Chevron buyout boosts Total Kenya’s profits

Total Kenya announced an eightfold increase in its half-year net profits helped by higher fuel prices and proceeds from Chevron Kenya, which the oil firm bought in June 2009.

The oil marketer’s net profit stood at Sh302 million in the six months to June 2010, compared to Sh36 million in the same period a year earlier.

Its revenues grew by 250 per cent to Sh38.9 billion in the period under review with the Chevron outlets estimated to have generated more than 40 per cent of the sales.

“This good performance arises from synergies resulting from the merger,” said Total Kenya managing director Felix Majekodunmi.

The company said that this year’s rising oil prices contributed significantly to the realisation of increased profit margins.

The period saw pump prices average between Sh86.20 per litre and Sh92.20 per litre, which is higher compared to the Sh84.50 per litre and Sh78.90 per litre range during the same period last.

Oil prices rose this year on renewed demand even as global economic growth took over from months of subdued demand occasioned by the Eurozone debt crisis in the half of 2009.

The company’s operating expenses rose from Sh657 million to Sh1.2 billion, while depreciation and amortisation expenses rose by Sh285 million resulting from the cost of running acquired assets from the merger.

Higher sales volumes arising from increased market presence due to the merger between the company and Chevron saw the firm’s turnover rise from Sh15 billion last year to Sh38 billion.

The merger has boosted the company’s competitiveness in terms of increasing her market share.

Rival Kenol Kobil delivered Sh1.17 billion in after-tax half year profits, rising from Sh431 million loss in the same period last year, buoyed by relatively stable oil prices.

Kenol Kobil’s firm grip on the local market has been loosened by a re-energised Total Kenya, helped by the acquisition of Chevron assets.

Data from industry lobby Petroleum Institute of East Africa (PIEA) places Kenol’s market share at 18.7 per cent, down from 23.6 per cent last year.

Total’s market share stands 31 per cent up from 19 per cent last year.

Smaller players like OiLibya, National Oil, Engen, and Gapco among others hold the remaining share of the market.

However, the company’s cash flow position remains in the negative territory at Sh10 billion compared to last year’s Sh4 billion putting into doubt its ability to generate sufficient cash to run its high operating costs in the long term.

New preference shares

The company’s share price rose by 10 per cent from Sh29 on Wednesday to Sh32 on Thursday, according to brokers at Suntra Investment Bank.

“Unlike ordinary preference shares that generally attract a constant dividend payout that is not pegged on a company’s annual performance, the new preference shareholder will get dividends from the same pool of after tax earnings as ordinary shareholders,” said Johnson Nderi of Suntra Investment Bank.

The new preference shares account for 70 per cent of the oil marketer’s 175 million issued shares.

Until the Sh7.5 billion loan from parent company Total Outre Mer is fully paid, it could take long before Total Kenya shareholders start earning dividends similar to what they earned before the transaction, according to researchers at Suntra.

There remains strong demand for the shares, however it should be noted that most of the stocks are preference shares owned by the parent company hence dividend will not really benefit the local market,” said Mr Nderi.

The cost financing interest charged on outstanding loans, borrowed to finance increased working capital, went up by Sh366 million.

In recent years, capacity constraints on the national pipeline has seen industry players revert to the expensive road transport pushing up operating costs.

High cost business

As a result, the high cost business environment has slowed down the industry’s earnings while increased competition has seen a number of big oil players quit the Kenyan market.

“The management remains optimistic that there will be improved product flow to upcountry locations,” said Mr Majekodunmi.

Last year volatility in international oil prices contributed largely to the negative results that Total posted, as competitors reduced their prices forcing the oil marketer to dump expensive stock at low prices.

“The local currency having strengthened in the last few weeks from highs of Sh82 to Sh80 against the dollar gives a cushion against the high crude costs,” said Robert Mwaluko of Drummond Investment Bank.

Crude oil was trading at $75.99 per barrel on Thursday, having gained from $75.44 per barrel the previous day.