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Last week, Forte Oil informed the investing public of its decision to sell off its upstream and Ghanaian units, as well as its stake in the Geregu power plant.

The company attributed its decision to a need to focus on the downstream segment. The move is however subject to the approval of shareholders at its forthcoming 39th Annual General Meeting.

Forte Oil share price is down 20% in the last one year and about 6% year to date. Since this announcement, the share price has dropped from a year high N47 to N40 suggesting that the market may not have been impressed by the move to spin of upstream and power segment of its business operations.

Ghanaian operations are minuscule

Ghanaian operations have been insignificant at both the top and bottom lines. AP Oil and Gas Ghana accounted for just 0.9% of the Group’s revenues of N148.6 billion in 2016 and 3.6% of Group revenues of N129.4 billion in 2017.

Bottom line contributions are even far smaller. The Ghanaian segment made a loss before tax of N59 million in 2016, and a profit before tax of just N29 million in 2017.

Forte made an equity investment of N670 million in AP Oil and Gas Ghana, in addition to cumulative preference shares worth N424.9 million.

Prior to the decision to put the Ghanaian subsidiary on sale, the company had taken several impairments on its investment. Impairments of N547 million were taken in 2016 and N410 million in 2017 respectively.

Selling off Geregu power plant is puzzling

While the decision to sell its Ghanaian unit makes sense, offloading its stake in Geregu is quite puzzling. Forte Oil prides itself as the leading integrated energy company in the country. Also, gross profit margins from Geregu has been impressive, at between 35% and 40%. 

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  • Forte owns 57% of Amperion Power Distribution Limited, BSG Resources Limited owns 38%, while Shangai Municipal Electric Power Company (SMEPC) has a 5% stake.
  • Amperion Power Distribution Limited, in turn, owns 51% of Geregu Power Plc. In effect, Forte owns about 29% of Geregu Power Plc.
  • Amperion completed the acquisition of a majority stake in the Geregu Power plant for $132 million in August 2013. The company has since invested funds into rehabilitation of the plant.
  • Like fuel, an increase in electricity tariffs is almost inevitable, most likely after the elections. All variables used to calculate the current rates have since gone up.

Having invested so much in the plant’s rehabilitation and in view of the potentials the industry has, Forte selling its stake comes across as contrarian. 

A buyer won’t come easy

Nigeria’s power sector has struggled with various issues ranging from poor collection rates, to tariffs that are not cost-effective, and an absence of metered customers.

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  • This has cascaded from the final consumer to the GENCOs. Getting a buyer for its stake In Geregu may take some time.
  • The prospective buyer would also have to assume responsibility for the loans guaranteed by Forte Oil Plc.

As at the 3 months ended March 2018, the Group had a long-term loan of N11.4 billion for its acquisition of the Geregu Plant through Amperion.

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The case for downstream

Forte has one of the largest networks of petrol stations in the country. In a country of over 120 million people, many are dependent on petrol for running their cars and generating sets; this serves as an advantage.

  • Also, as a means of diversifying its revenue base, Forte recently announced that it had obtained the distributorship rights for the Havoline line of lubricants.
  • Interesting to note that Forte Oil’s revenue from its downstream division has been on the decline in the last three years. Revenue has dropped from N152 billion in 2015 to N121 billion (restated) and N78.8 billion in 2016 and 2017 respectively.
  • The drop is largely attributed to its volume declines as NNPC remains the sole importer of fuels in the country.
  • By focussing on downstream only, analysts suggest Forte Oil is positioning itself ahead of the commencement of operations of the Dangote Refinery as well as other smaller modular operations currently being constructed across the country.

Last year, the MD/CEO of Forte Oil Mr. Akin Akinfemiwa, announced Forte Oil was in talks with a major refinery to “form a strategic partnership for local refining of petroleum products in Africa’s top oil exporter”

Forte Oil is a market leader when it comes to downstream operations and while fuel subsidy still persists they perhaps believe this won’t be sustained. If fuel subsidy is removed, margins could improve for a sector that has relied on volumes and government handouts to survive.

There is also lubricants and diesel and other by-products where subsidy no longer exists. Forte Oil recently acquired rights to distribute Chevron’s Havoline Motor Oil which is expected to help boost its Lubricants and Greases division valued at about N12 billion.

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Against sole reliance on downstream earnings

Petrol prices remain heavily regulated by the Federal Government through the Nigerian National Petroleum Corporation (NNPC). The Buhari administration in 2015 increased the pump price of petrol from N86.50 to N145 per litre.

  • A combination of the depreciation of the naira against the dollar, as well as rising crude oil prices, mean that petrol landing prices have since gone up. The government has however been reluctant to increase pump prices once more to avoid a populist backlash.
  • This has left the NNPC as the sole importer, even as it racks huge losses. The government has also been reluctant to use the term, ‘subsidy’ preferring to call it an under recovery.
  • Downstream players continue to be owed by the Government through the PPPRA. Q1 2018 results by the company show that it is owed N18.8 billion by the Petroleum Support Fund (PSF).

Post-May 2019, the government could decide to increase pump prices again, to enable major marketers to begin importing again. Till then, most downstream players will continue to struggle.

Going Forward

Forte’s strategy may not deliver returns in the near to medium term but will pay off were the government to fully deregulate the downstream sector.

While Nigeria is much closer to that, no one knows exactly when it will take place. The Buhari administration has doggedly stood against the removal of fuel subsidy, against advice from policy observers. 

However, with oil price racing above $70 and predicted to hit $100 it is unlikely that the government will continue to tow this line. Fuel subsidy could be removed after the election in 2019, paving the way for Forte Oil to perhaps win in the battle for the downstream sector.

 

Onome Ohwovoriole has a degree in Economics and Statistics from the University of Benin and prior to joining Nairametrics in December 2016 as Lead Analyst had stints in Publishing, Automobile Services, Entertainment and Leadership Training. He covers companies in the Nigerian corporate space, especially those listed on the Nigerian Stock Exchange (NSE). He also has a keen interest in new frontiers like Cryptocurrencies and Fintech. In his spare time, he loves to read books on finance, fiction as well as keep up with happenings in the world of international diplomacy. You can contact him via onome.ohwovoriole@nairametrics.com

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