Jacques Magliolo
Engen has intensified its thrust for exploration and=20 production of oil in West Africa in an attempt to stem=20 declining profits and to rectify a free-falling share=20
The chemical and oil giant’s 1994 financial year saw a=20 13,6 percent drop in earnings per share and its share=20 price has fallen from a 1993 high of 5 300 cents to a low=20 of 3 000 cents in 1994. The share is now trading at 2 890=20
To make matters worse, market forces predict a poor=20 interim set of financial results — expected for release=20 in the first week of April. Stockbroker Irish & Menell=20 Rosenberg’s technical analyst, Tony Henfrey, says: “Engen=20 has moved sideways relative to the JSE overall index for=20 the past year and is now showing signs of further=20 downward movement. Essentially, despite recent falls, the=20 share is still expensive and could drop to its next=20 support level of 2 000 cents. “However, the share will=20 only become cheap when it falls to 1 500 cents,” says=20
Abbas Gani, general manager of corporate services, says:=20 “The oil and chemical sector has undergone a dramatic=20 change in the last two years and we have had to react to=20 these changes.
“An internal project is underway to ensure that proper=20 structures are in place to quickly react to the changing=20 business environment,” he says.=20
Members of Engen’s top management have been developing=20 new strategies behind closed doors, “which are about=20 focus, finding profit opportunities and improving=20 internal efficiencies,” says Gani. Called Project=20 Discovery, management are optimistic that, as a result of=20 the changes introduced by Discovery, profit could improve=20 by some R300-million.
In fact, the only way in which Engen will see this happen=20 is to reduce cost structures. Low world oil prices and=20 refining margins, together with a regulated South African=20 oil industry and problems in the commissioning of Phase=20 II of its new Durban refining plant, mean that the=20 company has little choice in how it can improve financial=20
One alternative to improving efficiencies (which Gani=20 says may not necessarily include large scale=20 retrenchments) is to see contribution to turnover and=20 profit margins improve from upstream (exploration and=20 production) divisions. In this vein, Engen acquired a=20 four percent stake in the N’Kossa and Haute Mer oil=20 exploration fields off the coast of the Belgian Congo.
The company bought the interest from Elf Congo, a=20 subsidiary of the French international oil and gas=20 company Elf Aquitaine, which operates more than 65=20 percent of the Congo’s total oil production of 180 000=20 barrels a day. In January chief executive Rob Angel=20 said: “The acquisition of this interest in the Congo is=20 an important stepping stone for Engen into sub-Saharan=20 Africa. The group already participates in the Kudu gas=20 discovery offshore Namibia, in block 1 Angola and in the=20 onshore Migoubi licence in Gabon.”
Gani adds: “When N’Kossa operates at full production, it=20 will yield 100 000 barrels a day. This will help Engen’s=20 objective of increasing upstream contribution to bottom- line profits to 25 percent.” At present this oil field is=20 being developed and is expected to come on stream during=20
Where else has Engen targeted? Says Gani: “We are=20 optimistic that we will have further opportunity to=20 participate in other ventures in Africa.”
Engen admits that it sees these upstream businesses as a=20 means to improving bottom line profits. “If you have=20 large upstream businesses and crude prices improve, then=20 crude production profitability has to increase. In turn,=20 this goes to offset a decline in profits from local=20 marketing operations,” says Gani.
However, analysts don’t believe world oil prices will=20 reach Engen’s expectations in the near future. While=20 prices wallow at between $16 and $17 a barrel, they fall=20 short of the forecast $18 to $19 a barrel. In addition,=20 refining margins were expected to reach between $4 and $5=20 a barrel, but are now still about $3 a barrel.
This does not bode well for Engen’s forthcoming interim=20 results. Expert predictions range from a 15 percent to 20=20 percent decline in profits.
There is, however, a possibility that Engen will offer=20 shares in lieu of cash. The risk of issuing more shares=20 to improve reserves is that additional shares in an=20 oversold market often cause new downward momentum.