Oil majors in Africa’s largest economy are in dire need of continuous acceleration in crude oil price that will add impetus to cash flow required to absorb huge interest expenses in their books.
The combined total debt of Seplat Corporation Development Company Plc and Oando Plc stood at N558.47 billion as at December 2020, which is 10.57 percent higher than 2019’s N505.08 billion.
Separating the wheat from the chaff and to make the analysis easier for readers and investors, Seplat incurred debt of N265.39 billion in December 2020, but the figure is lower than the N294.17 billion recorded in 2019.
Oando Plc incurred a total debt of N293.07 billion as at September 2020 review as against N210.91 billion as at September 2019. The company has not released its full year 2020 results.
Perhaps more worrisome is that these companies do not have enough strong operating income (due to weak sales on the back of lower oil price) to cover interest expense, which is why they are reeling from huge losses.
It is noteworthy that operating costs are growing faster than revenue growth, and spiraling impairment on financial assets have become a burden.
Both Oando and Seplat have negative times interest coverage ratio, this is not surprising since they posted combined operating losses of N24.45 billion.
The interest coverage ratio measures how many times a company can cover its current interest payment with its available earnings. In other words, it measures the margin of safety a company has for paying interest on its debt during a given period.
The ratio is calculated by dividing a company’s EBIT by the company’s interest expenses for the same period. The lower the ratio, the more the company is burdened by debt expense. When a company’s interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.
Oando’ financial woes started when it borrowed money from the banks to finance the acquisition of an asset from ConocoPhillips in 2014, and shortly after the deal was consummated, crude oil prices began to crash and Nigeria slipped into its first recession in 25 years.
Oil prices also took an unprecedented beating last year due to the outbreak of the coronavirus pandemic and disagreement between Saudi Arabia and Russia over output cut.
In April 2020, oil prices turned negative for the first time on record as oil producers ran out of space to store the oversupply of crude left by the coronavirus crisis, triggering an historic market collapse which left oil traders reeling.
However, the gradual reopening of the global economy and accelerated vaccine rollout-as more people got the jab at the arm- helped underpin the price of the commodity at the start of 2021.
Early in March 2021, Brent, the oil against which Nigeria’s crude is priced, rose to a high of $70/barrel, which was the highest price in more than a year, but it had been dropping in price since then and had hovered around $60/barrel on most occasions.
For Nigeria’s upstream oil and gas firms to deliver the desired return on investment to shareholders, there has to be a speedy economic recovery that hinges on mass vaccinations and economic policies of governments across the globe.