Liquidity
The company had efficient credit management of its customers and inventory turnover, as shown in its current and quick ratios, which it maintained within the same range over the period under review. The industry average for United States oil and gas companies is usually 1:1 for current ratios and 0.8:1 for quick ratios, due to the huge leverage the industry demands. The company’s current ratio dropped from 1.06 to 0.91, which can be viewed as fairly stable given its operating environment, while that of the benchmark dropped from 1.3 to 1.0 over the period under review. The quick ratio followed the same pattern as it moved from 0.83 to 0.72 for the company and from 1.0 to 0.73 for the benchmark.
The changes in government policies that made the government the sole importer of petroleum products, whose price is not determined by demand and supply, accounted for the tepid decrease in these two ratios. The company has been forced to rely on the national oil operator as the sole importer of one of its main products, PMS, leading to incessant scarcity and a drop in inventory levels, thus affecting sales and cash flows ultimately. Also, the company was able to manage through this challenge by diversifying more into petroleum products whose prices are not fixed, such as AGO and DPK, and properly managing its credit facilities to its customers, thereby leading to fairly stable liquidity ratios, as shown above.
Gearing and Solvency
The company is highly geared based on its debt-to-total capital ratio, which has increased from 36.9% to 85.6% over the period under review. The industry, as mentioned earlier, is a highly leveraged one due to its capital requirement and thus calls for increased funding from different sources. The Nigerian market, which has been saddled with political nuances and uncertainties, leaves most industrialists with little or no option other than interest-bearing liabilities. The benchmark company reported an increase in its gearing ratio from 31% to 64% over the same period, which doesn’t differ much from the reference company. However, one subtle observation is that the risk of default is evident in the company’s interest cover. Interest cover helps measure the ability of a company to repay its interest when due by comparing the operating profit (profit before interest and taxes) to its interest payable in multiples. When the Federal Government’s Petroleum Subsidy Fund (PSF) scheme was operational, the finance costs of the company were much lower, and interest cover stood at 3.5x in 2013. By 2015, with the new administration’s changes to the PSF scheme, the company was forced to source funds from financial institutions, which drastically increased its finance costs. Since 2016, the company has struggled to keep this ratio at pre-2015 levels, and has deteriorated to -1.4 in 2022. The benchmark company experienced the same fate, having its interest cover drop from 1.4x to -0.8x in 2021; however, it was able to refinance its interest-bearing loans in the 2022 FY with probably some moratorium (little information is available to assert this as its unaudited financials were used), thereby leading to reduced finance costs and an interest cover of 3.5x.
Conclusions and Recommendations
My review shows that the company has gone through ups and downs amidst management changes, organic and inorganic growth, divestments, economic boom and turmoil, and conflicting government policies and strategies, thereby destabilising the macro-economic environment, especially the opaque subsidy regime.
My conclusions are as follows:
- Revenue growth was one of the major drivers for the company.
- The strategy for growth was inorganic, using acquisitions and divestments.
- Debt was a key component of its capital structure.
- Capital has not been effectively utilised due to its low ROCE and is primarily driven by low margins.
- The company is very sensitive to external shocks from the macroeconomic environment, both at the national and global levels.
| Strengths | Weaknesses |
| Strong revenue growthDiversified portfolio (energy mix) The strong and broad management team Industry dominance Ease of debt and equity financing | Inefficient cost management strategies Low-quality margins High risk of default on debt servicing Vulnerability to external shocks |
Based on the review and analysis, I recommendations are as follows:
- Review its capital sourcing and management to accommodate rising finance costs as central banks around the world, including Nigeria, keep raising rates to control inflation caused by the COVID pandemic.
- Renegotiate existing loans for interest breaks, moratoriums, or tenure extensions.
- Actively participate in policy formulation by policy makers as the Nigerian economy is largely driven by the sector the company operates.
- Introduce cost minimization strategies for profit maximization.
- Review acquisitions and divestments for optimal synergies to the company’s vision.
- Develop risk management strategies to protect the company from external shocks such as macro-based changes; changes in global trends; changes in consumption patterns.
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