Question Tag: Environmental Issues

Octopus Petroleum PLC is a multinational oil and gas group operating in the Niger Delta areas of Nigeria. The company has been highly profitable over the years. The group explores and extracts natural resources, holds reserves, and has recently become involved in the downstream sector by opening various commercial retail outlets for the sale of petrol to motorists.

In June 2020, the company was involved in an ecological disaster in the Ogoni area of Niger Delta as a result of massive oil spillage due to some technical faults, thereby resulting in spilling oil into the surrounding ocean and damaging wildlife and local communities.

Investors are concerned about the future prospects of Octopus Petroleum PLC and whether it represents a safe investment since the company normally operates in the lucrative oil and gas sector.

Octopus Petroleum Group annual report for the year 2020 and its comparative figures are shown below:

Octopus Petroleum Group Consolidated Statement of Profit or Loss for the Year Ended December 31

Octopus Petroleum Group Consolidated Statement of Financial Position as at December 31

Additional Information:

1. The N3,700 million provision for the Ogoni oil spill is an estimated cost net of relevant tax.
2. Calculating the financial cost of the oil spill in Ogoni land has been slightly problematic. However, N530 million had been expended by year-end, while the future costs of clean-up and compensation are undetermined.
3. One uncertain cost is fines payable to the Federal Government of Nigeria. Past fines have exceeded N2,500 million.
4. Octopus Petroleum Group vertically integrated in 2020 by acquiring and rebranding petrol stations.
5. Oil reserves were at record-high levels in 2020.
6. Oil prices increased by approximately 5% during 2020.
7. The company values inventory on a last-in-first-out (LIFO) basis, which contravenes IAS 2.
8. Dividend payments remained at N625 million for both 2020 and 2019.
9. Investors typically evaluate companies using these ratios:
   • Profitability Ratios:
     • Return on Capital Employed (ROCE)
     • Return on Equity (ROE)
     • Gross Profit Percentage
     • Operating Profit Percentage
   • Liquidity Ratios:
     • Current Ratio
     • Acid Test Ratio
   • Resource Utilization and Financial Position Ratios:
     • Inventory Turnover
     • Asset Turnover
     • Interest Cover
     • Gearing Ratio

Required:

(a) Analyze the performance of Octopus Petroleum Group over the two-year period. Your analysis should also consider the group’s ability to finance the cost of the oil spill in Ogoni land in the coming years. (14 Marks)