Higher borrowing cost crimps Forte Oil’s profit

Forte Oil plc, a company that operates in the downstream oil and gas sector, took a hit at the bottomline as increased borrowing cost continues to hurt profits, analysis of its financial statement shows.

For the first three months through March 2015, the company’s net income fell by 28.93 percent to N783.14 million from N1.10 billion the same period of the corresponding year of (Q1) 2014.

Earnings per share (EPS) dropped by 65.33 percent to 26k in 2015 compared with 75k in 2014.

The performance of the company is unconnected with the spiralling borrowing costs that increased by 37 percent, which some analysts attribute to the delay in subsidy payments as most firms can not service loans owned to banks.

Oil markers borrow money to fund the importation of petroleum products into the country.

The Ministry of Finance said the N267 billion outstanding payments would be paid before the end of March.

Pending management comments, we attribute the spiralling borrowing costs to delayed subsidy payments as marketers are contending with huge receivables and payables to them by the Federal Government.

Forte Oil’s 84.41 percent debt-to-equity ratio is high and may expose the company to financial and systematic risk as the recent exchange rate volatility stoked by the devaluation of the naira may spiral dollar denominated debt in the company’s balance sheet.

Recall that marketers also blamed the recent fuel scarcity that degenerated in long queues at the filling stations to the devaluation of the naira that spiked the exchange rate of bringing petroleum products into the country.

Forte Oil’s net margin, a measure of profitability and efficiency, reduced to 2.36 percent in the review period as against 3.16 percent as of March 2014.

However, there were reductions in production costs as cost of sales reduced by 3.81 percent to N29 billion from N30.15 billion in 2014.

Its cost-to-income ratio fell to 87.72 percent in 2015 as against 121.67 percent last year, which means the oil firm is spending less to generate each unit of sales.

Despite the fall in input costs, operating profit dropped by 85.71 percent while gross profit reduced by 12.33 percent as the company was unable to manage direct costs attributable to projects.

Operating expenses were down, reduced by 1.26 percent to 3.11 percent to N3.11 billion from N3.15 billion in 2014. It is expected that the passage of the Petroleum Industry Bill (PIB) will attract foreign direct investment to the country’s oil and gas industry, which analysts say will put a firm like Forte Oil on a growth trajectory.

Forte’s share price closed at N208 on the floor of the exchange.

BALA AUGIE