Second Quarter Results And The World Of Oil By Nasiru Suwaid
In the world of economics, it is the trite norm to measure systemic governmental policies and performance from the prism of the financial markets, be they; currency, stock, bond or commodity exchanges. Thus, we cannot examine and assess the Nigerian economy, outside its biggest commodity source of revenue, which is basically the crude oil and most importantly, the financial performance of the international exploration companies, upon which the country draw its collectible revenue receipts, to coalesce as the national revenue base.
As at this time, the appropriate measure to gauge the financial standing of crude oil as a tradable commodity is through the instrument of the second quarter company results and performance of the international exploration companies. Basically, all of them are listed in the biggest and most visible financial market in the world, which unarguably is the New York Stock Exchange (NYSE), where for most of last week, they posted result of their performance in the second quarter of the financial year.
The results were as similar as they are glaringly negative, as an overview and a sample; Shell Petroleum Development Company (SPDC) saw its quarterly profit plummet by 70% percent as low oil prices bites, where its second quarter earnings on current cost of supplies (CCS) basis attributable to shareholders (excluding identified items) was $1 billion dollars, down from $3.8 billion in the same period, a 72% percent drop.
France’s Total second adjusted net income was down by 30% year on year (YOY) to stand at $2.2 billion dollars, although, when measured on a quarter on quarter (QOQ) basis, it actually rose by 33% percent, when compared with the first quarter results.
As for the biggest of them all, that is the British Petroleum (BP), it reported a second quarter 2016 results, which posted revenue of $47.28 billion dollars, however, for the corresponding period of second quarter 2015, the same company posted a turnover of 63.21 billion dollars, aggregately, a loss of 30% percent in company income.
Indeed, the financial hemorrhage did not only stop at oil exploration companies, even the oil support services companies, faced a similar problem, as the Halliburton Oil Services Coy, posted in the second quarter, an adjusted diluted loss per share of $0.14 dollars, on a revenue of $3.84 billion dollars, the firm reported a quarterly net loss of $3.21 billion dollars.
Now, if we place this fact with the reality of the pipeline vandalism in the Niger-Delta, where Nigeria aggregately, was unable to export more than 60% of its allotted crude oil quota, it best explains why on the half year basis, the country lost over a trillion naira in collectible revenue receipts. But, there is silver lining, in this predicament serving as an incentive to try capturing revenue from non oil sources, through, matching economic activity with revenue generation.
Also, in the instance where deliberate policies are made, to discourage import and galvanize local production, as in the case of the much criticized Central Bank of Nigeria (CBN) import ban, which listed a certain number items [including palm oil] that were denied access to foreign exchange (FOREX) in the official interbank market.
The 2016 second quarter results in the Nigerian Stock Exchange (NSE), had vindicated the often vilified policy, when despite the exceptional rise in the prices of crude oil byproducts markets, due to the removal of petroleum subsidy, most oil companies posted an average of 30% percent rise in profit, while many others, even had a lot less financial returns.
However, compare their financial output with Okomu Oil Palm Company, a value adding agricultural company that had been struggling to survive until last year, which had a rise in sales of 66% percent in the first half of the year (HY1) 2016, as profit margin rose by 48% in the second quarter, while it had a turnover of 51% percent, it doubled profit against the corresponding period of last year, which is an indication of a surge, strong growth and earning at a time of general downturn in company performance and profits.
And this two other things:
MANUFACTURING PRODUCTIVITY WATCH
As Nigeria enters a season of ‘technical’ recession, it is important to examine manufacturing productivity data, as to observe whether it is on a sustained basis and indication or, the economy could return to the path of growth and development.
The World Economics headline Sales Managers Index (SMI) for the month of July 2016, reports that the Nigerian economy has registered an improvement after 5 months of contraction, Sales Growth Index (SGI) is still below 50 Index Point (IP), however, there is sharp improvement in Business Confidence Index (BCI) and, growth is likely to be weak, but, productivity conditions are improving slowly.
As for the Central Bank of Nigeria (CBN) headline Purchasing Managers Index (PMI) for the month of July 2016, manufacturing PMI rose marginally to 44.1 Index Point (IP) in July, as compared to 41.9 Index Point (IP), which is an indication of slower rate of decline in the review period.
Although there is a decline on all the key indicators, however, it was in a much slower pace, also, the data did not take into cognizance, significant improvement in electricity and widespread availability of petroleum products, which are a stimulus for improvement in economic activity and its capability in strengthening purchasing power, despite the very high inflationary trend.
Regarding the Nigeria’s premier manufacturing productivity indicator, the FBNQuest headline Purchasing Managers Index (PMI) for the month of July, 2016, posted a pick-up in productivity to stand at 51.0 Index Point (IP), although, last month it posted a figure of 50.2 Index Point (IP), however, this is the first time in months, three of the key indicators were in the positive territory, as against two that lay in negative area.
Stocks of purchases sub-index, suppliers’ delivery times sub-index and new orders sub-index exhibited signs, to suggest that manufacturing has risen off the floor and, possibly, that Gross Domestic Product (GDP) numbers for the third quarter 2016 (Q3) will be less depressing, than the second quarter (Q2) economic report.
EXCESS CRUDE ACCOUNT REBOUND
One of the stark financial problems which the administration of President Muhammadu Buhari (PMB) inherited, upon assumption into office, apart from a very badly managed economy, low oil price revenue and an imprudent fiscal management of the public service, was the reality of a highly depleted Excess Crude Account (ECA).
It is usually a kind of a governmental savings account, where prices of sold crude oil that surpasses the pegged oil bench mark price, would be saved into an account in case of budgetary shortfall and expenditure deficiency by the two tiers of the federal and state governments.
Normally, an Excess Crude Account (ECA) should enjoy the graces of high oil prices, fortunately, the past few years had been a period of relatively, high crude oil prices, usually, it is expected that such an account balance, would be on a very high side, unfortunately, Nigeria is a typical depiction of a nation that does not plan, thus, did not save for the rainy day.
Sadly, this has been the narrative of exchanges, between the officials of the present government and that of the past democratic regime, with the former complaining of a depleted reserve, while the latter countered, that it is because the last administration, was led by a leadership that lacked the will power and resolve to save.
Now, one of the challenges the present administration has been facing, apart from the acknowledged low oil prices in the international market is the evident disruption in crude oil production, through the sabotage of crude oil pipeline by the act of vandalism, in fact, it is the reason why the nation is having problems with foreign exchange availability for trade.
Yet, as at today, through deliberate effort and prudent economic governance, the Excess Crude Account (ECA) has climbed to nearly $4 billion dollars, or if I am to be most precise, $3.9 billion dollars, while, the federation account has started sharing bigger sum of revenue amongst the three tiers of government.
Basically, that is how to stimulate and wean an administrative system from a recession, with increasing government spending, creating increased consumer confidence and, a financial back-up saving to stave off the eventuality, of an uncertain economic world of crude oil reliance.
Follow me on twitter: @neeswaid