… The numbers tell an interesting story.
Nigeria’s state-owned oil company NNPC reported the group’s after-tax profit of N287.2 billion for the fiscal year ended December 2020. The result is an improvement over losses of 1.76 billion. billion naira and 803.1 billion naira reported in 2019 and 2018 respectively.
The results also surprised many people given the state of the economy in 2020, especially for Nigeria’s crude oil production. In addition, the NNPC is experiencing massive losses from its refineries, all of which continue to operate without refining a single drop of petroleum products. The expenses incurred and the impact of covid-19 on its profits are expected to lead them to massive losses in 2020.
In the first of a series of articles analyzing the results, we take a closer look at the group’s impressive profit and how they were able to achieve it. A little warning, the scan can include a lot of numbers, so be patient as you go with the flow. However, we have tried to make reading as easy as possible.
In the year under review (2020), the NNPC also reported a turnover of 3.7 trillion naira, a decrease of 19% from the 4.6 trillion naira declared during the same period. in 2019. In fact, the NNPC reported a gross profit, which is derived after deducting the direct cost of the sale from the income, of 64.7 billion naira, far less than the 714 billion naira reported in 2019. This Gross profit equals only 1.7% of income, which in most cases will surely result in an after-tax loss.
The NNPC’s slim gross margins were mainly due to the 2.23 trillion naira it incurred as a year-round under-recovery from the sale of petroleum products, which the government subsidizes. NNPC’s sales of N3.7 include sales of PMS, DPK and AGO.
In fact, after making just 64.7 billion naira in gross profit, it incurred 714.5 billion naira in operating expenses during the year, which brought the company to an operating loss. before depreciation of 649.7 billion naira. However, NNPC ended up posting a strong profit when it was likely destined for another year of massive losses.
So how did they go from an operating loss before depreciation, interest payments and taxes to a staggering profit of 287.2 billion naira?
The benefits of NNPC decoded
A more in-depth analysis of the results of the NNPC provides clearer details of how it actually posted the profit of NN287.2 billion in 2020. Two main factors made the difference.
First, the NNPC reported that it had a “net write-back” of 718.4 billion naira in December 2020, compared to 273.6 billion naira of impaired debts in 2029. We will explain what this means. shortly. Much of the reversal belongs to NPDC, a subsidiary of NNPC.
Second, NNPC also earned 675.6 billion naira in other income, which in the financial statements represents income from other sources that are not directly related to what the company actually does. We will explain this as well.
Add the two incomes, reversal of depreciation and other incomes, you get an additional income of 1.39 trillion naira, which is enough to absorb the operating expenses of 714.5 billion naira (mentioned above). above), pay over 431.8 billion naira in taxes and keep a profit of 287.2 billion naira.
Net reversal of depreciation
In accounting, it is a requirement that businesses assess whether they can receive money owed to them from their debtors (trade). If, for example, your accounts receivable owe you 1000 N and there is a plausible doubt that you cannot recover 400 N, you incur a depreciation of 400 N, which is charged against your profit. If, however, you recover the N400 in the future, you can re-enter it into profit in the year it is recovered. This is what the NNPC did.
Here’s how NNPC explained it. “The reversals of depreciation during the year mainly concern the recovery of strategic alliance receivables from the Federation and the reversal of total depreciation on receivables which are no longer doubtful. These amounts have been fully written down in previous years.
What does that mean? We dug deeper and found that the amount represents transactions made on behalf of the federal government in previous years that the NNPC had written off as bad debts. However, it appears that he has now made a deal with the government to write off the debts, thereby returning them to the federal government or to the “federation” as he claimed. What is interesting to note, however, is that a bad debt collection is usually represented by a cash payment. But in this case, the NNPC did not receive any real money from the government. Rather, it appears that he simply transferred the bad debt to the government and then deducted it from what it owes the government. It is somewhat unconventional but allowed by accounting rules.
To better understand, we turned to the NPDC accounts which better explain the reversal of depreciation.
According to NPDC, which we suspect about N467 billion of depreciation was written off, these were deals gone awry in previous years, 2014 and 2016, to be precise with Atlantic Energy Drilling Concepts Limited ( AEDC), Atlantic Energy Brass Development (AEBD) Limited and Septa Energy Nigeria Limited.
According to NPDC, he received “The approval of the President and the National Economic Council to effect the compensation of the amount of 1.57 billion dollars (595.8 billion N) to be received from the AEDC and the AEBD, against the debt of the company towards the Federation. “ It sounds like a really murky transaction gone awry.
The 675 billion naira from other income represents the income of about 20 other sources where the NNPC also earns money. They are separated from income because they are generally not earned in the ordinary course of business. We will look at the main sources which represent up to 80% of the total.
Change in stock of crude that the NNPC describes as “Movement of crude stocks, underloading and overloading positions” took in 250.1 billion naira. It was zero in 2019. Over / under-raised positions are oil production sharing agreements between the company and its partners where an undershoot represents a debt of an (active) partner and a surplus represents a debt. to a (passive) partner. It appears that this was a net asset for NNPC, meaning it was gaining more under-raised versus over-raised positions.
Another major income earned was “miscellaneous income” of 157 billion naira which he said was “amounts recovered from the Federation for balances from strategic alliances”. This is again similar to the amount he rewrote. The NNPC also declared 110.6 billion naira as part of other income and explains that it was “Received from the Federation for expenses incurred on their behalf that had previously been written off. ” Seems familiar?
In total, the NNPC made – 713.3 billion naira (depreciation reimbursement), 157 billion naira (miscellaneous income) and 110.6 billion naira (recovered from the federation) – in total 980.9 billion naira from government takeovers.
The NNPC was able to make a profit in 2020 thanks to the repossession of debts and the collection of debts that it contracted with the federal government. Most critics will attribute this to financial engineering, but it’s perfectly legal and permitted in accounting since it has been audited by PWC, SIAO Partners, and Muhtari Dangana & Co.
Without the takeovers, the NNPC could have ended the year with another huge after-tax loss. Reversals often give rise to collections, but this was not the case here. The NNPC simply deducted the rewrite from what it owed the government.
Despite the impressive profits, the NNPC as a group still records a cumulative loss of 1.5 trillion naira. This means that it cannot pay dividends until the losses are paid off. Most of it is due to its loss-making refineries.
It is also important to note that despite the paper profits reported by the NNPC, one of the main reasons for its poor performance is the undercollection of the sale of petroleum products at subsidized rates.