Analysts explain why Total Nigeria’s earnings were beaten down in Q3
This is not the best of times for downstream oil and gas giant Total Nigeria Plc as the company’s margins, sales and profit continue to shrink.
The company’s performances were below analysts’ expectations as oil marketers in Africa’s most populous and largest nation operate in a tough operating environment.
For the first nine months through September 2017, Total Nigeria’s net income fell by 49.20 percent to N5.95 billion as against N11.63 billion the previous year.
Sales increased by less than one percent to N221.05 billion the period under review as government reforms undermined growth in revenue.
On a quarter on quarter basis, Total Nigeria’s recorded strong sales in the second quarter of 2016, a period that coincides with the removal of subsidy in May.
Subsequently, revenues began to fall as Nigeria National Petroleum Corporation (NNPC) became the sole importer of petroleum products after Federal Government had removed subsidy on the sale of Premium Motor Spirit (PMS). This means the end of free money for operators in the industry.
However, there was an uptick in sales (quarter on quarter) in December 2016. This didn’t last as revenue continues to nosedive to all through the third quarter of 2017. See Charts.
“Volumes are dropping and NNPC has 90 days of storage and demand has fallen as people are managing their consumption,” said Dolapo Oni, Head Energy Research at Ecobank Limited.
In economics when people tend to be more conservative with resources when they pay the market price of a product. When fuel was selling for N87 and below at government subsidized price, consumers put on the generator set for an indeterminable period of time.
Johnson Chukuwu, managing director of Cowry Asset Management Limited said that the oil marketers cannot make a profit at the current controlled price.
“Trading in the downstream sector is no longer profitable as profit margins have been eroded,” said Chukwu
Indeed margins have been eroded as Total Nigeria’s gross margins hit a record high in the last quarter of 2016. Then it began to dip all through to the third quarter of 2017.
Delay in the payment of subsidy claims by the federal government is taking a toll on Total Nigeria as finance costs surged by 328.10 percent to N2.15 billion while debt to equity ratio increased to 88.35 percent in September 2017 from 39.65 percent the previous year.
Total debts on the balance sheet surged by 152.44 percent in the period under review from N9.21 billion the previous year.
However, the downstream oil and gas giant is not burdened by interest expense as interest coverage ratio, a measure of corporate leverage, fell to 3.29 times earnings in September 2017 from 33.85 times earnings the previous year.
The lower a company’s interest coverage ratio is the more its debt expense burden. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
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