Nigeria: Evaluating NNPC’s Declaration of N287.2bn Profit
Nigeria’s state-run oil company, Nigerian National Petroleum Corporation (NNPC) reported a group profit after tax of N287.2 billion in the financial year ended December 2020.
According to the audited report released recently by the corporation, it earned less revenue in 2020 than it did in 2019, but managed to record a historic profit that relied mostly on the reversal of amounts impaired for years, and on income from other sources.
Following up on President Muhammadu Buhari’s recent announcement of the declaration of N287 billion Profit After Tax (PAT) in year 2020 by the Nigerian National Petroleum Corporation (NNPC), the corporation has consolidated on the remarkable achievement, by publishing the Audited Financial Statements (AFS) on its official website.
While announcing the feat, president Buhari, who is also the minister of petroleum resources, said: “I have further directed the Nigerian National Petroleum Corporation to timely publish the Audited Financial Statements in line with the requirements of the law and as a follow-up to our commitment to ensuring transparency and accountability by public institutions.”
Also, the corporation, in a statement, recently, said in compliance with the president’s directive, it has fulfilled this very important statutory requirement by publishing its Audited Financial Statements. “Among the highlights of the 2020 AFS is the corporation’s group profit which rose from a loss position of N1.7billion in 2019 to a profit of N287bn in 2020, for the first time in 44 years,” the statement signed by the group general manager, group public affairs division, NNPC, Garba Deen Muhammad, read in part.
The group managing director of the NNPC, Mele Kyari, had at various times since the president’s declaration of profit, attributed the turnaround to aggressive cost cutting, automation of the system and renegotiation of contracts downwards by about 30 per cent, among other tough measures.
“Further highlights of the AFS revealed that while the Corporation’s group financial position increased in total current assets by 18.7% compared to that of 2019, its total current liabilities increased by 11.4% within the same period. The group’s working capital remained below the line at N4.56trillion in 2020 as against N4.44trillion in 2019, the AFS further revealed. Similarly, the Corporation’s group revenue for the 2020 financial year stood at N3.718trillion as against N4.634trillion in 2019, a decrease that could be attributed to the decline in the production and price of crude oil due to the global impact of the Covid-19 pandemic. This is the third consecutive year that the NNPC is publishing its AFS, having done so for 2018 and 2019,”the statement read.
Analysts said that the state-run oil company’s historic profit relied mostly on the reversal of amounts impaired for years, and on income from other sources.
Impairment reversal is when a company declares an asset valuable after it previously declared it a liability. The reversal related mainly to its recovery of “strategic alliance” amounts from the federation, the report said without giving further details, while its non-core business income included gain from the devaluation of the naira as well as refunds from the federation for expenses that had previously been written off. Both subheads injected a huge boost to the corporation’s bottom-line to the tune of N1.39 trillion as against N11.5 billion loss recorded a year earlier.
The company had said that, “The impairment reversals during the year relate mainly to the recovery of strategic alliance receivable amounts from the federation and reversal of full impairment on receivables which are no longer doubtful.”
The results caught many by surprise considering the state of the economy in 2020, especially for Nigeria’s crude oil production output. In addition, the NNPC recorded massive losses from its refineries all of which continue to operate without refining a single drop of petroleum products. The expenses incurred and impact covid-19 had on its profits was expected to lead them to massive losses in 2020.
According to analysts, NNPC’s results provides details into how the corporation actually posted the profit of N287.2 billion in 2020. “Two major factors made the difference. Firstly, NNPC reported that it had a “Net Impairment reversal” of N718.4 billion in December 2020 compared to N273.6 billion in impairment receivables in 2019. Secondly, NNPC also earned a whopping N675.6 billion in other income, which in financial statements represents the income earned from other sources that are not directly tied to what the company actually does. Add the two incomes, the impairment reversal, and the other income, you get an extra income of N1.39 trillion which is enough to absorb the operating expenses of N714.5 billion (mentioned above), pay over N431.8 billion in taxes and retain a profit of N287.2 billion.
According to an energy expert, Felix Alo, the corporation’s 2020 profit became possible after the firm cut costs.
Kyari had told journalists on August 26 that, “There are very drastic changes to the way we do our business. One is to cut costs, to be more efficient, and also to ensure that this company is transparent and accountable to Nigerian people, and therefore is a process that started in 2015.” The first principle of course elimination is that, don’t buy what you don’t need. And we simply stopped buying what we don’t need. Also, particularly in fiscal 2020 whoever they engaged in all our contracts we insisted on cutting costs to at least 30 per cent. This worked, and we’re able to pull down most of our procurement costs by 30 per cent totally. We saw the opportunity to be much more efficient by automating our system and process, and processes that made us faster and also ultimately it reduced so much of logistic costs that ordinarily would have been additional costs on our business so why do you combine all these.”
Also, an oil and gas expert, Mr Wilson Opuwei, says the recent declaration of profit after tax of N287 billion for the year 2020 by the NNPC will boost investor confidence in the oil and gas sector.
Opuwei, who is the chief executive officer of Dateline Energy Services Limited, said the declaration of profit by the NNPC, for the first time in 44 years, should be commended by industry stakeholders and well-meaning Nigerians.
He said, “It is great that the NNPC is now opening up its books to auditors for us to see how the company is being run. That level of transparency and accountability is what investors looking to invest in Nigeria are interested in. For the NNPC to declare profit in its audited reports, is a big plus for the industry because it will attract more investments.”
He said it was, however, surprising that some people had been criticising the report, without a proper understanding of its significance.
“The critics of the timing of the announcement are only being political because other National Oil Companies have been declaring their reports in the past. What the NNPC management did was to show that they can compete with their peers in the global oil market space and this is very significant, especially with the enactment of the Petroleum Industry Act”, Opuwei said.
He urged the NNPC management to sustain the practice of entrenching accountability in the company’s operations in order to help reposition the oil and gas sector for national development.