NNPC: Inefficient in its Core Business, Excelling in Non-Core Areas (3)

Previous Series

NNPC: Inefficient in its Core Business, Excelling in Non-Core Areas (1)

NNPC: Inefficient in its Core Business, Excelling in Non-Core Areas (2)

NNPC Retail

NNPC retail principally engages in the marketing and sale of refined petroleum, liquefied petroleum gas, and allied products. It basically operates in the Nigerian downstream sector of the oil and gas industry. The company recorded revenue growth of 9.48% to N236.64 billion in 2018 from N216.14 billion in 2017. The Cost-to-sales ratio was 89.79% during the period. This is compared to Conoil which had a Cost-to-sales ratio of 89.55%, Mobil with a Cost-to-sales ratio of 89.92%, and Total Nigeria which had a Cost-to-sales ratio of 88.71% all in 2018. This shows that the cost margin in the downstream sector is very high which translates to lower opportunities and profit for the firms operating in the sector. For NNPC retail, operating profit shrank to N936.85 million in 2018 compared to N1.79 billion in 2017. A major factor we attribute to this -47.72% decline was a 23.24% increase in administrative expenses as well as N6.98 billion impairment loss on financial assets (vs. N633.56 million impairment loss in 2017). The company got a tax credit of N1.18 billion in 2018 which cushioned the PAT for the year, which printed at N2.28 billion (vs. N1.83 billion in 2017). The Return on Equity (ROE) for the year settled at 4.24%. This is lower when compared to Conoil (9.84%), Total Nigeria (25.90%) and Mobil (27.63%). This implies that even though the cost margin in the downstream sector is high, NNPC retail is not effectively utilising shareholder’s money.

Nigerian Petroleum Development Company Limited (NPDC)

NPDC is engaged in the principal activities of oil prospecting, mining drilling, and such things as may be considered necessary to effectively monitor the company’s joint venture and participating interests in the oil-producing and service companies in Nigeria. Revenue for the company grew significantly by 55.80% to N1.37 trillion from N882.39 billion recorded in 2017. A major factor attributed to this was a 63.92% increase in revenue from crude oil to N1.14 trillion while revenue from Power grew to N30.57 billion (2017: N29.91 billion) and revenue from natural gas grew to N205.05 billion (2017: N157.53 billion). The cost of sale also increased significantly during the period to N1.04 trillion compared to N483.73 billion our analysis shows increased royal and rental charges, variation in crude stock, impairment on E&E asset, gas flaring penalty, and security and protocol to be the major drivers of the increased cost of sales. The profit margin, therefore, printed at 13.02% compared to the profit margin of 17.84% in 2017. As at 2018, the total non-current asset of NPDC was N3.74 trillion of which oil and gas assets were valued at N2.26 trillion while intangible assets amounted to N1.01 trillion.

Nigerian Pipelines and Storage Company Limited (NPSC)

The principal activity of NPSC is the provision of transportation and storage services for petroleum products through its pipelines and storage facilities for distribution throughout Nigeria. The company also transports crude through pipelines and evacuations of petroleum products through petroleum coastal tankers. The company did not record any income and expenses in 2017. In 2018 however, revenue was N44.4 billion, with the cost of sales printing at N1.50 billion, bringing the gross margin to 96.62% as gross profit was N42.90 billion. However, administrative expenses were greater than gross profit by N768 million, which was also the loss for the year. With an actuarial gain net of tax at N11.99 billion, total comprehensive income for the year stood at N11.22 billion.

Port Harcourt Refining Company Limited (PHRC)

The Port Harcourt refinery generated revenue of N1.46 billion in 2018 and this represents a significant decline of -69.71% (vs.  N4.82 billion in 2017). Processing expenses printed at N64.04 billion, 4,286.30% above the revenue generated, indicating gross inefficiency. Administrative expenses in 2018 (N24.03 billion) was however 38.08% lower than N38.81 billion recorded in 2017. Hence, the loss for the year printed at N45.59 billion (vs. N55.77 billion loss in 2017). This is a result of the company’s inability to refine crude in sufficient quantities to break-even, hence it was unable to earn enough to cover its costs. The auditors of the account however noted that NNPC is committed to supporting the sustenance of the operations of the Port Harcourt Refinery through adequate funding.

Petroleum Products Marketing Company Limited (PPMC)

PPMC engages in the supply and marketing of refined petroleum products to the marketers/retailers on behalf of the NNPC. Revenue for 2018 was significantly down, by -73.90% to N29.54 billion due to a 71.2% decline in commission on the sale of petroleum products, its inability to record any income on tariff relating to the movement of crude oil (N11.73 billion in 2017) as well as not earning throughput income (N1.94 billion in 2017). The Cost-to-sales ratio was 17.70% and gross profit was N24.31 billion during the year under review. Administrative expenses however gulped N16.23 billion (N51.04 billion in 2017) and PAT for the year printed at N9.35 billion compared to the N27.36 billion loss recorded in 2017. The company made additional investments, increasing its total assets to N49.08 billion in 2018 compared to N23.67 billion in 2017. Total Equity also grew to N11.13 billion in 2018 compared to negative N423.14 billion in 2017. The reason for this was because the company had N423.14 billion in “Other Reserves” which represents non-reciprocal contribution via conversion of debt owed to NNPC to equity. As part of a recapitalization of the company, NNPC (which is the parent company) relinquished its right to recall the amount of debt owed by the company to eliminate the company’s accumulated deficit of N423.14 billion as at Jan 1, 2018.

The Wheel Insurance Limited (TWI)

Incorporated in Guernsey, Channel Islands on Feb 8, 2008, The Wheel Insurance engages in the principal activities of insurance, and its earnings are recorded in US dollars. Insurance premium written was $14.87 million in 2018 with acquisition cost amounting to $2.90 million during the same period. With net insurance premium revenue printing at $6.13 million and net insurance claims of $8.64 million as well as net operating expenses of $339,022, balance on the technical account for 2018 was $14.44 million compared with $11.34 million recorded in 2017.

Warri Refining and Petrochemical Company Limited (WRPC)

Like the KRPC, the Warri Refinery engages in the business of refining crude oil as well as processes feedstock to produce petrochemical products. Revenue for the Warri refinery grew by 59.2% to N1.99 billion from N1.25 billion recorded in 2017, and the cost of sales declined by 12.38% to N12.74 billion. Regardless, it recorded a gross loss of N10.78 billion compared to the gross loss of N13.29 billion in 2017. Operating expenses printed lower at N34.64 billion (vs. N71.85 billion in 2017). The company made a loss of N44.44 billion for the 2018 financial year (vs.f N84.60 billion in 2017). When the actuarial loss of N7.74 billion is added, the total comprehensive loss for the year under review amounted to N52.18 billion. With total assets of N55.17 billion and total liabilities of N396.86 billion, total equity for the year ended negative at N341.69 billion. From the current liabilities of the company, we noted that the NNPC which is the parent company gave additional funding of N157.23 billion to the company (WRPC) (comprising of N150.15 billion balance at the beginning of the year and N7.37 billion net funding during the year).

Conclusion

We believe some of the subsidiaries can be merged together as the analysis made us understand that some are performing duplicating functions. For example, we see no reason why N-GAS, NGC and NGMC should be operating as different subsidiaries given the close nature of their activities. They are all engaged in the transportation and delivery of natural gas to customers in the country and the West African sub-region and merging those together means they can share some cost centres and resources. Another example is in the case of NIDAS marine and NIDAS shipping who are separate subsidiaries under the NNPC but engage in almost the same activities. If these subsidiaries can be merged together, it will save the Group in terms of general and administrative expenses as well as operating expenses such as personnel cost, thereby improving the profitability and efficiency of the Group.

• This article was written by the Research Team (Abdulazeez Kuranga, Okeowo Ebenezer, Sheriff Adeoti and Olorunsaiye Joshua), the analytics was led by Okeowo Ebenezer while Samuel Adebisi Edited it.

For questions, opinions, corrections and contributions, please drop them in the comment section. You can as well contact the writer on Twitter @K2ice_JR

Additionally, should you need data backed research and analysis for your business or research needs, you can contact us by sending a mail to info@giftedanalysts.com