Mobil Nigeria plc posted an 84 percent rise in profit despite delayed subsidy payment and currency volatility that expose firms operating in the downstream oil and gas sector to financial risk.
The 2014 audited financial statement showed net income climbed to N6.39bn from N3.48bn in the same period of the corresponding year (FY) 2013, while sales increased by 1 percent to N79.58bn.
Mobil, a major player in the downstream oil and gas sector beat expectation with its impressive results at the top and bottom line level despite tough operating environment bedevilling businesses in Nigeria.
Firms operating in this sector are exposed to exchange rate risks as the recent devaluation of the country’s currency means the naira value of dollar denominated debt in their capital structure may swell thus increasing financial risk.
These firms borrow money from banks to fund the importation of refined petroleum products.
Also stunting growth of firms is delay in subsidy payment which hinders them from paying loans owned to banks hence spiraling borrowing costs.
“The current subsidy regime on premium motor spirit (PMS) continues to weigh heavily on the sector,” said Uwadiae Osadiaye, equity analyst with FBN Capital in a March 24 note.
“Although the federal government continues to reassure stakeholders of its commitment to maintain the fixed-price regime, persistent delays in subsidy re-imbursements reduce operational efficiency whilst increasing the industry’s risk assessment by banks,” said Osadiaye.
The value of presently outstanding subsidy payments was put at N300bn, with the FGN committing to clear about half of this amount before the end of the year.
This means lies ahead for the downstream sector as bills of laden executed before the devaluation, the subsidy repayment will be based on the pre-devaluation exchange rate and only bills executed after the devaluation will be refunded using the devalued exchange rate.
Further analysis of Mobil’s financial statement showed cost of sales ratio was as high as 86.50 percent, leaving a low net profit margin that makes the company susceptible to currency devaluation.
Mobil’s gross margins were likely hurt by fears surrounding the devaluation of the naira and persistent product shortages in the fourth quarter of the year.
The company was able to cut costs as operating expenses and cost of sales remained flattish at N86bn and N7.3bn respectively.
Direct costs attributable to projects were effectively managed as gross profit increased by 8.04 percent to N10.74bn as against N9.94bn last year while gross profit margin remained increase to 13.97 in 2014 from 12.62 percent in 2013.
Total assets were up by 20.87 percent to N49.22bn as against N40.72 percent as at December 2013.
“Mobil proposed a DPS of N6.60 which works out to a dividend yield of just 4.6 percent and a pay-out ratio of around 39 percent, which differs significantly from a five year average of 70 percent. The proposed dividend compares to our 2014 DPS estimate of N13.0 and consensus N11.1 respectively,” said analysts at FBN Capital.
“In addition to these, delays in repayment of subsidies by the federal government weigh on the liquidity of these firms, leading to higher interest costs,” said Osadiaye.
Mobil’s share price closed at N145 on the floor of the exchange while market capitalisation was N52.28bn.
BALA AUGIE
