of an additional 100 trucks to increase the number to 200 trucks, having acquired 100 trucks already.

However, given the 2014 full year results, the impact of the restructuring appears to be affected by the high cost of borrowings. The solution may be in an equity injection to reduce the effect of the high charges on short term borrowings.

Source-This day

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