Operating in the Nigerian oil and gas industry with an average total debt to equity of 67.94 percent at the end of 2017, two firms, Oando and Capital oil having total debt to equity of 90.1 percent and 280.9 percent respectively, underscores serious challenges.
Creditors view a higher debt to equity ratio as risky because it shows that the investors haven’t funded operations of the company as much as creditors have. Hence, it is safe to say investors don’t have as much skin in the game as the creditors do in the business of the above mentioned companies.
An analyst BusinessDay spoke with noted that incurring such high ratio would ordinarily not be much of an issue if the companies are efficiently utilizing their borrowings to generate more revenue and increase profitability.
This is however not the case for oando and capital oil as they have not fared so well on the revenue and profit front in the last 5 years.
BusinessDay analysis of Oando’s five year financial summary as stated in the company’s 2017 financial statement indicates that the company made its first profit before tax (PBT) in 2017( N27.1 billion) after 4 years, posting continuous losses after tax in 2014, 2015 and 2016 (N137.7 billion, N51.1 billion and N32.4 billion respectively).
Profit after tax (PAT) for 2017 stood at N19.7 billion up by 405 percent from N3.9 billion in 2016. While the company posted losses of N49.7 billion and N145.7 after tax in 2015 and 2016.
Oando spent N58.5 billion as interest paid on debt in 2015, the company’s highest in 8 years. The amount however dropped by 11.6 percent to N51.7 billion and 52.8 percent to N24.4 billion in 2016 and 2017 respectively.
Kayode Tinuoye, fund manager at united capital asset management stated that “excessive debt is a disadvantage to investors in many ways because the company’s bottom line is adversely affected by interest payment on debt. That is probably why you haven’t seen Oando declared substantial dividend payment for shareholders”
He continued by saying if the trend continues, there are high possibilities that the companies go into default or receivership, a situation in which an institution or enterprise is held by a receiver or an individual placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights especially in cases where a company cannot meet financial obligations or enters bankruptcy.
“Being leveraged hurts badly especially when oil prices which are unpredictable falls” Tinuoye concluded.
Capital oil, record the highest debt to equity ratio on the NSE oil and gas index but was unable to grow bottom line has continuously posted losses since 2013 both before and after tax.
The company’s five year financial summary put losses before tax in 2013, 2014, 2015, 2016 and 2017 at N156.5 billion, N291.3 billion, N56.2 billion, N113.2 billion and N495.3 billion respectively.
In the same vein, it posted losses after tax of N160.8 billion, N294.7 billion, N61.9 billion, N131.2 billion and N475.5 billion in 2013, 2014, 2015, 2016 and 2017 at respectively.
Company turnover was at a 5 year low in 2017 down 84 percent from N2.4 billion in 2013 to N471.4 billion in 2017 the worst of all companies on the Nigerian stock exchange oil and gas index.
“Capital oil, because of their size and liquidity of stock are not major market mover in the sector compared to the likes of Total, and Mobil” said an analyst BusinessDay spoke with.
“Operating in a sector with very low margins, you will need quite a lot of volume to be able to make meaningful profit and because they are relatively small, this has proven it is difficult. Also they are not as diversified as others in that space that has gone into higher margin businesses to compliment efforts” the analyst concluded.
Companies with a higher debt to equity ratio are considered more risky to creditors and investors than companies with a lower ratio because unlike equity financing, debt must be repaid to the lender.
Credit : Business Day