FORTE OIL PLC Final Rating Report

Transcription

1 FORTE OIL PLC Final Rating Report

2 2016 Corporate Rating Report Forte Oil Plc. Rating Assigned: Bbb This refers to companies with satisfactory financial condition and adequate capacity to meet obligations as and when they fall due. Outlook: Stable Issue Date: 11 July 2017 Expiry Date: 30 June 2018 Previous Rating: N/A Industry: Petroleum Products Marketing Outline Page Rationale 1 Company Profile 4 Financial Condition 7 Ownership, Mgt. & Staff 12 Outlook 14 Financial Summary 15 Rating Definition 18 Analysts: Ojuru Adeniji ojuruadeniji@agusto.com Isaac Babatunde isaacbabatunde@agusto.com Agusto & Co. Limited UBA House (5th Floor) 57, Marina Lagos Nigeria RATING RATIONALE Agusto & Co. has assigned a Bbb rating to Forte Oil Plc. ( Forte Oil, FO or the Company ). The rating is supported by good cash flow, improvement in profitability, satisfactory financing structure, stable and experienced management team, strong brand, extensive retail network and good market position in the downstream oil & gas industry. The rating is however constrained by the high leverage position of the Company resulting from the increasing working capital requirement. During the year ended 31 December 2016, Forte Oil s revenue grew by 21% to billion, supported by the 49% increase in pump price of premium motor spirit (PMS), higher sales volumes of lubricants and liquefied petroleum gas (LPG). In the same vein, cost of sales trended upwards by 20% to account for 88.5% of revenue in 2016, fuelled by the impact of devaluation of the domestic currency which led to higher costs of importing petroleum products. Despite the high cost environment, operating profit margin improved to 3.3% from 1.2% the previous year while the Company reported a pre-tax return on average equity of 43.7%; higher than our expectation. In the year under review, Forte Oil improved its financing structure, with the issuance of a 9 billion 5-year bond in Q4 2016, which replaced the short term expensive commercial bank borrowings. Management has disclosed plans to raise 20 billion from the equity market before the end of 2017 (rights issue or private placement) in order to strengthen its capital base and create a favourable long term financing position. Should this be successful, we are of the view that additional equity will address FO s long term working capital need and improve overall financial performance in the medium term. During the year ended 31 December 2016, Forte Oil reported a positive operating cash flow of 13.9 billion. Operating cash flow was sufficient to cover returns to providers of financing and estimated mandatory capital The copyright of this document is reserved by Agusto & Co. Limited. No matter contained herein may be reproduced, duplicated or copied by any means whatsoever without the prior written consent of Agusto & Co. Limited. Action will be taken against companies or individuals who ignore this warning. The information contained in this document has been obtained from published financial statements and other sources which we consider to be reliable but do not guarantee as such. The opinions expressed in this document do not represent investment or other advice and should therefore not be construed as such. The circulation of this document is restricted to whom it has been addressed. Any unauthorized disclosure or use of the information contained herein is prohibited.

3 expenditure. FO s operating cash flow as a percentage of sales of 11% is above our minimum expectation. Overall, the Company s cash flow is good. As at 31 December 2016, FO s total interest bearing liabilities (IBL) stood at 33.4 billion, up by 32% from the prior year, following the issuance of the 5- year bond in November Net debt as a percentage of average total assets (less cash) stood at 80%, while total IBL to equity ratio of 281% is also high. Overall, we consider the Company s leverage to be very high. Forte Oil s current ownership structure shows significant concentration, with over 70% of equity (directly and indirectly) controlled by an individual shareholder, thus exposing the Company to potential key man risk. Nonetheless, the Board comprising four non-executive directors provides some level of checks and oversight function. In addition, Forte Oil remains one of the few listed companies in Nigeria with a balanced directorship mix between executive and non-executive directors, of which four are independent directors. FO has a large distribution network, with over 400 retail outlets spread across the country. Forte Oil has a good market position, controlling over 12% of the Nigerian oil & gas downstream industry. The Company has a strong brand presence, following its rebranding and marketing positioning efforts and thus is considered one of the leading downstream oil & gas players in the country. Going forward, Forte Oil s strategy to deepen focus on high margin products, diversify revenue base, optimise the Company s distribution channels and improve internal efficiencies in its core operations (downstream activities) could lead to improvement in financial condition in the short to medium term in our opinion. Based on the foregoing, we attach a stable outlook to Forte Oil Plc Corporate Rating

4 Figure 1: Strengths, Weakness & Challenges Strengths Good cash flow Good market position Extensive retail network of over 400 outlets Stable, qualified and experienced management team Diversification into power generation and upstream activities Weakness High leverage Challenges Improving cash generating capacity in view of incessant delays in subsidy payments by the FGN Highly regulated industry susceptible to policy changes Thining industry wide operating profit margin Corporate Rating

5 PROFILE Forte Oil Plc. was originally incorporated as British Petroleum Limited (BP) in 1964, marketing and selling BP s products across the country. The Company s name changed to African Petroleum Plc., following the indigenisation policy of the Federal Government (FG) in the 1970s, which led to the acquisition of 60% equity stake in BP at the time. In 1989, the FG sold 20% of its equity stake to the Nigerian public in the first phase of a privatisation program. This privatisation process was completed in 2000, with the acquisition of the 40% equity stake in the Company by Zenon Petroleum and Gas Company Limited, following the divestment by the Federal Government. In 2010, Zenon Petroleum acquired majority shares in African Petroleum and subsequently changed the Company s name to Forte Oil Plc. in the following year. Today, Forte Oil Plc. is one of the leading integrated energy companies operating in Nigeria, with business interest in the oil & gas (downstream & upstream) and the power sector. Figure 2: Evolution of Forte Oil Plc Incorporated as British Petroleum (BP) Nigeria Limited Dominant foreign ownership NNPC divests 30% to core investor In 1989 name changed to African Petroleum (AP) NNPC sold 10% stake to the Nigerian public Rebranded to Forte Oil New Management team Introduced 3-year strategic turnaround program Consolidate growth, build resilience and entrench best practices To become the foremost integrated energy solutions provider in Nigeria Converted to a Public Company NNPC acquired 60% stake with 40% of shares to Nigerian citizens Zenon Petroleum & Gas Ltd acquired majority stake in AP and changed the name to Forte Oil Plc Strategic program yielding results Acquired Geregu power plant with a 414MW capacity The Company primarily engages in the marketing of refined petroleum products and blending of lubricants. Forte sells Premium Motor Spirit (PMS), Automotive Motor Oil (AGO), Dual Purpose Kerosene (DPK) and Aviation Turbine Kerosene (ATK). FO has a wide range of lubricant brands including SUPER V, VISCO 2000, Diesel Motor Oil, Gear Oil 40 and Gear Oil 90. In 2013, Forte Oil introduced SYNTH 10000, a synthetic-based engine oil to its product range, in a bid to compete with the imported range of lubricants in the market. The Company also sells industrial and organic chemicals such as Polyol, Acetone, Calcium Hydrochloride and Isopropyl Alcohol to companies operating in the upstream oil & gas sector. FO also provides aircraft refuelling services at five major airports in Nigeria under the brand Air FO for international and local airlines operating in the country. Forte Oil operates its business from 400 retail outlets across Nigeria and also possesses a 30,000 metric ton lubricant blending plant and aviation fuel storage facilities in Lagos State. The Company is a member of the Major Oil Marketers Association of Nigeria (MOMAN) alongside Conoil Plc., Mobil Oil Nigeria Plc. (Mobil), MRS Corporate Rating

6 Oil Nigeria Plc. (MRS), Oando Plc. and Total Nigeria Plc. (Total). Forte Oil controls over 5% of the market share of PMS distributed in the Country 1. The Company is listed on the Nigerian Stock Exchange with over 161,000 shareholders. Zenon Petroleum & Gas Limited is the largest single institutional shareholder, controlling 48.87% equity stake, while other significant shareholders include; Thames Investment Incorporated Limited (15.11%) and Mr. Femi Otedola (14.21%). Forte Oil Plc. is governed by an eight-man board of directors, comprising two executives and six non-executive directors. Mr. Femi Otedola is the Chairman of the Board, while Mr. Akin Akinfemiwa is Group Chief Executive Officer. Prior to year end, two non-executive directors - Mrs. Grace Ekpenyong and Mr. Phillip Akinola retired from the Board in October and December 2016 respectively. During the period under review, Forte Oil restructured its Board, with the appointment of three additional independent directors namely: - Mrs. Salamatu Suleiman and Dr. Mairo Mandara (both were appointed in October 2016), while Mr. Nicolaas Vervelde was appointed on December 8, The Board has five sub-committees which govern the affairs of the Company. Over the last three years, FO has received satisfactory report on its corporate governance practices by Price Waterhouse Coopers (PWC). Table 1: Current Directors Mr. Femi Otedola Mr. Akin Akinfemiwa Mr. J.B. Omodayo-Owotuga Mr. Anil Dua Mr. Christopher Adeyemi Mrs. Salamatu Suleiman Dr. Mairo Mandara Mr. Nicolaas Vervelde Chairman Group Chief Executive Officer Group Chief Financial Officer Non-executive Director Non-executive Director (Independent) Non-executive Director (Independent) Non-executive Director (Independent) Non-executive Director (Independent) The Company has two wholly owned subsidiaries: Forte Upstream Services Limited (formerly AP Oil Fields Services Limited) and AP Oil & Gas Ghana Limited. In addition, Forte Oil owns 57% stake in Amperion Power Distribution Company a independent power generating company in Kogi State, Nigeria. Forte Upstream Services Limited (FUS) was established in The company, which is wholly owned by Forte Oil, is primarily engaged in the sale of chemicals and drilling fluids to companies in the upstream oil and gas industry. The company also provides project management services, environmental & safety services, rig operations & marine supplies to local, international oil exploration and production companies. The company plans to supply production chemicals and drilling fluids chemicals to operators in Sao Tome and Principe. AP Oil & Gas Ghana Limited (APOG) was established in It is wholly owned by Forte Oil and is engaged in marketing refined petroleum products in Ghana through its 15 retail outlets. The company intends to expand operations to other West African countries in the near term. During the period under review, the Company 1 Agusto & Co. Research Corporate Rating

7 impaired 50% of its Ghana operations to focus on harnessing its business activities in Nigeria. Amperion Power Distribution Company is largely owned by Forte Oil Plc. with 57% equity stake. Other shareholders with more than 5% equity stake are Benny Steinmetz Group Resources Limited (BSGR) with 38% and Shanghai Municipal Electric Power Company (SMEPC) with 5%. BSGR is a diversified natural resources company, with operations across 12 countries and over $1 billion annual turnover. SMEPC is a prominent multinational power generation and electrical equipment manufacturing company based in China. In August 2013, Amperion Power Distribution Company acquired a majority stake (51%) in Geregu Power Plc (owners of Geregu Power Plant), while the Federal Government (FGN) retained 49% through the Bureau of Public Enterprises and Ministry of Finance Incorporated. Geregu power plant was commissioned in 2007 and has a generating capacity of 414 megawatts (MW). In 2016, the Company carried out repair rehabilitation works on the power plants which increased the generating capacity to 435 MW. During the year ended 31 December 2016, the power generation business segment earned a revenue of 12.9 billion, accounting for 8.7% of the Group s total revenue. Table 2: List of Subsidiaries Business Focus Ownership Stake Managing Director Amperion Power Distribution Company Power 57% Mr. Adeyemi Adenuga (FNSE) AP Oil and Gas Ghana Limited Downstream oil & gas 100% Mr. Ukpai Okwara Forte Upstream Services Limited Chemicals and drilling fluids 100% Mr. Seye Alabi As at 31 December 2016, Forte Oil s total assets stood at 73.5 billion. During the year under review, the Company s total revenue amounted to billion, while FO reported a profit after tax of 3.2 billion. Table 3: Background Information as at 31 December 2016 Authorized Share Capital: 2 billion Paid-up Capital: 0.6 billion Shareholders Funds: 11.8 billion Registered Office: 13, Walter Carrington, Crescent, Victoria-Island, Lagos Principal Business: Petroleum Products Marketing Auditors: PKF Professional Services Number of Employees Corporate Rating

8 ANALYSTS COMMENTS PROFITABILITY Forte Oil Plc. s primary business includes the marketing, distribution and sale of refined petroleum products comprising fuels (PMS, DPK, ATK, AGO and LPFO), lubricants and LPG through the Company s network of over 400 retail outlets. In addition, FO has diversified its business into power generation and upstream oil & gas and the revenue from these businesses are reflected in other income. During the financial year ended 31 December 2016, FO s revenue grew by 21% to billion. This growth is primarily driven by the 49% increase in the pump price of PMS by the Federal Government in May In addition, we note that the sale of PMS, AGO and DPK together accounted for the largest portion of revenue at 91.3%. Further analysis of revenue growth per product, revealed that the lubricant business segment grew by 64% to account for 8.7% of the Company s total revenue in the year ended 31 December 2016 (2015: 5.7%). FO repositioned its lubricant business segment, with the introduction of new products, improved production efficiency and enhanced its marketing strategy to grow lubricant revenue. As a result, the volume of lubricants sold increased to 21.7 million litres in 2016, from 13.2 million litres in the prior year. Management has disclosed plans to sustain this growth, riding on the Company s strong brand, wide retail network and product quality. Figure 3: Revenue Breakdown by Business Segments Figure 4: Year-on-Year Growth in Product Volume Fuels Lubricants and greases Production chemicals 100% 0.002% 0.024% 98% 5.7% 96% 8.7% 94% 92% 90% 94.3% 88% 91.3% 86% % 250% 200% 150% 100% 50% 0% -50% -100% 255% 65% 3% AGO ATK DPK LPFO LPG LUBES PMS -24% -35% -2% -74% During the year ended 31 December 2016, Forte Oil s cost of sales rose by a significant 20.6% to billion, due to the increased cost of importation of fuels and other petroleum products which have been elevated on account of the impact of devaluation of the domestic currency. However, the direct cost of importation is somewhat moderated, given that the pump price of PMS is regulated and the Federal Government s subsidy payments include exchange rate differential. In the year under review, the Company s operating expenses inched upwards by 6%, to account for 8.3% of turnover, reflecting the high level of inflation of 18.55% 2 in FO has disclosed plans to moderate its costs 2 National Bureau of Statistics, 2016 CPI report Corporate Rating

9 by rationalising its distribution channels while Figure 5: Operating Profit Margin ( ) focusing on enhancing product sales in prime Forte Oil Total MRS locations. The Company has also reviewed a number 6.7% 7% of its maintenance service level agreements for 6% repairs to be done on a need basis. Overall, 5% Management expects operating expenses to remain 4% 3.3% 3.3% relatively unchanged in the near term. On account of 3% 2.4% 2.4% 1.8% 1.9% an enlarged revenue base, FO recorded 3.3% 2% operating profit margin, the highest recorded in the 1% 0.2% past three years. This is however lower than its peer 0% Total Nigeria Plc. (Total) of 6.7% but higher than MRS -1% Oil Nigeria Plc. (MRS) of 1.8%. Forte Oil plans to -2% -1.9% achieve its target operating profit margin of 3.5% in 2017, by deepening its high margin lubricant business. We believe this is achievable, owing to the Company s improved route-to-market strategy. Forte Oil s other income of 2.4 billion comprises throughput income earned on the storage of products for the pipeline & petroleum marketing company (PPMC), dividend from Amperion Power Distribution Limited, rental income on investment property, freight income earned from trucking activities and foreign exchange gains from sale of FX inflows. Other income also includes 0.22 billion from crude lifting contract of 45,000 barrels per day (bpd) executed with the Nigerian National Petroleum Company (NNPC). We expect other income to continue to boost Forte Oil s earnings, following the increased capacity of the Geregu power plant to 435MW and throughput income earned from petroleum storage. Despite the growth in revenue recorded during the year, profit before interest and tax dipped by 10% to 8.1 billion, due to the high cost of sales and operating expenses. However, the Company s interest expense decreased by 15% to 2.6 billion, on the back of the reduction in high cost commercial bank loans, which was repaid from the proceeds of the bond issue. As a result, the ratio of interest expense to sales improved to 2% (2015: 2.8%). Thus, the Company s pre-tax profit to sales of 4.1%, is within our expectation. During the year, Forte Oil reported an impressive pre-tax return on average equity (ROE) of 43.7%, higher than our expectation and higher than MRS of 10.6% but lower than Total of 102.2%. The Company s pre-tax return on average assets (ROA) which stood at 1.9% was lower than our benchmark. FO s 3-year ROA of 2.2% remained lower than our expectation while average ROE of 41.6% was significantly higher than our threshold. In our opinion, Forte Oil s overall profitability has improved, largely due to the increase in volumes of lubricants and PMS as well as the dividend earned from the power business segment. Figure 6: Pre-tax return on Average Equity ( ) Forte Oil Total MRS 120% 102.2% 100% 80% 60% 43.7% 46.5% 46.8% 40.4% 34.5% 40% 20% 10.6% 7.1% 6.4% 0% Corporate Rating

10 CASH FLOW Though Forte Oil s sales are largely on cash basis, the Company also engages in credit sales of 60 days to large Figure 7: OCF to Sales Forte Oil Total MRS corporates and dealer-owned retail outlets. During the 15% 13% financial year ended, OCF remained largely unchanged 11% at 13.9 billion from the prior year. Although the 10% 8% 7% 8% Company s OCF to sales ratio dipped to 11% from 13% the previous year, this level is better than its peers Total: 8% and MRS: (-7%) and within our expectations. 5% 5% 0% 4% % -5% The Company s operating cash flow of 13.9 billion was sufficient to cover returns to providers of financing (comprising interest payment of 2.6 billion) and -10% -7% dividend payment of 4.5 billion) and estimated mandatory capital expenditure ( 2.1 billion). However, the balance OCF of 1.6 was unable to cover current portion of long term loan of 12 billion. Forte Oil Plc. has a petroleum support fund (PSF) receivable of 15.1 billion, comprising subsidy payment, interest on delayed payment and foreign exchange differential owed by the Federal Government. We note that 77% of this receivable has been outstanding past 360 days and thus categorised as long term receivable rather than a trade receivable. Agusto & Co. recognises efforts by the Major Oil Marketers Association of Nigeria (MOMAN) towards realising outstanding payments under the PSF scheme recoverable from the petroleum pricing regulatory agency (PPPRA). Subsequent to year end, Management has disclosed receipts of 1.3 billion from the PPPRA covering the interest on delayed subsidy payment and foreign exchange rate differential. In addition, there are strong indications of further receipts from the PSF receivable from the Federal Government 3. In our opinion, the Company s operating cash flow is good. Nonetheless, the expected inflow from PPPRA will improve the overall cash flow position of the Company going forward. 3 (Thisday Newspaper, 2017) - The Acting President has ordered the Minister of Finance to pay oil marketers all outstanding subsidy claims estimated at $2 billion. Published on 15 June Corporate Rating

11 FINANCING STRUCTURE AND ADEQUACY OF WORKING CAPITAL As at 31 December 2016, Forte Oil s working assets stood at 23.5 billion, representing a 20% decline compared to the prior year and accounting for 32% of total assets. The decline in working assets is due to the significant drop in inventory level and trade debtors in the year under review. The Company temporarily stopped the importation of PMS in April 2016 for the entire year, due to the illiquidity in the foreign exchange market, devaluation of the domestic currency and the outstanding payment on the PSF. The Company s spontaneous financing which stood at 28.2 billion as at 31 December 2016, was largely due to a 15% increase in trade creditors to 14.5 billion following the more favourable terms of trade. In the review period, spontaneous financing was sufficient to cover working assets, resulting in a short term financing surplus of 4.7 billion. As at 31 December 2016, FO s long term assets stood at 33.8 billion (2015: 26.1 billion) consisting of investment in subsidiary (Amperion Power Distribution Limited operators of the Geregu Power Plant, Forte Upstream and AP Oil & Gas Ghana) 48%, plant, property & equipment (43%) and investment properties (8%). As at year end, the Company s long term funds which amounted to 22.7 billion, comprising equity (52%) and long term borrowings (48%), were insufficient to finance Forte Oil s long term assets, leaving a long term financing need of 11.1 billion. The Company s short term financing surplus was insufficient to cover the long term financing need, thus resulting in a working capital deficiency of 6.3 billion. Forte Oil s working capital deficiency was exacerbated by the rise in pump price of PMS, which has increased the working capital requirement for downstream oil & gas operators. The working capital deficiency was funded by short term borrowings. Overall, Agusto & Co. is of the view that Forte Oil s working capital requires improvement. However, Management has disclosed plans to access long term funds from the equity market (via rights issue or private placement) in order to diversify its funding source and create a favourable long term financing position. Should this be successful, we are of the view that additional equity will reduce the long term financing need and impact leverage positively. Figure 9: (Working Capital need)/ Financing Surplus Figure 8: Working Capital/ (Long Term Financing Need) Forte Oil Total MRS Forte Oil Total MRS (5) (10) (15) (0.1) (2.0) (8.1) (10.4) (5) (10) (15) (0.1) (0.1) (1.2) (6.4) (7.6) (12.1) Corporate Rating

12 LEVERAGE As at 31 December 2016, Forte Oil s total liabilities stood at 61.6 billion, representing a 17% increase from the prior year, due to the significant rise in interest bearing liabilities. As at year end, interest bearing liabilities represented 54% of total liabilities while non-interest liabilities accounted for the balance. In the period under review, interest bearing liabilities grew by 32% to 33.4 billion from previous year, largely driven by the 236% growth in long term borrowing from the prior year and the rise in current portion of long term borrowings. The increase in long term borrowing is due to the 9 billion unsecured 5-year corporate bond issued in November 2016, with coupon rate of 17.5%. The proceeds of the bond was used to refinance commercial bank loans and fund the Company s retail outlet expansion. In addition, the rise in current portion of the long term borrowings include import finance facilities of 19.9 billion used to fund letters of credit for the importation of petroleum products under the petroleum subsidy fund. During the FYE 2016, Forte Oil s interest expense to sales ratio improved to 2% (2015:2.8%), due to the reduction in high cost commercial bank loans, which was repaid from the proceeds of the bond issue. Forte s ratio of interest expense to sales was higher than peers- Total: 0.3% and MRS: 1.5%. The net debt as a percentage of average total assets (less cash) at 80% is high, while total IBL to equity ratio at 281% is also high. In our opinion, FO s leverage position is high and requires improvement. Management has disclosed plans to raise capital through a rights issue program and/or a private placement to buffer its current capital level. We believe that the expected capital injection will aid in moderating Forte s leverage position in the medium term. Figure 10: Interest Expense to Sales Forte Oil Total MRS 3.0% 2.8% 2.5% 2.2% 2.0% 2.0% 2.0% 1.5% 1.5% 1.5% 1.1% 1.0% 0.9% 0.5% 0.3% 0.0% Figure 11: Net Debt as a % of Total Assets (excluding cash) 120% 97% 100% 80% 80% 63% 60% 40% 20% 0% Corporate Rating

13 OWNERSHIP, MANAGEMENT & STAFF As at 31 December 2016, Forte Oil s authorised share capital stood at 2 billion, of which 0.6 billion were issued and fully paid up. FO is a public company quoted on the Nigerian Stock Exchange and has over 161,000 shareholders. Zenon Petroleum & Gas Limited is the single largest institutional shareholder, accounting for 48.87% of the Company s equity, while Mr. Femi Otedola is the largest individual shareholder, with a 14.21% equity stake in FO. We note the concentration in the ownership structure of the Company, with the Chairman directly and indirectly holding over 70% equity stake. Nevertheless, the restructuring of the Board, with the inclusion of four independent directors should help strengthen corporate governance in the Company. Table 4- Shareholding Structure as at 31 December 2016 Shareholders Equity Stake Other Individuals and Institutions 21.81% Zenon Petroleum & Gas Limited 48.87% Mr. Femi Otedola 14.21% Thames Investment Incorporated Ltd 15.11% Total % Forte Oil has an eight-member Board of Directors, which is led by the Chairman, Mr. Femi Otedola. During the period under review, Mrs. Grace Ekpenyong and Mr. Phillip Akinola retired from the Board as non-executive directors while Mrs. Salamatu Suleiman, Dr. Mairo Mandara and Mr. Nicolaas Vervelde were appointed to the Board as independent directors. Forte Oil s leadership team comprises 18 members, each reporting directly to the Chief Executive Officer. In the review period, Mr. Michael Adedoyin Ogun joined the leadership of the Company as Manager, Investor & Government Relations. We are of the view that FO has a qualified management team with extensive experience in the oil & gas downstream industry. In 2016, the Company had average staff strength of 171 persons compared to an average of 182 persons in prior year. In the year under review, Forte Oil s average cost per employee increased to 12.1 million, while the net earnings per staff at 31.8 million is 2.63 times the average cost per employee, which we consider to be an indication of satisfactory staff productivity. Leadership Team Mr. Akin Akinfemiwa, the Group Chief Executive Officer of Forte Oil Plc. holds a Bachelor of Science Degree in Mechanical Engineering from the University of Ibadan and a Masters of Business Administration (Information Technology) Degree from Hull Business School, University of Lincolnshire, UK. He has attended several leadership courses in various institutions including The Wharton School, University of Pennsylvania and Advanced Management and Leadership Program at Said Business School, University of Oxford, UK. Prior to joining Forte Oil Plc, Mr. Akin Akinfemiwa was a Director with Fineshade Energy Limited after rising from the position of Head, Trading and Business Development. He was also formerly a Products and Derivatives Trader with Oando Supply and Trading Limited. Mr. Akinfemiwa was appointed as the Group Chief Executive Officer in December Corporate Rating

14 Mr. Julius B. Omodayo-Owotuga is the Group Chief Financial Officer of Forte Oil Plc. He holds a Bachelor of Science degree in Accounting from the University of Lagos and has attended several short management courses at the Harvard Business School among other renowned management schools. Julius is a CFA charter holder, Chartered Management Accountant, Chartered Tax Practitioner and a Certified Treasury and Financial Manager. Prior to joining Forte Oil as the Chief Financial Officer, he was the Assistant Treasurer at the African Finance Corporation (AFC). Mr. Omodayo-Owotuga has extensive finance experience which cuts across banking, consultancy and financial management services. He has worked with KPMG Professional Services, MBC International Bank Ltd (Now First Bank of Nigeria Ltd) and Standard Chartered Bank Nigeria Limited. Other members of the Leadership team include: Seye Alabi Tunji Rabiu Temitope Fagbemi Akin Olagbende Toyin Leo-Olagbaiye Nduka Okoisor Tunde Taiwo Chibu Oguike Ndidi Obiorah Kenneth Otaru Samson Oyeyemi Adams Rasheed Michael Adedoyin Ogun Habib Bello Gbemiro Adeboye Iyimola Akinbola Toyin Mike-Aigbe Ayodeji Adelakun Samuel Eze Managing Director, Forte Upstream Services Limited General Manager, Business Operations Group Head, Human Capital Group Head, Corporate Services and Chief Compliance Officer General Manager, Business Development Forte Oil Upstream Services Manager, Talent Management Manager, Lubes & Specialties Manufacturing Manager, Health, Security, Safety, Environment & QA Manager, Strategy Manager, Marketing Manager, Properties Manager, Information Technology Manager, Investor & Government Relations Manager, Lubes & Specialties Marketing Manager, Engineering/Infrastructural Projects Head, Business Assurance & Risk Management Head, Treasury and Procurement Head, Finance Head, Non-Fuel Revenue Corporate Rating

15 OUTLOOK In 2016, the Nigerian downstream oil & gas industry witnessed a 49% increase in the pump price of PMS, following the devaluation of the Naira which made the importation of PMS uneconomical. During the review period, profit margins remained depressed, largely due to the high input costs, driven by the devaluation of the domestic currency and inflationary pressures. During the year ended 31 December 2016, Forte Oil sales growth was supported by its extensive retail network spread across the Country and increase in sales volume of lubricants, coupled with the increase in price of PMS. Operating expenses trended upwards marginally despite the high cost operating environment. As a result, operating profit margin inched to 3.3%. The Company intends to deepen its focus on high margins products including lubricants and diversify its revenue base, by increasing its capacity in power generation while offering other alternative energy solutions going forward. Therefore, we anticipate revenue growth supported by the FO s growing lubricant product portfolio and increased capacity of the Geregu power plant. Forte Oil s operating cash flow could have been significantly better but for the outstanding receivable from the PPPRA, comprising subsidy payments, interest on subsidy and exchange rate differential. Subsequent to year end, Management has received 1.3 billion from the PPPRA. Going forward, the FGN has committed to paying the backlog of subsidy claims before the end of Agusto & Co. is of the view that further improvements to FO s cash flow will depend on receipt of the PSF receivable as well as sustained favourable trade terms with customers and suppliers, particularly for unregulated products, efficient cash receipts from the power plant and growth in upstream services. The Company s financing structure improved, following the issuance of a 5-year 9 billion bond which replaced the high cost short term commercial bank loans. Management has disclosed plans to raise additional long term funds from the equity market via rights issue and /or private placement in order to diversify its funding source and create a favourable long term financing position. In addition, management is at advanced stages in securing alternative source of funding core working capital requirements. Should all the proposed funding initiatives be successful, we expect significant improvement in Forte Oil s working capital and leverage. Forte Oil s strategy to optimize its distribution channels, deepen the market for the sale of high margin products, diversify revenue base, optimise working capital mix and improve internal efficiencies in its core operations (downstream activities) should lead to improvement in the Company s financial condition in the short to medium term in our opinion. Based on the aforementioned, we have attached a stable outlook to Forte Oil Plc Corporate Rating

16 FINANCIAL SUMMARY STATEMENT OF FINANCIAL POSITION 31-Dec Dec Dec-14 '000 '000 '000 ASSETS IDLE CASH 1,134, % 62, % % MARKETABLE SECURITIES & TIME DEPOSITS 15,009, % 10,062, % 13,757, % CASH & EQUIVALENTS 16,143, % 10,124, % 13,758, % FX PURCHASED FOR IMPORTS ADVANCE PAYMENTS AND DEPOSITS TO SUPPLIERS 2,003, % 1,297, % 3,645, % STOCKS 3,928, % 9,096, % 11,377, % TRADE DEBTORS 4,069, % 6,672, % 8,071, % DUE FROM RELATED PARTIES 8,114, % 6,515, % 4,756, % OTHER DEBTORS & PREPAYMENTS 5,373, % 5,913, % 28,768, % TOTAL TRADING ASSETS 23,489, % 29,496, % 56,620, % INVESTMENT PROPERTIES 1,799, % 1,831, % 1,934, % OTHER NON-CURRENT INVESTMENTS 10,707, % 11,072, % 11,050, % PROPERTY, PLANT & EQUIPMENT 9,452, % 9,663, % 9,851, % SPARE PARTS, RETURNABLE CONTAINERS, ETC GOODWILL, INTANGIBLES & OTHER L T ASSETS 11,866, % 3,552, % 462, % TOTAL LONG TERM ASSETS 33,826, % 26,120, % 23,299, % TOTAL ASSETS 73,458, % 65,740, % 93,678, % Growth 11.7% -29.8% 43.4% LIABILITIES & EQUITY SHORT TERM BORROWINGS 1,812, % 10,226, % 16,496, % CURRENT PORTION OF LONG TERM BORROWINGS 20,689, % 12,026, % 12,288, % LONG-TERM BORROWINGS 10,876, % 2,976, % 4,302, % TOTAL INTEREST BEARING LIABILITIES (TIBL) 33,378, % 25,229, % 33,088, % TRADE CREDITORS 14,525, % 12,587, % 23,958, % DUE TO RELATED PARTIES ADVANCE PAYMENTS AND DEPOSITS FROM CUSTOMERS 1,933, % 3,575, % 2,388, % OTHER CREDITORS AND ACCRUALS 10,346, % 10,574, % 21,532, % TAXATION PAYABLE 982, % 751, % 639, % DIVIDEND PAYABLE DEFERRED TAXATION 417, % OBLIGATIONS UNDER UNFUNDED PENSION SCHEMES MINORITY INTEREST REDEEMABLE PREFERENCE SHARES TOTAL NON-INTEREST BEARING LIABILITIES 28,205, % 27,489, % 48,519, % TOTAL LIABILITIES 61,584, % 52,718, % 81,607, % SHARE CAPITAL 655, % 546, % 546, % SHARE PREMIUM 8,071, % 8,181, % 8,181, % IRREDEEMABLE DEBENTURES REVALUATION SURPLUS OTHER NON-DISTRIBUTABLE RESERVES (1,396,326) -1.9% (1,396,326) -2.1% (2,255) 0.0% REVENUE RESERVE 4,543, % 5,691, % 3,346, % SHAREHOLDERS' EQUITY 11,874, % 13,022, % 12,071, % TOTAL LIABILITIES & EQUITY 73,458, % 65,740, % 93,678, % Corporate Rating

17 STATEMENT OF COMPREHENSIVE INCOME 31-Dec Dec Dec-14 '000 '000 '000 TURNOVER 131,613, % 108,853, % 156,714, % COST OF SALES (116,429,276) -88.5% (96,540,929) -88.7% (143,843,421) -91.8% GROSS PROFIT 15,184, % 12,312, % 12,871, % OTHER OPERATING EXPENSES (10,905,739) -8.3% (10,263,256) -9.4% (9,085,989) -5.8% OPERATING PROFIT 4,278, % 2,049, % 3,785, % OTHER INCOME/(EXPENSES) 3,785, % 6,873, % 3,524, % PROFIT BEFORE INTEREST & TAXATION 8,064, % 8,923, % 7,309, % INTEREST EXPENSE (2,622,410) -2.0% (3,091,295) -2.8% (3,102,519) -2.0% PROFIT BEFORE TAXATION 5,442, % 5,831, % 4,207, % TAX (EXPENSE) BENEFIT (2,206,653) -1.7% (1,037,177) -1.0% (1,568,530) -1.0% PROFIT AFTER TAXATION 3,235, % 4,794, % 2,638, % NON-RECURRING ITEMS (NET OF TAX) MINORITY INTERESTS IN GROUP PAT PROFIT AFTER TAX & MINORITY INTERESTS 3,235, % 4,794, % 2,638, % DIVIDEND (4,521,671) -3.4% (2,730,478) -2.5% (4,321,123) -2.8% PROFIT RETAINED FOR THE YEAR (1,285,842) -1.0% 2,064, % (1,682,210) -1.1% SCRIP ISSUES 1 OTHER APPROPRIATIONS/ ADJUSTMENTS 138, , ,677 PROFIT RETAINED B/FWD 5,691,196 3,346,139 4,854,671 PROFIT RETAINED C/FWD 4,543,801 5,691,196 3,346,139 ADDITIONAL INFORMATION 31-Dec Dec Dec-14 Staff costs ( '000) 2,069,216 1,955,843 1,391,701 Average number of staff Staff costs per employee ( '000) 12,101 10,746 9,278 Staff costs/turnover 1.6% 1.8% 0.9% Capital expenditure ( '000) 1,058, ,935 3,206,070 Depreciation expense - current year ( '000) 1,226,872 1,119, ,146 (Profit)/Loss on sale of assets ( '000) - 2,484 2,541 Number of 50 kobo shares in issue at year end ('000) 1,310,628 1,092,190 1,092,190 Market value per share of 50 kobo (year- end) 8,443 33,000 22,790 Market capitalisation ( '000) 110,656, ,422, ,910,101 Market/Book value multiple Non-operating assets at balance sheet date ( '000) 12,507,393 12,904,729 12,985,800 Market value of tradeable assets ( '000) Revaluation date - Investment properties Revaluation date - Other properties Average age of depreciable assets (years) Sales at constant prices - base year 1985 ( '000) 518, , ,637 Auditors PKF PKF PKF Opinion CLEAN CLEAN CLEAN Corporate Rating

18 CASH FLOW STATEMENT FOR THE YEAR ENDED 31-Dec Dec Dec-14 '000 '000 '000 Operating cash flow (OCF) 13,946,583 13,988,932 (2,459,911) Less: Returns to providers of finance (7,144,081) (5,821,773) (7,423,642) OCF after returns to providers of finance 6,802,502 8,167,159 (9,883,553) Non-recurring items Free cash flow 6,802,502 8,167,159 (9,883,553) Investing activities (8,932,864) (3,942,928) 1,763,544 Financing activities 8,149,495 (7,858,520) 16,597,118 Change in cash 6,019,133 (3,634,289) 8,477,109 PROFITABILITY PBT as % of Turnover 4% 5% 3% Return on equity 44% 46% 34% Real sales growth 1.8% -36.5% 23.5% Sales growth 20.9% -30.5% 33.3% CASH FLOW Interest cover (times) (0.8) Principal payback (years) WORKING CAPITAL Working capital need (days) Working capital deficiency (days) LEVERAGE Interest bearing debt to Equity 281% 194% 274% Total debt to Equity 519% 405% 676% IBD net of cash and Equiv. as a % of Equity without rev. 145% 116% 160% Net Debt/Avg Total Assets Exc. Cash and Rev. Surplus 102% 82% 114% Corporate Rating

19 RATING DEFINITIONS Aaa This is the highest rating category. It indicates a company with impeccable financial condition and overwhelming ability to meet obligations as and when they fall due. Aa This is a company that possesses very strong financial condition and very strong capacity to meet obligations as and when they fall due. However, the risk factors are somewhat higher than for Aaa obligors. A This is a company with good financial condition and strong capacity to repay obligations on a timely basis. Bbb This refers to companies with satisfactory financial condition and adequate capacity to meet obligations as and when they fall due. Bb This refers to companies with satisfactory financial condition but capacity to meet obligations as and when they fall due may be contingent upon refinancing. The company may have one or more major weakness (es). B This refers to a company that has weak financial condition and capacity to meet obligations in a timely manner is contingent on refinancing. C This refers to an obligor with very weak financial condition and weak capacity to meet obligations in a timely manner. D In default. Rating Category Modifiers A "+" (plus) or "-" (minus) sign may be assigned to ratings from Aa to C to reflect comparative position within the rating category. Therefore, a rating with + (plus) attached to it is a notch higher than a rating without the + (plus) sign and two notches higher than a rating with the - (minus) sign Corporate Rating

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21 Agusto&Co. UBA House (5th Floor) 57 Marina Lagos Nigeria. P.O Box Ikoyi +234 (1) (1) Fax: 234 (1)