Oil marketers’ debt hits five-year high on rate hikes

The average debt-to-equity ratio of Nigeria’s oil marketing firms has hit its highest level in at least five years in the first half (H1) of 2024, analysis by BusinessDay shows.

Data showed the average debt-to-equity ratio for Nigeria’s listed oil marketers stood at 4.44 percent in H1, up from 3.9 percent recorded in the same period of 2023.

“The increase in a debt-to-equity ratio is a reflection of higher interest rates and the pendency that comes with a rising prime lending rate, as well as the rising cost of exchange rate differentials before all the intermediation windows,” said Kelvin Emmanuel, energy sector expert, and co-founder/CEO at Dairy Hills.

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Emmanuel noted that with the challenges of foreign exchange rates and the capital repatriation happening in the country, companies had no choice but to rely on borrowing or taking on debt to ensure their operations could continue and adjust to the evolving circumstances.

The listed firms surveyed include: Conoil Oil Plc, TotalEnergies Marketing Nigeri Plc, Eterna Plc and MRS Oil.

In H1, TotalEnergies reported the highest debt-to-equity ratio of 6.4 percent, followed by MRS Oil with 1.4 percent and Conoil Oil with 1.2 percent.

The debt-to-equity ratio is a financial metric that indicates the proportion of debt and equity used to finance a company’s operations. It provides insights into a firm’s financial position and its risk and stability.

It also determines if there’s enough shareholder equity to pay off debts if the company were to face a decrease in profits.

A lower ratio indicates effective financial management, with reduced reliance on debt and improved financial stability, while a higher debt-to-equity ratio often signifies that a company poses a higher risk to its shareholders, increasing the possibility of bankruptcy if profits slow.

Experts say several factors have converged to push oil marketers deeper into debt. One of the most prominent issues is the volatility of the exchange rate.

With the Central Bank of Nigeria (CBN) having floated the naira in 2023, the currency’s sharp devaluation has led to increased costs for importers of petroleum products.

Marketers who are required to settle import bills in U.S. dollars now face far higher costs than in previous years, with the naira currently trading at over ₦1600 to the dollar.

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Naira has lost about 70 percent of its value under President Bola Tinubu’s administration and averaged N1,511.34/$ at the Investors and Exporters window this year, according to data on the CBN website. It slipped to more than 8 percent on Wednesday to 1,600 to a dollar, according to data by the FMDQ.

Dollar supply fell by 14.34 percent to $176.45 million on Wednesday, down from $181.86 million recorded on Monday at NAFEM.

“Pressures from fuel subsidy removal and access to forex, especially with the recent lifting of forex restrictions, have affected their businesses,” Chinedu Onyegbula, an energy sector expert and director of Bullox Resources Limited, said.

Experts said the removal of petrol subsidies has opened up the market to increased competition, prompting marketers to explore strategic options to maintain or increase their market share.

Emmanuel noted that given the unpegged exchange rate, companies are now turning to the non-exchange derivatives market to manage the increased volatility index associated with Eurobond capital imports in the international debt capital markets.

According to Emmanuel, this approach is expected to alleviate the gearing ratio for downstream oil and gas companies.

“As the government attempts to reflate the economy from the removal of power, FX and petrol subsidy as a tool to reduce the FX exposure on durable goods that is due to cost-push inflation, you begin to see a gradual adjustment in convexity for the bond yield curve and lower pendency on existing loans or debt instruments,” Emmanuel said.

During the first half of 2024, the total liabilities of these firms amounted to N598.7 billion, reflecting an increase from the N438.5 billion recorded in the corresponding quarter of 2023.

Simultaneously, the total equity stood at N134.7 billion, rising from the N110.9 billion.

As oil marketers seek to stay afloat, many have turned to commercial banks for loans, only to face soaring interest rates.

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Nigeria’s lending rates have surged for the fifth consecutive time this year in response to inflationary pressures and monetary tightening policies by the CBN, with the Monetary Policy Rate (MPR) hovering around 27.25 percent in September. This has made borrowing more expensive, further complicating the financial position of oil marketers.

Conoil Plc

Conoil Plc observed a 0.8 percent increase in total liabilities, reaching N50.4 billion from N50 billion.

On the other hand, its total equity stood at N41.2 billion rising from N31.2 billion.

Conoil witnessed an increase in net cash generated from operating activities, to N26.6 billion, a jump from a loss of N876 million balance.

Total Energies Marketing Nigeria Plc

Total Energies recorded a 6.17 percent increase in total liabilities, amounting to N436.8 billion in the first half of 2024, compared to N298.2 billion in the same period of 2023.

However, its total equity stood at N68.1billion up from N51.9 billion.

The Oil firm reported a negative net cash of operation amounting to N540 million, from N12.9 billion recorded.

MRS Oil Nigeria Plc

MRS Oil recorded a 26 percent increase in total liabilities, reaching N38.2 billion from N30.2 billion. However, its total equity stood at N26.8 billion rising from N20.8 billion.

MRS Oil Nigeria Plc achieved a positive outcome in terms of net cash generated from operating activities. In H1, it experienced a gain of N7.72 billion from N3.32 billion recorded.

This favourable result can be attributed to two factors: the receipt of advances from their customers and an increase in trade and other payables.

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Eterna Plc

In H1, Eterna Plc witnessed an increase in total liabilities, reaching N73.3 billion from N59.8 billion in the same quarter of 2023. However, the company reported a loss in its shareholder funds amounting to N1.33 billion from a gain of N7.04 billion.

During the first half of the year, Eterna Oil recorded a loss after tax of N4.8 billion from a loss of N5.54 billion.

The firm’s revenue increased by 16.25 percent, reaching N147.5 billion compared to N69.3 billion.

The oil firm’s net cash from operations increased to a positive N7.62 billion from a negative N176 million.