Forte oil bond issuance

For some time, we have not discussed about the stock market news - well I think that’s something that we need to rectify. To address this, we will be looking at Forte Oil and its recent activities in the financial market – specifically its ongoing bond issuance.

Forte Oil, an indigenous energy company involved in providing services to the upstream oil and gas industry. In addition to this, it is also involved in the downstream where it operates as a retail outlet business providing petroleum products in Nigeria as well as in Ghana via its subsidiary AP Oil & Gas Ghana (APOG).

But that is not all. It is also involved in power generation and distribution as well as being positioned to partake in the anticipated sale of marginal fields that the Federal Government of Nigeria is contemplating. Together they are called the Forte Group. All in all, an all-round integrated indigenous Oil and Gas Company. How about that?

Forte is in the process of raising loans via bonds for the expansion of their business. This is great for the business hopefully as they intend to not only refinance their existing short term loans (smart idea) and expand on their retail outlets. Reports say that Forte is rated A- and A1- for the long and short terms respectively by the GCR.

A bit on the industry…

As someone who has had experience in the oil and gas industry, this is the kind of company that you may want to evaluate holistically as it is not bound by a specific sector. For instance, when oil and gas prices rise, the upstream companies smile to the bank, and they can invest in projects and carry out relevant (and sometimes irrelevant) ventures - there is money flowing.

So as Forte is a service provider, it will benefit from potential “business” with the soaring prices. Refiners (midstream guys) suffer as they will see their margins shrink and they will begin to look for how to reduce costs. However, the downstream people, will just buy the products at whatever prices and sell after adding their profits, so the consumer bears the brunt – sorry guys! This however (downstream) is where Forte’s business also resides.

When the prices fall on the other hand, upstream begin to do “structural adjustment programmes (SAP)” via job cuts, reduced spending etc. this will affect upstream service companies as well but will be somewhat beneficial to refiners as the cost of their chief resource, crude, will fall reducing overall operating costs and potentially increasing their margins. Again, since the refiners may reduce prices due to price wars. This in turn may reduce the prices of products sold by the retailers however, it may not really matter to retailers as they only need to add a margin to the costs. Please remember this is very simplistic to provide us with a general gist!!!

Essentially, Forte’s business is positioned at the 2 ends of the spectrum. One where they are highly exposed to the “swings” in oil prices and the other where their exposure to oil prices “directly” is limited as they are essentially (for simplicity in this case) a buy-and-sell team. I can therefore say that they are hedged in a very unique way as they are relatively integrated.

Now for the main course

For the purpose of this section, we shall be discussing Forte Oil (Forte) the downstream company as that is the arm that is registered in the Nigerian Stock Exchange.

So why did I pick this topic you may ask? Their interest in expansion and raising capital from corporate bond sale. At the beginning of the year, the stock price for Forte oil was in the 340 region but at the time this article was written, it was selling at 84 per share. The last time this stock was this low was in 2014 so when I learnt about their intent to expand, I felt I should look a bit deeper. After all, I think that investing in good companies is what we should do, right? Now after a look at this company’s performance (based on its submissions) for this year, I can understand why they may want to raise long term notes – and I think it is financially astute!

First, we look at the profitability of the business. “Revenues” and “Profit After Tax” have consistently increased from the 1 to 3 quarters this year (2016) – signs of promise?

Next, the current liability (CL) has consistently been higher than the current assets which would indicate that there are issues with the company but a closer review led me to understand that the high CL has been due to the large short term borrowing and overdrafts – which in all the periods reviewed was consistently higher than the total long term debt. Not cool!

For those of us that have had to take short term loans from the bank, we know that short term loans are (in theory) usually given at a high interest rate relative to say, a bond. Since it is not really different for businesses, the theory is, well the same. We can therefore agree that even if the same amount of money was borrowed based on longer terms conditions, it is logical to assume that financing costs will decrease as the interest rates may be more favourable. This will in turn (in my opinion of course), increase the profitability as well as solvency of Forte – well from an accounting perspective at least.

So if the current loans (bond) issued can be used to get rid of the high short term debt (loans, borrowings and overdrafts) or at least a large chunk of it, the company’s books would in my opinion be less “clogged” with all the “noise” in the financial statements. This will allow us see how this company is really doing.

In summary

This is a growing company that wants to work on its financial position with the market’s help (hence the bonds) in order for it to expand in line with its corporate vision. Well there are other tests that may be required but based on this little review, I think that this company needs a proper nose-dive evaluation for those investors that may want to take the plunge as the current price may just be….well make up your mind! J

For a more detailed review of the company, contact us at http://www.yourinvestmentanalyst.com/contact/

As always, remember there is no 100% risk proof investment – just try to minimise your risk!

Keep investing,

Your Financial Analyst http://www.yourinvestmentanalyst.com

Disclaimer:

The information in this article is based on controlled assumptions that was based on a single individual’s personal situation. The analyst has not shares or interest in the company reviewed and does not get any monetary compensation of any sort from this company.