New Telegraph

Oil firms’ debt burden to banks soars past N6trn

DOWNGRADE

Lender, asset managers downgrade country’s downstream outlook as too weak

 

Oil firms’ debt burden on banks in Nigeria has soared past N6 trillion with outlook for the players in the downstream sub-sector downgraded by lenders and asset managers.

 

A total of over N6.125 trillion, an impecabble source at a tier one bank told New Telegraph at the weekend, is hanging on oil and gas sector. While the performance and outlook on debts owed by upstream firms are still rated above average, analysts at FBN Quest declared a bleak forecast for the players in the downstream sub-sector.

 

Dragged down by negative economic impact of coronavirus on their bisinesses, the commercial banks in Nigeria have, according to the source, heightened “the recovery of the N6.125 trillion borrowed by oil firms.” “This is particularly to braze themselves amidst the sector’s recapitalization fears,” he said.

 

Corroborating this, a management expert in a leading bank in Nigeria, Prince joe Nnaji, said in a document sighted by this newspaper on Sunday that the financial health of energy companies based in Nigeria and their resolve to service their debts was extremely vital to the banking industry of Nigeria.

 

“Oil companies accounted for about 30 per cent of all bankingsector loans recorded in the third quarter of 2019, and their borrowing took about 24 per cent of all non-performing loans in Nigeria,” he declared. Nigerian banks’ non-performing loans dropped significantly by 41 we cent in 2019 but the debt burden still accumulates.

 

Commercial banks in Nigeria with heavy exposure to Nigerian oil producers include tier-one banks. The oil price plunging along with the devaluation of the naira has indirect effects on the banking industry.

 

However, the margins of downstream sector due to heavily regulated petrol market has been blamed for pulling the business of players there from being lucrative. Meanwhile, analysts at merchant bank and asset manager, FBN Quest, said in a note èntitled ‘Downstream Oil and Gas at a Crossroads and Due for Favourable Policy Steps,’ at the weekend, that the near time outlook for the petroleum industry was subdued considering the comparatively low fuel demand in the first half of 2020.

 

They also observed that a full pricing deregulation is crucial to the transformation of the fortunes of the oil and gas industry given that the downstream business is characteristically a low margin one.

 

The note prepared by Uwadiae Osadiaye, Oil & Gas, Industrials and Agriculture Analyst at FBN Quest nevertheless stated that the longterm prospects of the sector seem promising.

 

“The downstream oil and gas business is typically a low margin one. However, other factors, mainly constraining policies, have led to historically low investments in the sector over the last decade. “In our view, the fortunes of the sector could change with the growing possibility of full pricing deregulation.

 

“We believe the reintroduction of a market-friendly pricing template for petrol in March and the central bank’s current attempt at unifying foreign exchange rates increase the prospects of the end of mandated petrol price ceilings,” the note said.

 

FBN Quest remarked that recently adopted pricing template embraced several factors like petroleum product cost and foreign currency conversion rate at which fuel marketing firms import petroleum products.

 

They said: “We expect the recent ad-justment of the naira official FX rate from N306/$1 to N380 to test the durability of this template within this quarter.

 

“Assuming all other inputs remain constant on the most recently published PPPRA petrol pricing template, an adjustment of the FX rate assumption to current levels raises ex-depot prices by approximately 20 per cent.

 

“Competition within major marketers is growing with new ownership/management. In the event that the Federal Government decides to continue with the new pricing template, effectively deregulating the sector, we see competition intensifying over the long term.”

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