By Dipo Olowookere
The long term and short term national scale Issuer ratings of BBB(NG) and A2(NG) respectively have been assigned to Eterna by Global Credit Ratings (GCR).
Eterna Plc is an integrated energy company with operations focussed on the downstream sector of the oil and gas industry.
Although, Eterna has a relatively small market share for petroleum products, its significant assets across the value chain (including storage facilities and a lubes plant) positions it well to take advantage of opportunities in the industry.
Eterna also leverages upon extensive technical expertise, linkages with well-established international partners, and off-take arrangements with big corporates and oil exploration companies.
Notwithstanding the potential for profit enhancement, GCR said it considers crude trading operation to be highly risky. The volumes and debt funding required to facilitate the business are very large, while the thin margin does not provide any headroom for unexpected delays or oil price volatility.
The rating firm said although, revenue from the retail and lubricant segments are lower, earning streams are more predictable, helping to reduce risk, with the higher margins serving to bolster sustainable earnings.
Furthermore, the network of fuel retail outlets (about 19), combined with the blending capacity in the Lubricant and Chemical segment present less risky opportunities for sustainable growth.
According to GCR, while margins in fuel retail are also thin, due to government regulations, there are opportunities to increase profitability through an improved service offering and economies of scale.
It noted that given the higher margin potential, Eterna plans to expand the retail and distributor network to increase accessibility to lubricants across the country.
Despite the volatility caused by trading activities and crude prices, as evidenced by the spike in the operating margin in FY16 and the decline in FY17, Eterna has steadily increased its scale, with operating profit having doubled between FY13 and FY17.
In this regard, the company has maintained sufficient funding facilities to cover trading and inventory requirements even under stressed scenarios. In this regard, trade credit facilities totalling $500 million have been secured from some leading banks. Up to N10 billion (around $25 million) has been drawn at a given time to import inventories, only a small portion of the available lines.
Nevertheless, having multiple lines with the different banks is important to ensure that Eterna is able to obtain the most competitive rates, while some of the credit facilities also serve as enhancements to secured contracts.
GCR said the retention of earnings has facilitated strong cash accumulation, with cash holdings increasing to a high N7.1 billion at FY16. Accordingly the company has been able to fund a portion of working capital requirements internally, thus maintaining gearing metrics at moderate levels.
Thus, net gearing registered at 27 percent at FY17, from an ungeared position previously. In addition, net interest coverage has been strong over the review period.
The rating agency said positive rating action is likely on attainment of targeted volume growth in all product segments (especially in the retail, chemical and lubricant segment), combined with effective cost management, resulting in improved earnings margins and stronger credit protection metrics.
Conversely, excessive gearing, even to fund profitable transactions, could result in a downgrade. This is particularly true in light of the vagaries of oil market environment and general operating environment, which could materially impact earnings and lead to liquidity strain and debt service challenges.
Adedapo Adesanya