High financing costs erode Total’s soaring profits
A Total Kenya outlet. The company expects to reap long-term benefits after its acquisition of Chevron. Photo/FILE
Oil marketer Total Kenya’s financing costs have tripled in nine months to the end of September, weighing down on the French multinational’s earnings and slashing cash available for payment of dividends to shareholders, even as net profits soared by 53 per cent.
The oil marketer incurred net finance costs of Sh766 million in the nine months to September, up from Sh282 million last year.
The costs have been inflated by interest on a Sh4.7 billion syndicated loan from local commercial banks and other short-term borrowings that Total borrowed to finance purchase of assets of rival firm Chevron.
Preferential shares
“The finance costs have severely eroded the company’s profits but the long-term gains arising from the increased market share associated with the Chevron acquisition are greater,” said Mr Robert Munuku, the head of research at Drummond Investment Bank.
Total Kenya (TKL) also issued its Paris-based parent company, Total Group, preferential shares worth Sh3.9 billion as part-financing for the Chevron deal.
TKL’s turnover increased two-and half times to Sh57 billion on addition of the 70 outlets the company acquired from the American oil marketer, Chevron, whose exit from the Kenyan market was concluded mid last year.
In the first nine months of the financial year, the company’s interest payments soared to Sh778 million up from Sh290 million last year, owing to short-term borrowing made to supplement fund raised from the five-year loan from Citibank, Standard Chartered and Kenya Commercial Bank.
So far, the highly leveraged firm has paid out a quarter of the principal amount in a year that has seen less volatility in the international oil prices that had depressed its earnings last year.
Out of the Sh30.6 billion worth of assets that the company has on its books, close to two-thirds of it is funded by current liabilities, including mainly short term borrowings.
Mr Munuku said that despite the high financing costs, the firm’s prospects for the full year were sound owing to its enhanced market share.
The Petroleum Institute of East Africa estimates TKL’s market share among local oil marketers increased to 31 per cent, up from 19 per cent before the acquisition.
“The current market conditions are in favour of the company especially looking at its chunk of the market share plus the stability of the crude oil prices in the international markets,” he said.
Analysts at Dyer and Blair Investment Bank said TKL’s financing costs will be off-set by long term gains that the company has achieved from the Chevron acquisition, which took its tally of service stations to 174 across the country.
Last year, the firm’s profitability fell by almost half owing to the high volatility in the prices of crude oil in the international markets that saw the company hold expensive stocks when prices had declined, eroding its margins.
In the nine months to September, the oil marketer reported a 53 per cent gain in net profits to Sh348.6 million on the back of increased volumes that doubled to 360 Kilotons (KT) attributed to the enhanced market share.
The firm paid Sh1 dividend last year, departing from its constant dividend pay-out of Sh2.50 in previous years.
The tradition was broken with the entry of the 123 million preferential shares in the company’s books that scooped the bulk of the dividend payout.
Total Kenya’s parent company, Total Outre Mer, is currently the majority shareholder with a 78 per cent stake in the Kenyan operation.
Pipeline system
Mr Alexis Vovk, the managing director, said the improved performance was expected with the acquisition that positioned TKL as the biggest oil marketer in Kenya.
“The increased volumes are in line with expected performance of the new company after acquisition of Chevron business at the end of 2009,” said Mr Vovk, in a statement.
Mr Vovk is optimistic about the company’s performance in the full year based on increased volumes to its upcountry locations through the Kenya pipeline system.
“The performance of the remainder of the year will be in line with projections, provided that there will be increased product flow to upcountry locations through the Kenya pipeline system, together with improved efficiency at the refinery and stable international oil prices,” said Mr Vovk.
