September 9, 2021/CSL Research
Recently, the President of the Federal Republic of Nigeria, Muhammadu Buhari who is also the Minister of Petroleum resources announced that the Nigerian National Petroleum Corporation (NNPC) turned in profit of N287bn in FY 2020. According to the president, the NNPC had been directed to publish in a timely manner, the Audited Financial Statements (AFS) on its official website. In compliance with the directive of the President, yesterday, the NNPC published its AFS. Based on the report, the NNPC posted a surplus of N287bn, the first of its kind in forty-four (44) years – since the establishment of the corporation.
In addition, the Group Managing Director (GMD) of the corporation, Mele Kyari had on several occasions said that the turnaround in performance was driven by aggressive cost cutting, automation of the system and renegotiation of contracts downwards by about 30%, among other tough measures. An analysis of the financials revealed a significant decline in some cost line, as evidenced by the 21.0% y/y fall in Selling and Distribution expenses. General and administrative expenses also fell, albeit marginally (2.6% y/y) in the period. That said, the reversal of impairment of N713.4bn and Other Income of N675.66bn were the main drivers of profit in the period. The reversal was done post-recovery of strategic alliance receivables from the Federal Government (The Owners) – the FG is expected to pay down doubtful debts.
The financial position of the corporation remains shaky, however, and one evidence of this amongst many is its continued reporting of negative working capital position – indicating its inability to meet its short-term financial obligations. In FY 2020, negative working capital stood at N4.56bn from N4.44bn in the corresponding period of 2019. Elsewhere, we also noted that the corporation would have reported a negative cash flow performance save for the injection of N63.95bn by the Federal Government (FG) in the period.
We laud the developments in terms of prompt release of the corporation’s financials, but we do not believe the corporation can run profitably henceforth as it would appear going by the FY 2020 performance. We hold that efficiency needs to be fostered through a restructuring of the establishment. In 2016, there was a plan by the government, contained in a revised draft Petroleum Industry Bill (PIB) to split the Nigerian National Petroleum Corporation (NNPC) into two. This was to be followed by the sale of at least 40% of one of the newly created companies in subsequent years.
Restructuring of the NNPC is pivotal to a successful oil and gas sector reform, in our view. However, we believe the government would continue to meet resistance in its attempts to restructure the state-run oil firm. Not forgetting that In March 2016, the then Managing Director of the NNPC, Dr. Kachikwu’s plan to restructure the NNPC. Upon its annoucement, series of strike actions by the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) and the National Union of Petroleum and Natural Gas Workers (NUPENG) surfaced.
