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NNPCL’s Lower Borrowing Costs Signal Stronger Balance-Sheet

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Despite oil theft, the coronavirus pandemic, and vandalism of facilities that undermined production, Nigerian National Petroleum Company Limited (NNPCL) has maintained lower borrowing costs that indicates a cleaner balance sheet and financial stability.

Of course, investors are sensitive about the leverage position of an entity because a high debt burden without cash flows to pay back interest is a harbinger of corporate bankruptcy.

NNPCL’s balance sheet is looking healthy because its interest coverage ratio stood at 8.1 at the end of 2021, substantially higher than the pandemic level of 3.80, according to data from S&P Global Market Intelligence.

The figure (interest coverage ratio) is a measure of a company’s ability to repay its debts, with a ratio of at least 2 generally considered the minimum acceptable amount for a company with solid revenues. Analysts typically prefer a coverage ratio of 3 or higher.

The improved financial health of the state oil company means management and board of directors are poised to place the company on a global competitive arena.

However, most of the company’s assets are financed through debt as gearing ratio increased to 82.71 percent in 2021 from 68.28 percent the previous year, according to MoneyCentral calculations.

A breakdown of total liabilities shows the state owned corporation has short-term obligation or trade and other payables to a tune of N7.85 billion, which is 11.60 percent lower than 2020’s N8.88 billion.

A further breakdown of trade and other payables shows N1.91 trillion was payable to the Federation which includes crude supplies for domestic use; payables to Dangote refinery of  N723.60 billion which represents the balance due Dangote Oil Refinery Company for the acquisition of 20 percent interest in Dangote Petroleum Refinery and Petrochemicals Free Zone Enterprise (DPRP FZE).

Driven by its activities in the upstream operations as well as in gas and power, NNPCL’s operating profit spiked 79.74 percent to N167.41 billion in December 2021 from N93.41 billion the previous year.

Net income followed the same growth trajectory as it spiked by 134.60 percent to N674.01 billion in the period under review from N287.31 billion as at December 2020.

Gross profit also surged by 1556.34 percent to N1.07 trillion in the period under review from N64.77 billion the previous year.

Oil companies benefited from the reopening of the economy and roll of vaccine that helped underpin a rebound consumption of crude oil they returned to the oil rigs.

As of the first quarter of 2020, the coronavirus pandemic plunged oil prices to near zero as there was no storage capacity in a market that was inundated by supply.

However, today, oil prices are at an all-time high, thanks to sanctions imposed on Russia by the United States and Europe over the invasion of Ukraine.

Benchmark Brent crude added 0.43 percent to around $97 a barrel, helped by news that the international alliance OPEC + was planning a substantial production cut.

NNPCL is able to turn each Naira invested in sales into higher profit as net margin increased to 10.50 percent in 2021 from 7.73 percent the previous year.

It generated profit from core operations as operating profit margin moved to 2.61 percent in the period under review from 2.50 percent the previous year.

Gross profit margin, another measure of efficiency and pricing policy, improved to 16.73 percent in 2021 from 1.74 percent the previous year.

The Nigerian state oil company produces 1.20 million barrels a day, which is lower than the planned production target and the country had been exempted from output on several occasions by OPEC on the ground of theft and destruction of oil facilities.

“We believe that at least when they (assets) are running you can lose up to 200,000 barrels to theft. But in actual losses, today our plan is to produce at 1.8 million barrels per day. If you are doing 1.2 million barrels per day,  it means technically you are losing the difference between 1.2 million barrels and 1.8 million barrels, which is around 600,000 barrels per day opportunity loss, not stolen,” said Mele Kyari, Group Chief Executive Officer, NNPCL.

“But I’m happy to also say that the interventions that were seen in terms of the security measures that we have taken in collaboration with the government security agencies, with the private contractors, surveillance and security contractor we have put in place, we believe that in the next couple of days we’ll be able to bring back the Trans  Niger Pipeline (TNP) and also restore production back to the Forcados terminal,” said Kyari.

“We are sure that we can see at least 400,000 barrels come in on the space and as we continue to progress with the security intervention, we will be able to bring back the other production facilities,’’ he summed.

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