Oil & gas sector will continue to be challenged by policy uncertainty – CEO, Cowry Asset

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Early this month, Forte Oil Plc released its 2016 audited financial report and accounts showing huge debt burden, high finance cost and deferred taxation, as well as depleted bottomline. In this interview, Mr. Johnson Chukwu, CEO, Cowry Asset Management Limited, an investment banking firm, posited that other companies in the sector might suffer the same fate, as they were beset by myriad of negative factor in the out-gone year

By Nkiruka Nnorom

ACTIVITY in the oil and  gas sector has been oscillating with companies like Oando Plc and Forte Oil Plc pulling movement either to the negative or positive direction. What is the reason for this?

I think the greatest challenge we have in downstream oil and gas sector is because today, we are back to what you may call ‘a managed subsidy system’ and once in a while, there is strong feeling that government will allow market forces to determine the price of petroleum products, particularly Premium Motor Spirit.

So whenever this news comes, the market responds to it. Ultimately, when you have a regulated market environment, you also constrain the free interplay of demand and supply. So, we have seen instances where the landing cost of PMS today is close to N165.00, whereas the maximum pump price is about N148.

•Johnson Chukwu, CEO, Cowry Asset Management Ltd.

So, you find out that for an oil company that has huge distribution network, they should allow the market forces to adjust for better opportunity for them to make profit. Whenever the news or rumours that the government will allow price to adjust hits the market, the market responds to it by buying up the shares of such companies.

If that market news turns out to be false, investors may decide to relinquish their holdings in such companies because the purpose for which they invested seem not to be materializing. As long as we continue to see this uncertainty in the policy environment as it relates to the price of PMS, we are going to see zig-zag movement in the share prices of major petroleum marketers.

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So, those zig-zag movements you are seeing is in response to the market outlook that keep oscillating between a controlled and a regulated market and a possibility of full deregulation.

Early this month, Forte Oil released not-too-good financial result for 2016 financial year. Do you think this particular result has set the tune for what will be seen in other companies in that same sector this year?

Well, we have to look at what happened last year. 2016 was the year when the government adjusted the price of petroleum products, particularly, PMS. When that happened, consumption dropped by more than 40 per cent because people did not have the disposable income to continue to consume as they had. So, that drop in consumption will certainly affect the fortune of marketing companies. Therefore, I do not think it may be only Forte Oil that will experience that.

Across the breath of the petroleum marketing companies, volume of consumption dropped and because today’s marketing is about margin, with a thin margin and given that profitability in that line of business is dependent on volumes, so with a drop in volumes, it would certainly affect the profitability or profit that would be retained by such marketing companies. And that was actually what happens in an environment where prices are adjusted and volume of consumption drops. So, I expect that other marketing companies will have that effect in their bottom-line but the size of the effect will be dependent on the size of their operation.

Considering the huge bank debt at N19.79 billion as at year ended December 31, 2016 coupled with N495.372 million deferred taxation, do you still see the proceeds of the N9 billion Forte Oil already raised from the debt market impacting the company’s operation in a positive direction?

I think the primary objective why they went to the debt market to raise money was to substitute higher cost borrowing with lower cost borrowing and a more stable borrowing. So, you should have the effect of that in their Profit & Loss account.

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Fixed rate interest

I do not think that the N9 billion is all they needed; I think that the N9 billion is the first tranche of the money they want to raise. But, ultimately, I think the reason why they are raising debt is because they want certainty in terms of interest cost. They also want to replace the higher cost borrowing from banks with a more stable fixed rate interest instrument. So, when that adjustment in their P&L in subsequent years, they should begin to see the impact on the bottom-line.

The result just released by Forte Oil has no provision for corporate action in terms of dividend payment. So, do we expect this trend to run through the entire sector this year?

You know, each company as its dividend policy. The dividend policy at most instances are defined by the expectations and cash needs, as well as the level of cash liquidity of the operating institution. A situation where a company is borrowing and has a high cost of funds to finance its operation, the appropriate thing to do is to retain or reinvest whatever profit that was made.

So, that policy will be specific and unique to each corporate organisation. So, the policy that apply to Forte Oil may not apply to Oando and other companies depending on their leverage, their free cash flow they have, and the expectation of their investors.

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