21
FORTE OIL PLC. 2017 Final Rating Report
FORTE OIL PLC.
2017 Final Rating Report
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2016 Corporate Rating Report
Forte Oil Plc.
Rating Assigned:
Bbb This refers to companies with satisfactory financial condition and adequate
capacity to meet obligations as and when they fall due.
Outlook: Stable
Issue Date: 11 July 2017
Expiry Date: 30 June 2018
Previous Rating: N/A
Industry:
Petroleum Products Marketing
Outline Page
Rationale 1
Company Profile 4
Financial Condition 7
Ownership, Mgt. & Staff 12
Outlook 14
Financial Summary 15
Rating Definition 18
Analysts:
Ojuru Adeniji [email protected]
Isaac Babatunde [email protected]
Agusto & Co. Limited
UBA House (5th Floor)
57, Marina
Lagos
Nigeria
www.agusto.com
RATING RATIONALE
Agusto & Co. has assigned a “Bbb” rating to Forte Oil Plc. (“Forte Oil”, “FO” or
“the Company”). The rating is supported by good cash flow, improvement in
profitability, satisfactory financing structure, stable and experienced
management team, strong brand, extensive retail network and good market
position in the downstream oil & gas industry. The rating is however
constrained by the high leverage position of the Company resulting from the
increasing working capital requirement.
During the year ended 31 December 2016, Forte Oil’s revenue grew by 21% to
₦131.6 billion, supported by the 49% increase in pump price of premium
motor spirit (PMS), higher sales volumes of lubricants and liquefied petroleum
gas (LPG). In the same vein, cost of sales trended upwards by 20% to account
for 88.5% of revenue in 2016, fuelled by the impact of devaluation of the
domestic currency which led to higher costs of importing petroleum products.
Despite the high cost environment, operating profit margin improved to 3.3%
from 1.2% the previous year while the Company reported a pre-tax return on
average equity of 43.7%; higher than our expectation.
In the year under review, Forte Oil improved its financing structure, with the
issuance of a ₦9 billion 5-year bond in Q4 2016, which replaced the short term
expensive commercial bank borrowings. Management has disclosed plans to
raise ₦20 billion from the equity market before the end of 2017 – (rights issue
or private placement) in order to strengthen its capital base and create a
favourable long term financing position. Should this be successful, we are of
the view that additional equity will address FO’s long term working capital
need and improve overall financial performance in the medium term.
During the year ended 31 December 2016, Forte Oil reported a positive
operating cash flow of ₦13.9 billion. Operating cash flow was sufficient to
cover returns to providers of financing and estimated mandatory capital
2 2017 Corporate Rating
Forte Oil Plc.
expenditure. FO’s operating cash flow as a percentage of sales of 11% is above
our minimum expectation. Overall, the Company’s cash flow is good.
As at 31 December 2016, FO’s total interest bearing liabilities (IBL) stood at
₦33.4 billion, up by 32% from the prior year, following the issuance of the 5-
year bond in November 2016. Net debt as a percentage of average total assets
(less cash) stood at 80%, while total IBL to equity ratio of 281% is also high.
Overall, we consider the Company’s leverage to be very high.
Forte Oil’s current ownership structure shows significant concentration, with
over 70% of equity (directly and indirectly) controlled by an individual
shareholder, thus exposing the Company to potential key man risk.
Nonetheless, the Board comprising four non-executive directors provides
some level of checks and oversight function. In addition, Forte Oil remains one
of the few listed companies in Nigeria with a balanced directorship mix
between executive and non-executive directors, of which four are independent
directors.
FO has a large distribution network, with over 400 retail outlets spread across
the country. Forte Oil has a good market position, controlling over 12% of the
Nigerian oil & gas downstream industry. The Company has a strong brand
presence, following its rebranding and marketing positioning efforts and thus
is considered one of the leading downstream oil & gas players in the country.
Going forward, Forte Oil’s strategy to deepen focus on high margin products,
diversify revenue base, optimise the Company’s distribution channels and
improve internal efficiencies in its core operations (downstream activities)
could lead to improvement in financial condition in the short to medium term
in our opinion. Based on the foregoing, we attach a stable outlook to Forte Oil
Plc.
3 2017 Corporate Rating
Forte Oil Plc.
Figure 1: Strengths, Weakness & Challenges
•Good cash flow
•Good market position
•Extensive retail network of over 400 outlets
•Stable, qualified and experienced management team
•Diversification into power generation and upstream activities
Strengths
•High leverage
Weakness
•Improving cash generating capacity in view of incessant delays in subsidy payments by the FGN
•Highly regulated industry susceptible to policy changes
•Thining industry wide operating profit margin
Challenges
4 2017 Corporate Rating
Forte Oil Plc.
PROFILE Forte Oil Plc. was originally incorporated as British Petroleum Limited (BP) in 1964, marketing and selling BP’s
products across the country. The Company’s name changed to African Petroleum Plc., following the
indigenisation policy of the Federal Government (FG) in the 1970s, which led to the acquisition of 60% equity
stake in BP at the time. In 1989, the FG sold 20% of its equity stake to the Nigerian public in the first phase of
a privatisation program. This privatisation process was completed in 2000, with the acquisition of the 40%
equity stake in the Company by Zenon Petroleum and Gas Company Limited, following the divestment by the
Federal Government. In 2010, Zenon Petroleum acquired majority shares in African Petroleum and
subsequently changed the Company’s name to Forte Oil Plc. in the following year. Today, Forte Oil Plc. is one
of the leading integrated energy companies operating in Nigeria, with business interest in the oil & gas
(downstream & upstream) and the power sector.
Figure 2: Evolution of Forte Oil Plc.
The Company primarily engages in the marketing of refined petroleum products and blending of lubricants.
Forte sells Premium Motor Spirit (PMS), Automotive Motor Oil (AGO), Dual Purpose Kerosene (DPK) and Aviation
Turbine Kerosene (ATK). FO has a wide range of lubricant brands including SUPER V, VISCO 2000, Diesel Motor
Oil, Gear Oil 40 and Gear Oil 90. In 2013, Forte Oil introduced SYNTH 10000, a synthetic-based engine oil to its
product range, in a bid to compete with the imported range of lubricants in the market. The Company also sells
industrial and organic chemicals such as Polyol, Acetone, Calcium Hydrochloride and Isopropyl Alcohol to
companies operating in the upstream oil & gas sector. FO also provides aircraft refuelling services at five major
airports in Nigeria under the brand Air FO for international and local airlines operating in the country.
Forte Oil operates its business from 400 retail outlets across Nigeria and also possesses a 30,000 metric ton
lubricant blending plant and aviation fuel storage facilities in Lagos State. The Company is a member of the
Major Oil Marketers Association of Nigeria (MOMAN) alongside Conoil Plc., Mobil Oil Nigeria Plc. (Mobil), MRS
1964
• Incorporated as British Petroleum (BP) Nigeria Limited
• Dominant foreign ownership
1965 -1979
• Converted to a Public Company
• NNPC acquired 60% stake with 40% of shares to Nigerian citizens
1980 - 2000
• NNPC divests 30% to core investor
• In 1989 name changed to African Petroleum (AP)
• NNPC sold 10% stake to the Nigerian public
2001-2010
• Zenon Petroleum & Gas Ltd acquired majority stake in AP and changed the name to Forte Oil Plc
2010-2011
• Rebranded to Forte Oil
• New Management team
• Introduced 3-year strategic turn-around program
2012-2015
• Strategic program yielding results
• Acquired Geregu power plant with a 414MW capacity
2016-2020
• Consolidate growth, build resilience and entrench best practices
• To become the foremost integrated energy solutions provider in Nigeria
5 2017 Corporate Rating
Forte Oil Plc.
Oil Nigeria Plc. (MRS), Oando Plc. and Total Nigeria Plc. (Total). Forte Oil controls over 5% of the market share
of PMS distributed in the Country1.
The Company is listed on the Nigerian Stock Exchange with over 161,000 shareholders. Zenon Petroleum &
Gas Limited is the largest single institutional shareholder, controlling 48.87% equity stake, while other
significant shareholders include; Thames Investment Incorporated Limited (15.11%) and Mr. Femi Otedola
(14.21%).
Forte Oil Plc. is governed by an eight-man board of directors, comprising two executives and six non-executive
directors. Mr. Femi Otedola is the Chairman of the Board, while Mr. Akin Akinfemiwa is Group Chief Executive
Officer. Prior to year end, two non-executive directors - Mrs. Grace Ekpenyong and Mr. Phillip Akinola retired
from the Board in October and December 2016 respectively. During the period under review, Forte Oil
restructured its Board, with the appointment of three additional independent directors namely: - Mrs. Salamatu
Suleiman and Dr. Mairo Mandara (both were appointed in October 2016), while Mr. Nicolaas Vervelde was
appointed on December 8, 2016. The Board has five sub-committees which govern the affairs of the Company.
Over the last three years, FO has received satisfactory report on its corporate governance practices by Price
Waterhouse Coopers (PWC).
Table 1: Current Directors
Mr. Femi Otedola Chairman
Mr. Akin Akinfemiwa Group Chief Executive Officer
Mr. J.B. Omodayo-Owotuga Group Chief Financial Officer
Mr. Anil Dua Non-executive Director
Mr. Christopher Adeyemi Non-executive Director (Independent)
Mrs. Salamatu Suleiman Non-executive Director (Independent)
Dr. Mairo Mandara Non-executive Director (Independent)
Mr. Nicolaas Vervelde Non-executive Director (Independent)
The Company has two wholly owned subsidiaries: Forte Upstream Services Limited (formerly AP Oil Fields
Services Limited) and AP Oil & Gas Ghana Limited. In addition, Forte Oil owns 57% stake in Amperion Power
Distribution Company – a independent power generating company in Kogi State, Nigeria.
Forte Upstream Services Limited (FUS) was established in 2003. The company, which is wholly owned by Forte
Oil, is primarily engaged in the sale of chemicals and drilling fluids to companies in the upstream oil and gas
industry. The company also provides project management services, environmental & safety services, rig
operations & marine supplies to local, international oil exploration and production companies. The company
plans to supply production chemicals and drilling fluids chemicals to operators in Sao Tome and Principe.
AP Oil & Gas Ghana Limited (APOG) was established in 2008. It is wholly owned by Forte Oil and is engaged
in marketing refined petroleum products in Ghana through its 15 retail outlets. The company intends to expand
operations to other West African countries in the near term. During the period under review, the Company
1 Agusto & Co. Research
6 2017 Corporate Rating
Forte Oil Plc.
impaired 50% of its Ghana operations to focus on harnessing its business activities in Nigeria.
Amperion Power Distribution Company is largely owned by Forte Oil Plc. with 57% equity stake. Other
shareholders with more than 5% equity stake are Benny Steinmetz Group Resources Limited (BSGR) with 38%
and Shanghai Municipal Electric Power Company (SMEPC) with 5%. BSGR is a diversified natural resources
company, with operations across 12 countries and over $1 billion annual turnover. SMEPC is a prominent
multinational power generation and electrical equipment manufacturing company based in China. In August
2013, Amperion Power Distribution Company acquired a majority stake (51%) in Geregu Power Plc (owners of
Geregu Power Plant), while the Federal Government (FGN) retained 49% through the Bureau of Public
Enterprises and Ministry of Finance Incorporated. Geregu power plant was commissioned in 2007 and has a
generating capacity of 414 megawatts (MW). In 2016, the Company carried out repair rehabilitation works on
the power plants which increased the generating capacity to 435 MW. During the year ended 31 December
2016, the power generation business segment earned a revenue of ₦12.9 billion, accounting for 8.7% of the
Group’s total revenue.
Table 2: List of Subsidiaries Business Focus Ownership Stake Managing Director
Amperion Power Distribution Company Power 57% Mr. Adeyemi Adenuga (FNSE)
AP Oil and Gas Ghana Limited Downstream oil & gas 100% Mr. Ukpai Okwara
Forte Upstream Services Limited Chemicals and drilling
fluids
100% Mr. Seye Alabi
As at 31 December 2016, Forte Oil’s total assets stood at ₦73.5 billion. During the year under review, the
Company’s total revenue amounted to ₦131.6 billion, while FO reported a profit after tax of ₦3.2 billion.
Table 3: Background Information as at 31 December 2016
Authorized Share Capital: ₦2 billion
Paid-up Capital: ₦0.6 billion
Shareholders’ Funds: ₦11.8 billion
Registered Office: 13, Walter Carrington, Crescent, Victoria-Island, Lagos
Principal Business: Petroleum Products Marketing
Auditors: PKF Professional Services
Number of Employees 171
7 2017 Corporate Rating
Forte Oil Plc.
ANALYSTS’ COMMENTS
PROFITABILITY
Forte Oil Plc.’s primary business includes the marketing, distribution and sale of refined petroleum products
comprising fuels (PMS, DPK, ATK, AGO and LPFO), lubricants and LPG through the Company’s network of over
400 retail outlets. In addition, FO has diversified its business into power generation and upstream oil & gas
and the revenue from these businesses are reflected in other income. During the financial year ended 31
December 2016, FO’s revenue grew by 21% to ₦131.6 billion. This growth is primarily driven by the 49%
increase in the pump price of PMS by the Federal Government in May 2016. In addition, we note that the sale
of PMS, AGO and DPK together accounted for the largest portion of revenue at 91.3%.
Further analysis of revenue growth per product, revealed that the lubricant business segment grew by 64% to
account for 8.7% of the Company’s total revenue in the year ended 31 December 2016 (2015: 5.7%). FO
repositioned its lubricant business segment, with the introduction of new products, improved production
efficiency and enhanced its marketing strategy to grow lubricant revenue. As a result, the volume of lubricants
sold increased to 21.7 million litres in 2016, from 13.2 million litres in the prior year. Management has
disclosed plans to sustain this growth, riding on the Company’s strong brand, wide retail network and product
quality.
During the year ended 31 December 2016, Forte Oil’s cost of sales rose by a significant 20.6% to ₦116.4 billion,
due to the increased cost of importation of fuels and other petroleum products which have been elevated on
account of the impact of devaluation of the domestic currency. However, the direct cost of importation is
somewhat moderated, given that the pump price of PMS is regulated and the Federal Government’s subsidy
payments include exchange rate differential.
In the year under review, the Company’s operating expenses inched upwards by 6%, to account for 8.3% of
turnover, reflecting the high level of inflation of 18.55%2 in 2016. FO has disclosed plans to moderate its costs
2 National Bureau of Statistics, 2016 CPI report
91.3%
94.3%
8.7%
5.7%
0.002% 0.024%
86%
88%
90%
92%
94%
96%
98%
100%
2016 2015
Fuels Lubricants and greases Production chemicals
Figure 3: Revenue Breakdown by Business Segments 2015-2016 Figure 4: Year-on-Year Growth in Product Volume
-24%
3%
-74%
-35%
255%
65%
-2%-100%
-50%
0%
50%
100%
150%
200%
250%
300%
AGO ATK DPK LPFO LPG LUBES PMS
8 2017 Corporate Rating
Forte Oil Plc.
by rationalising its distribution channels while
focusing on enhancing product sales in prime
locations. The Company has also reviewed a number
of its maintenance service level agreements for
repairs to be done on a need basis. Overall,
Management expects operating expenses to remain
relatively unchanged in the near term. On account of
an enlarged revenue base, FO recorded 3.3%
operating profit margin, the highest recorded in the
past three years. This is however lower than its peer –
Total Nigeria Plc. (Total) of 6.7% but higher than MRS
Oil Nigeria Plc. (MRS) of 1.8%. Forte Oil plans to
achieve its target operating profit margin of 3.5% in
2017, by deepening its high margin lubricant business. We believe this is achievable, owing to the Company’s
improved route-to-market strategy.
Forte Oil’s other income of ₦2.4 billion comprises throughput income earned on the storage of products for
the pipeline & petroleum marketing company (PPMC), dividend from Amperion Power Distribution Limited,
rental income on investment property, freight income earned from trucking activities and foreign exchange
gains from sale of FX inflows. Other income also includes ₦0.22 billion from crude lifting contract of 45,000
barrels per day (bpd) executed with the Nigerian National Petroleum Company (NNPC). We expect other income
to continue to boost Forte Oil’s earnings, following the increased capacity of the Geregu power plant to 435MW
and throughput income earned from petroleum storage.
Despite the growth in revenue recorded during the year, profit before interest and tax dipped by 10% to ₦8.1
billion, due to the high cost of sales and operating expenses. However, the Company’s interest expense
decreased by 15% to ₦2.6 billion, on the back of the reduction in high cost commercial bank loans, which was
repaid from the proceeds of the bond issue. As a result, the ratio of interest expense to sales improved to 2%
(2015: 2.8%). Thus, the Company’s pre-tax profit to sales of 4.1%, is within our expectation.
During the year, Forte Oil reported an impressive pre-tax
return on average equity (ROE) of 43.7%, higher than our
expectation and higher than MRS of 10.6% but lower than
Total of 102.2%. The Company’s pre-tax return on average
assets (ROA) which stood at 1.9% was lower than our
benchmark. FO’s 3-year ROA of 2.2% remained lower than
our expectation while average ROE of 41.6% was
significantly higher than our threshold. In our opinion,
Forte Oil’s overall profitability has improved, largely due to
the increase in volumes of lubricants and PMS as well as
the dividend earned from the power business segment.
3.3%
1.9%2.4%
6.7%
2.4%
3.3%
1.8%
0.2%
-1.9%-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
2016 2015 2014
Forte Oil Total MRS
Figure 5: Operating Profit Margin (2014-2016)
43.7% 46.5%
34.5%
102.2%
40.4%46.8%
10.6% 7.1% 6.4%
0%
20%
40%
60%
80%
100%
120%
2016 2015 2014
Forte Oil Total MRS
Figure 6: Pre-tax return on Average Equity (2014-2016)
9 2017 Corporate Rating
Forte Oil Plc.
CASH FLOW Though Forte Oil’s sales are largely on cash basis, the
Company also engages in credit sales of 60 days to large
corporates and dealer-owned retail outlets. During the
financial year ended, OCF remained largely unchanged
at ₦13.9 billion from the prior year. Although the
Company’s OCF to sales ratio dipped to 11% from 13%
the previous year, this level is better than its peers –
Total: 8% and MRS: (-7%) and within our expectations.
The Company’s operating cash flow of ₦13.9 billion was
sufficient to cover returns to providers of financing
(comprising interest payment of ₦2.6 billion) and
dividend payment of ₦4.5 billion) and estimated mandatory capital expenditure (₦2.1 billion). However, the
balance OCF of ₦1.6 was unable to cover current portion of long term loan of ₦12 billion.
Forte Oil Plc. has a petroleum support fund (PSF) receivable of ₦15.1 billion, comprising subsidy payment,
interest on delayed payment and foreign exchange differential owed by the Federal Government. We note that
77% of this receivable has been outstanding past 360 days and thus categorised as long term receivable rather
than a trade receivable. Agusto & Co. recognises efforts by the Major Oil Marketers Association of Nigeria
(MOMAN) towards realising outstanding payments under the PSF scheme recoverable from the petroleum
pricing regulatory agency (PPPRA). Subsequent to year end, Management has disclosed receipts of ₦1.3 billion
from the PPPRA covering the interest on delayed subsidy payment and foreign exchange rate differential. In
addition, there are strong indications of further receipts from the PSF receivable from the Federal Government3.
In our opinion, the Company’s operating cash flow is good. Nonetheless, the expected inflow from PPPRA will
improve the overall cash flow position of the Company going forward.
3 (Thisday Newspaper, 2017) - The Acting President has ordered the Minister of Finance to pay oil marketers all outstanding subsidy claims
estimated at $2 billion. Published on 15 June 2017.
Figure 7: OCF to Sales
11%13%
-2%
8%
5%
8%
-7%
7%
4%
-10%
-5%
0%
5%
10%
15%
2016 2015 2014
Forte Oil Total MRS
10 2017 Corporate Rating
Forte Oil Plc.
FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL
As at 31 December 2016, Forte Oil’s working assets stood at ₦23.5 billion, representing a 20% decline
compared to the prior year and accounting for 32% of total assets. The decline in working assets is due to the
significant drop in inventory level and trade debtors in the year under review. The Company temporarily
stopped the importation of PMS in April 2016 for the entire year, due to the illiquidity in the foreign exchange
market, devaluation of the domestic currency and the outstanding payment on the PSF.
The Company’s spontaneous financing which stood at ₦28.2 billion as at 31 December 2016, was largely due
to a 15% increase in trade creditors to ₦14.5 billion following the more favourable terms of trade. In the review
period, spontaneous financing was sufficient to cover working assets, resulting in a short term financing surplus
of ₦4.7 billion.
As at 31 December 2016, FO’s long term assets stood at ₦33.8 billion (2015: ₦26.1 billion) consisting of
investment in subsidiary (Amperion Power Distribution Limited – operators of the Geregu Power Plant, Forte
Upstream and AP Oil & Gas Ghana) 48%, plant, property & equipment (43%) and investment properties (8%).
As at year end, the Company’s long term funds which amounted to ₦22.7 billion, comprising equity (52%) and
long term borrowings (48%), were insufficient to finance Forte Oil’s long term assets, leaving a long term
financing need of ₦11.1 billion. The Company’s short term financing surplus was insufficient to cover the long
term financing need, thus resulting in a working capital deficiency of ₦6.3 billion. Forte Oil’s working capital
deficiency was exacerbated by the rise in pump price of PMS, which has increased the working capital
requirement for downstream oil & gas operators. The working capital deficiency was funded by short term
borrowings.
Overall, Agusto & Co. is of the view that Forte Oil’s working capital requires improvement. However,
Management has disclosed plans to access long term funds from the equity market (via rights issue or private
placement) in order to diversify its funding source and create a favourable long term financing position. Should
this be successful, we are of the view that additional equity will reduce the long term financing need and
impact leverage positively.
Figure 9: (Working Capital need)/ Financing Surplus Figure 8: Working Capital/ (Long Term Financing Need)
(6.4)
(12.1)
12.6
(0.1) (1.2)
(7.6)
3.4
(0.1)
(15)
(10)
(5)
0
5
10
15
2016 2015 2014
Forte Oil Total MRS
4.7
(2.0)
(8.1)
20.2
11.5 8.4
(10.4)
1.8
(0.1)
(15)
(10)
(5)
0
5
10
15
20
25
2016 2015 2014
Forte Oil Total MRS
11 2017 Corporate Rating
Forte Oil Plc.
LEVERAGE
As at 31 December 2016, Forte Oil’s total liabilities stood at ₦61.6 billion, representing a 17% increase from
the prior year, due to the significant rise in interest bearing liabilities. As at year end, interest bearing liabilities
represented 54% of total liabilities while non-interest liabilities accounted for the balance.
In the period under review, interest bearing liabilities grew by 32% to ₦33.4 billion from previous year, largely
driven by the 236% growth in long term borrowing from the prior year and the rise in current portion of long
term borrowings. The increase in long term borrowing is due to the ₦9 billion unsecured 5-year corporate
bond issued in November 2016, with coupon rate of 17.5%. The proceeds of the bond was used to refinance
commercial bank loans and fund the Company’s retail outlet expansion. In addition, the rise in current portion
of the long term borrowings include import finance facilities of ₦19.9 billion used to fund letters of credit for
the importation of petroleum products under the petroleum subsidy fund.
During the FYE 2016, Forte Oil’s interest expense to sales ratio improved to 2% (2015:2.8%), due to the
reduction in high cost commercial bank loans, which was repaid from the proceeds of the bond issue. Forte’s
ratio of interest expense to sales was higher than peers- Total: 0.3% and MRS: 1.5%. The net debt as a
percentage of average total assets (less cash) at 80% is high, while total IBL to equity ratio at 281% is also
high. In our opinion, FO’s leverage position is high and requires improvement. Management has disclosed plans
to raise capital through a rights issue program and/or a private placement to buffer its current capital level.
We believe that the expected capital injection will aid in moderating Forte’s leverage position in the medium
term.
Figure 10: Interest Expense to Sales Figure 11: Net Debt as a % of Total Assets (excluding cash)
2.0%
2.8%
2.0%
0.3%
0.9%1.1%
1.5%
2.2%
1.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2016 2015 2014
Forte Oil Total MRS
80%
63%
97%
0%
20%
40%
60%
80%
100%
120%
2016 2015 2014
12 2017 Corporate Rating
Forte Oil Plc.
OWNERSHIP, MANAGEMENT & STAFF
As at 31 December 2016, Forte Oil’s authorised share capital stood at ₦2 billion, of which ₦0.6 billion were
issued and fully paid up. FO is a public company quoted on the Nigerian Stock Exchange and has over 161,000
shareholders. Zenon Petroleum & Gas Limited is the single largest institutional shareholder, accounting for
48.87% of the Company’s equity, while Mr. Femi Otedola is the largest individual shareholder, with a 14.21%
equity stake in FO. We note the concentration in the ownership structure of the Company, with the Chairman
directly and indirectly holding over 70% equity stake. Nevertheless, the restructuring of the Board, with the
inclusion of four independent directors should help strengthen corporate governance in the Company.
Table 4- Shareholding Structure as at 31 December 2016
Shareholders Equity Stake
Other Individuals and Institutions 21.81%
Zenon Petroleum & Gas Limited 48.87%
Mr. Femi Otedola 14.21%
Thames Investment Incorporated Ltd 15.11%
Total 100.00%
Forte Oil has an eight-member Board of Directors, which is led by the Chairman, Mr. Femi Otedola. During the
period under review, Mrs. Grace Ekpenyong and Mr. Phillip Akinola retired from the Board as non-executive
directors while Mrs. Salamatu Suleiman, Dr. Mairo Mandara and Mr. Nicolaas Vervelde were appointed to the
Board as independent directors.
Forte Oil’s leadership team comprises 18 members, each reporting directly to the Chief Executive Officer. In
the review period, Mr. Michael Adedoyin Ogun joined the leadership of the Company as Manager, Investor &
Government Relations. We are of the view that FO has a qualified management team with extensive experience
in the oil & gas downstream industry.
In 2016, the Company had average staff strength of 171 persons compared to an average of 182 persons in
prior year. In the year under review, Forte Oil’s average cost per employee increased to ₦12.1 million, while
the net earnings per staff at ₦31.8 million is 2.63 times the average cost per employee, which we consider to
be an indication of satisfactory staff productivity.
Leadership Team
Mr. Akin Akinfemiwa, the Group Chief Executive Officer of Forte Oil Plc. holds a Bachelor of Science Degree in
Mechanical Engineering from the University of Ibadan and a Masters of Business Administration (Information
Technology) Degree from Hull Business School, University of Lincolnshire, UK. He has attended several
leadership courses in various institutions including The Wharton School, University of Pennsylvania and
Advanced Management and Leadership Program at Said Business School, University of Oxford, UK. Prior to
joining Forte Oil Plc, Mr. Akin Akinfemiwa was a Director with Fineshade Energy Limited after rising from the
position of Head, Trading and Business Development. He was also formerly a Products and Derivatives Trader
with Oando Supply and Trading Limited. Mr. Akinfemiwa was appointed as the Group Chief Executive Officer
in December 2011.
13 2017 Corporate Rating
Forte Oil Plc.
Mr. Julius B. Omodayo-Owotuga is the Group Chief Financial Officer of Forte Oil Plc. He holds a Bachelor of
Science degree in Accounting from the University of Lagos and has attended several short management courses
at the Harvard Business School among other renowned management schools. Julius is a CFA charter holder,
Chartered Management Accountant, Chartered Tax Practitioner and a Certified Treasury and Financial Manager.
Prior to joining Forte Oil as the Chief Financial Officer, he was the Assistant Treasurer at the African Finance
Corporation (AFC). Mr. Omodayo-Owotuga has extensive finance experience which cuts across banking,
consultancy and financial management services. He has worked with KPMG Professional Services, MBC
International Bank Ltd (Now First Bank of Nigeria Ltd) and Standard Chartered Bank Nigeria Limited.
Other members of the Leadership team include:
Seye Alabi Managing Director, Forte Upstream Services Limited
Tunji Rabiu General Manager, Business Operations
Temitope Fagbemi Group Head, Human Capital
Akin Olagbende Group Head, Corporate Services and Chief Compliance Officer
Toyin Leo-Olagbaiye General Manager, Business Development Forte Oil Upstream Services
Nduka Okoisor Manager, Talent Management
Tunde Taiwo Manager, Lubes & Specialties Manufacturing
Chibu Oguike Manager, Health, Security, Safety, Environment & QA
Ndidi Obiorah Manager, Strategy
Kenneth Otaru Manager, Marketing
Samson Oyeyemi Manager, Properties
Adams Rasheed Manager, Information Technology
Michael Adedoyin Ogun Manager, Investor & Government Relations
Habib Bello Manager, Lubes & Specialties Marketing
Gbemiro Adeboye Manager, Engineering/Infrastructural Projects
Iyimola Akinbola Head, Business Assurance & Risk Management
Toyin Mike-Aigbe Head, Treasury and Procurement
Ayodeji Adelakun Head, Finance
Samuel Eze Head, Non-Fuel Revenue
14 2017 Corporate Rating
Forte Oil Plc.
OUTLOOK In 2016, the Nigerian downstream oil & gas industry witnessed a 49% increase in the pump price of PMS,
following the devaluation of the Naira which made the importation of PMS uneconomical. During the review
period, profit margins remained depressed, largely due to the high input costs, driven by the devaluation of
the domestic currency and inflationary pressures.
During the year ended 31 December 2016, Forte Oil sales growth was supported by its extensive retail network
spread across the Country and increase in sales volume of lubricants, coupled with the increase in price of
PMS. Operating expenses trended upwards marginally despite the high cost operating environment. As a result,
operating profit margin inched to 3.3%. The Company intends to deepen its focus on high margins products
including lubricants and diversify its revenue base, by increasing its capacity in power generation while offering
other alternative energy solutions going forward. Therefore, we anticipate revenue growth supported by the
FO’s growing lubricant product portfolio and increased capacity of the Geregu power plant.
Forte Oil’s operating cash flow could have been significantly better but for the outstanding receivable from
the PPPRA, comprising subsidy payments, interest on subsidy and exchange rate differential. Subsequent to
year end, Management has received ₦1.3 billion from the PPPRA. Going forward, the FGN has committed to
paying the backlog of subsidy claims before the end of 2017. Agusto & Co. is of the view that further
improvements to FO’s cash flow will depend on receipt of the PSF receivable as well as sustained favourable
trade terms with customers and suppliers, particularly for unregulated products, efficient cash receipts from
the power plant and growth in upstream services.
The Company’s financing structure improved, following the issuance of a 5-year ₦9 billion bond which replaced
the high cost short term commercial bank loans. Management has disclosed plans to raise additional long term
funds from the equity market via rights issue and /or private placement in order to diversify its funding source
and create a favourable long term financing position. In addition, management is at advanced stages in
securing alternative source of funding core working capital requirements. Should all the proposed funding
initiatives be successful, we expect significant improvement in Forte Oil’s working capital and leverage.
Forte Oil’s strategy to optimize its distribution channels, deepen the market for the sale of high margin
products, diversify revenue base, optimise working capital mix and improve internal efficiencies in its core
operations (downstream activities) should lead to improvement in the Company’s financial condition in the
short to medium term in our opinion.
Based on the aforementioned, we have attached a stable outlook to Forte Oil Plc.
15 2017 Corporate Rating
Forte Oil Plc.
FINANCIAL SUMMARY
STATEMENT OF FINANCIAL POSITION 31-Dec-16 31-Dec-15 31-Dec-14
₦'000 ₦'000 ₦'000
ASSETS
IDLE CASH 1,134,312 1.5% 62,117 0.1% 878 0.0%
MARKETABLE SECURITIES & TIME DEPOSITS 15,009,243 20.4% 10,062,305 15.3% 13,757,833 14.7%
CASH & EQUIVALENTS 16,143,555 22.0% 10,124,422 15.4% 13,758,711 14.7%
FX PURCHASED FOR IMPORTS
ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS 2,003,178 2.7% 1,297,961 2.0% 3,645,453 3.9%
STOCKS 3,928,633 5.3% 9,096,965 13.8% 11,377,637 12.1%
TRADE DEBTORS 4,069,464 5.5% 6,672,183 10.1% 8,071,729 8.6%
DUE FROM RELATED PARTIES 8,114,709 11.0% 6,515,081 9.9% 4,756,931 5.1%
OTHER DEBTORS & PREPAYMENTS 5,373,046 7.3% 5,913,929 9.0% 28,768,265 30.7%
TOTAL TRADING ASSETS 23,489,030 32.0% 29,496,119 44.9% 56,620,015 60.4%
INVESTMENT PROPERTIES 1,799,462 2.4% 1,831,743 2.8% 1,934,928 2.1%
OTHER NON-CURRENT INVESTMENTS 10,707,931 14.6% 11,072,986 16.8% 11,050,872 11.8%
PROPERTY, PLANT & EQUIPMENT 9,452,411 12.9% 9,663,556 14.7% 9,851,156 10.5%
SPARE PARTS, RETURNABLE CONTAINERS, ETC
GOODWILL, INTANGIBLES & OTHER L T ASSETS 11,866,606 16.2% 3,552,134 5.4% 462,724 0.5%
TOTAL LONG TERM ASSETS 33,826,410 46.0% 26,120,419 39.7% 23,299,680 24.9%
TOTAL ASSETS 73,458,995 100.0% 65,740,960 100.0% 93,678,406 100.0%
Growth 11.7% -29.8% 43.4%
LIABILITIES & EQUITY
SHORT TERM BORROWINGS 1,812,448 2.5% 10,226,394 15.6% 16,496,305 17.6%
CURRENT PORTION OF LONG TERM BORROWINGS 20,689,764 28.2% 12,026,413 18.3% 12,288,927 13.1%
LONG-TERM BORROWINGS 10,876,763 14.8% 2,976,673 4.5% 4,302,768 4.6%
TOTAL INTEREST BEARING LIABILITIES (TIBL) 33,378,975 45.4% 25,229,480 38.4% 33,088,000 35.3%
TRADE CREDITORS 14,525,519 19.8% 12,587,852 19.1% 23,958,736 25.6%
DUE TO RELATED PARTIES
ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS 1,933,746 2.6% 3,575,354 5.4% 2,388,572 2.5%
OTHER CREDITORS AND ACCRUALS 10,346,040 14.1% 10,574,968 16.1% 21,532,110 23.0%
TAXATION PAYABLE 982,389 1.3% 751,179 1.1% 639,847 0.7%
DIVIDEND PAYABLE
DEFERRED TAXATION 417,594 0.6%
OBLIGATIONS UNDER UNFUNDED PENSION SCHEMES
MINORITY INTEREST
REDEEMABLE PREFERENCE SHARES
TOTAL NON-INTEREST BEARING LIABILITIES 28,205,288 38.4% 27,489,353 41.8% 48,519,265 51.8%
TOTAL LIABILITIES 61,584,263 83.8% 52,718,833 80.2% 81,607,265 87.1%
SHARE CAPITAL 655,314 0.9% 546,095 0.8% 546,095 0.6%
SHARE PREMIUM 8,071,943 11.0% 8,181,162 12.4% 8,181,162 8.7%
IRREDEEMABLE DEBENTURES
REVALUATION SURPLUS
OTHER NON-DISTRIBUTABLE RESERVES (1,396,326) -1.9% (1,396,326) -2.1% (2,255) 0.0%
REVENUE RESERVE 4,543,801 6.2% 5,691,196 8.7% 3,346,139 3.6%
SHAREHOLDERS' EQUITY 11,874,732 16.2% 13,022,127 19.8% 12,071,141 12.9%
TOTAL LIABILITIES & EQUITY 73,458,995 100.0% 65,740,960 100.0% 93,678,406 100.0%
16 2017 Corporate Rating
Forte Oil Plc.
STATEMENT OF COMPREHENSIVE INCOME 31-Dec-16 31-Dec-15 31-Dec-14
₦'000 ₦'000 ₦'000
TURNOVER 131,613,962 100.0% 108,853,855 100.0% 156,714,840 100.0%
COST OF SALES (116,429,276) -88.5% (96,540,929) -88.7% (143,843,421) -91.8%
GROSS PROFIT 15,184,686 11.5% 12,312,926 11.3% 12,871,419 8.2%
OTHER OPERATING EXPENSES (10,905,739) -8.3% (10,263,256) -9.4% (9,085,989) -5.8%
OPERATING PROFIT 4,278,947 3.3% 2,049,670 1.9% 3,785,430 2.4%
OTHER INCOME/(EXPENSES) 3,785,945 2.9% 6,873,380 6.3% 3,524,532 2.2%
PROFIT BEFORE INTEREST & TAXATION 8,064,892 6.1% 8,923,050 8.2% 7,309,962 4.7%
INTEREST EXPENSE (2,622,410) -2.0% (3,091,295) -2.8% (3,102,519) -2.0%
PROFIT BEFORE TAXATION 5,442,482 4.1% 5,831,755 5.4% 4,207,443 2.7%
TAX (EXPENSE) BENEFIT (2,206,653) -1.7% (1,037,177) -1.0% (1,568,530) -1.0%
PROFIT AFTER TAXATION 3,235,829 2.5% 4,794,578 4.4% 2,638,913 1.7%
NON-RECURRING ITEMS (NET OF TAX)
MINORITY INTERESTS IN GROUP PAT
PROFIT AFTER TAX & MINORITY INTERESTS 3,235,829 2.5% 4,794,578 4.4% 2,638,913 1.7%
DIVIDEND (4,521,671) -3.4% (2,730,478) -2.5% (4,321,123) -2.8%
PROFIT RETAINED FOR THE YEAR (1,285,842) -1.0% 2,064,100 1.9% (1,682,210) -1.1%
SCRIP ISSUES 1
OTHER APPROPRIATIONS/ ADJUSTMENTS 138,447 280,957 173,677
PROFIT RETAINED B/FWD 5,691,196 3,346,139 4,854,671
PROFIT RETAINED C/FWD 4,543,801 5,691,196 3,346,139
ADDITIONAL INFORMATION 31-Dec-16 31-Dec-15 31-Dec-14
Staff costs (₦'000) 2,069,216 1,955,843 1,391,701
Average number of staff 171 182 150
Staff costs per employee (₦'000) 12,101 10,746 9,278
Staff costs/Turnover 1.6% 1.8% 0.9%
Capital expenditure (₦'000) 1,058,165 957,935 3,206,070
Depreciation expense - current year (₦'000) 1,226,872 1,119,705 794,146
(Profit)/Loss on sale of assets (₦'000) - 2,484 2,541
Number of 50 kobo shares in issue at year end ('000) 1,310,628 1,092,190 1,092,190
Market value per share of 50 kobo (year- end) 8,443 33,000 22,790
Market capitalisation (₦'000) 110,656,322 360,422,700 248,910,101
Market/Book value multiple 9 28 21
Non-operating assets at balance sheet date (₦'000) 12,507,393 12,904,729 12,985,800
Market value of tradeable assets (₦'000)
Revaluation date - Investment properties
Revaluation date - Other properties
Average age of depreciable assets (years) 6 7 8
Sales at constant prices - base year 1985 (₦'000) 518,815 509,484 802,637
Auditors PKF PKF PKF
Opinion CLEAN CLEAN CLEAN
17 2017 Corporate Rating
Forte Oil Plc.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31-Dec-16 31-Dec-15 31-Dec-14
₦'000 ₦'000 ₦'000
Operating cash flow (OCF) 13,946,583 13,988,932 (2,459,911)
Less: Returns to providers of finance (7,144,081) (5,821,773) (7,423,642)
OCF after returns to providers of finance 6,802,502 8,167,159 (9,883,553)
Non-recurring items - - -
Free cash flow 6,802,502 8,167,159 (9,883,553)
Investing activities (8,932,864) (3,942,928) 1,763,544
Financing activities 8,149,495 (7,858,520) 16,597,118
Change in cash 6,019,133 (3,634,289) 8,477,109
PROFITABILITY
PBT as % of Turnover 4% 5% 3%
Return on equity 44% 46% 34%
Real sales growth 1.8% -36.5% 23.5%
Sales growth 20.9% -30.5% 33.3%
CASH FLOW
Interest cover (times) 5.3 4.5 (0.8)
Principal payback (years) 7.1 4.1 -
WORKING CAPITAL
Working capital need (days) - 7 19
Working capital deficiency (days) 18 41 35
LEVERAGE
Interest bearing debt to Equity 281% 194% 274%
Total debt to Equity 519% 405% 676%
IBD net of cash and Equiv. as a % of Equity without rev. 145% 116% 160%
Net Debt/Avg Total Assets Exc. Cash and Rev. Surplus 102% 82% 114%
18 2017 Corporate Rating
Forte Oil Plc.
RATING DEFINITIONS
Aaa This is the highest rating category. It indicates a company with impeccable financial
condition and overwhelming ability to meet obligations as and when they fall due.
Aa
This is a company that possesses very strong financial condition and very strong
capacity to meet obligations as and when they fall due. However, the risk factors are
somewhat higher than for Aaa obligors.
A
This is a company with good financial condition and strong capacity to repay
obligations on a timely basis.
Bbb
This refers to companies with satisfactory financial condition and adequate capacity to
meet obligations as and when they fall due.
Bb
This refers to companies with satisfactory financial condition but capacity to meet
obligations as and when they fall due may be contingent upon refinancing. The
company may have one or more major weakness (es).
B
This refers to a company that has weak financial condition and capacity to meet
obligations in a timely manner is contingent on refinancing.
C
This refers to an obligor with very weak financial condition and weak capacity to meet
obligations in a timely manner.
D In default.
Rating Category Modifiers
A "+" (plus) or "-" (minus) sign may be assigned to ratings from ‘Aa’ to ‘C’ to reflect comparative position within the rating category.
Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a
rating with the - (minus) sign.
19
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