Forte Oil: Windfall from non-core operations lifts profit
Forte Oil closed its 2013 operations with a profit figure that is well ahead of forecast. Windfall from non-core earnings provided a last quarter surprise that gave the oil marketing company its first major profit recovery in five years. The exceptional growth in other income lines seems to hide the underlying constraints the company is facing in the core business however.
The company achieved a major profit leap in 2013, bringing net profit close to the 2008 peak. After tax profit advanced by about 397% to over N5.0 billion in the year after the company returned to profit in the preceding year. The preceding three years of operations to 2011 ended in losses.
Major profit acceleration was recorded in the last quarter. Of the full year net profit figure of slightly over N5.0 billion, about N2.3 billion was earned in the final quarter. The company had reported a net profit of N2.74 billion at the end of the third quarter.
The strong profit growth in the year was driven by a windfall in three non-core revenue lines. The first is other income, which rose by 367.5% to over N2.0 billion during the year. A big upsurge in other gains also happened in the year, lifting the income line by more than 2910% to N4.38 billion. There was also a major advance in finance income, which rose by about 1579% to N2.13 billion.
The company experienced difficulties from rising cost in its core business during the year in review. While sales revenue grew by 40.7% to N128.03 billion, the company could not convert any part of that increase into profit. Cost of sales grew ahead of sales revenue at almost 43% to N115.40 billion. That depressed gross profit margin from 11.2% in 2012 to 9.9% IN 2013.
Administrative cost claimed a lot more revenue in 2013 than in the preceding year. It came close to doubling at 95.6% against the 40.7% increase in sales revenue. The only cost moderation in the year was in respect of distribution expenses, which increased only marginally.
Despite the rapid expansion of 367.5% in other income, the company lost operating profit during the year. The result of operating activity is a drop of nearly 30% in operating profit to N18.9 billion.
A major event in the company's operations in 2013 is a change from net interest cost position to net finance income situation. Interest expenses made a marginal increase compared to the upsurge in interest earnings during the year. Against a net interest cost of N1.72 billion in 2012, a net interest income of N254 million appeared in 2013.
The marginal increase in interest expenses is not explained by the company's rising debt profile in the balance sheet. Long-term loans and borrowings have expanded by more than 1391% to N1.49 billion. Short-term debts grew by 279% to N4.98 billion during the year. The best that happened in respect of the company's debt stock is a 50.3% drop in bank overdrafts to N4.91 billion.
The outstanding performance in other income lines enabled the company to lift its profit margin last year. Its net profit margin rose from 1.1% at the end of 2012 to 3.9% in the 2013 full year. This is a further improvement from the third quarter record of about 3.0%.
Oil marketers recorded a general improvement in profit margin in 2013 as per their interim reports. At 3.9%, Forte Oil is second only to Mobil Oil Nigeria, which is leading the sector on profit margin at 4.3% in the third quarter.
A rise of 143% in trade debtors and other receivables caused some cash flow problems for the company last year. Net cash flow generated from operating activities dropped from N1.93 billion to N67.7 million during the year. Substantial new borrowings had to be made for the company to fund its investing and financing activities.
Forte Oil earned N4.32 per share in 2013, up from 93 kobo it reported for the 2012 operations. No dividend has been declared for the fifth year running, as the company needs to retain as much earnings as possible to rebuild its capital account previously depleted by accumulated losses.