Page 94 Compendium of a Review of Aspects of Petroleum Corporation of Jamaica

(PCJ) and a Comprehensive Audit of Petrojam Limited December 2018

Financial Statements Analysis of Petrojam

Financial Statements Analysis of Petrojam

Page 95 Compendium of a Review of Aspects of Petroleum Corporation of Jamaica

(PCJ) and a Petrojam+Limited">Comprehensive Audit of Petrojam+Limited">Petrojam Limited December 2018

Disclaimer:

This Financial Statements Assessment is solely an analytical review of the audited financial statements of

Petrojam+Limited">Petrojam Limited. We did not conduct an audit of the financial statements of the entity; hence we did not

test management’s assertions regarding the figures in the financial statements and disclosures. The

calculation of ratios was merely intended to provide trend analyses of key financial items in the balance

sheets and income statements of the entity, along with the notes provided.

8.1. This review was prepared using information from Petrojam’s audited financial statements

FY2013/14 to FY2017/18, annual reports and other supplementary information.

Petrojam records declining profit trend for last three years of review period 8.2. Petrojam over the review period recorded net profits on average, albeit with a declining trend for

the last three years following two consecutive years of losses. Net profit declined to US$18.59 million in

FY2017/18 from US$34.98 million in FY2015/16, following a net loss of US$13.53 million in FY2014/15.

Given this, Petrojam’s net profit margin declined during the profit making years to 0.02 for FY2017/18

from 0.04 in FY2015/16, relative to a net loss margin of -0.01 in FY2014/15. The net profit margin ratio for

FY2017/18 indicated that Petrojam recorded 2 cents of profits for each dollar of income received (Figure

7).

Figure 7 Petrojam’s Net Loss Position - FY2013-14 to FY2017-18

Source: Petrojam’s Financial Statements

8.3. Petrojam states that the major influence on the loss making years of FY2013/14 to FY2014/15 were

prevailing market conditions, primarily fuelled by the North American Shale oil boom81. This saw oil prices

plummeting to record levels in major benchmark markets, against the backdrop of the oversupply in the

81 Petrojam Annual Report FY2013/14-FY2014/15

Financial Statements Analysis of Petrojam

Page 96 Compendium of a Review of Aspects of Petroleum Corporation of Jamaica

(PCJ) and a Petrojam+Limited">Comprehensive Audit of Petrojam Limited December 2018

wake of the increase in non-OPEC oil exports. Petrojam states that in this environment, the refining

margins were weak and sometimes negative which led to the recording of net losses. Of note, prices are

adjusted with a one-week time lag; and the movement of finished products from the point of receipt to

the point at which they are sold in the market takes approximately two to three weeks. In a rapidly

declining market, margins are negatively impacted, as the purchase price is always higher than the selling

price.

Core revenues largely influenced by falling world oil prices 8.4. The decrease in Petrojam’s core revenues mainly reflected a 42 per cent decline in sales over the

review period, which moved to US$1.05 billion in FY2017/18 from US$1.8 billion in FY2013/14 (Table 29).

Petrojam indicated that whereas sales revenue declined over the period; sales volume was sustained at a

steady level of approximately 15 million Bbls per year. The decline in revenues was prompted by the

effects of falling world oil prices. This coupled with an observed reduction in customer demand,

particularly for automotive diesel oil and heavy fuel oil from industrial customers and power generating

companies, would have influenced the revenue/expense composition. Petrojam also continued to face

growing competition in the sale of Liquid Petroleum Gas, arising from increased importation by the

multinational corporations.

Table 29 Petrojam’s Income Statement Extract - FY2013-14 to FY2017-18

Income (US$M) 2017/18 2016/17 2015/16 2014/15 2013/14

Revenue (Sales) 1,048.4 927.5 952.7 1,557.8 1,805.4

Other Operating Income/(loss) (2.9) (10.0) 3.9 1.3 (1.61)

Total Income 1,045.5 917.5 956.6 1,559.1 1,803.8

Cost of Goods Sold 995.2 871.1 891.0 1,540.9 1,770.8

Total Expenses 1,024.2 891.2 912.0 1,577.0 1,809.0

Net Profit (Loss) 18.6 21.6 35.0 (13.5) (3.7)

Source: Petrojam’s Financial Statements

8.5. Expenses largely reflected a reduction in cost of goods sold over the review period of US$775.6

million (44 per cent) over the period. The reduction in cost of sales was most notable over financial years

FY2014/15 and FY2015/16, which saw a reduction of US$649.9 million (42 per cent) year over year. Cost

of sales largely related to the purchase of crude oil, which would have been subjected to the vagaries of

the international crude oil market, which ultimately influenced the respective margins (Figure 8).

Financial Statements Analysis of Petrojam

Page 97 Compendium of a Review of Aspects of Petroleum Corporation of Jamaica

(PCJ) and a Petrojam+Limited">Comprehensive Audit of Petrojam Limited December 2018

Figure 8 Profit and Loss Extract/US$ Per Barrel

Source: Petrojam’s Internal Reports

Petrojam cash resources covered an average 17 per cent of current obligations

8.6. Petrojam’s most liquid assets, cash and cash equivalents, covered only an average of 17 per cent

of its current liabilities over the 5-year period as cash generated from core operations was inadequate.

Hence, in an effort to support working capital, Petrojam borrowed US$35 million from the Petrocaribe

Development Fund in FY2014/15, augmented by a bank overdraft facility of J$101.5 million82. Further,

Petrojam in FY2015/16, converted dividends previously declared to its majority shareholder, PCJ, to a

loan, as it did not have adequate cash to meet this obligation.

Reduced efficiency in utilizing assets to generate sales

8.7. Petrojam’s total asset turnover averaged 2.6 over the review period, declining to 2.3 in FY2017/18

from 3.0 in FY2013/1483. Total asset turnover ratio measures the value of a company’s revenues generated

relative to the value of its assets. Although, Petrojam’s fixed assets increased to US$164.9 million in

FY2017/18 from US$117.2 million in FY2013/14, Petrojam’s total asset turnover ratio fell in a context of

declining sales over the period. This suggested a reduced efficiency by Petrojam in the utilization of assets

to generate sales despite an increase in fixed assets. The completion of the planned refinery upgrade is

intended to boost productive capacity and should assist in improving Petrojam’s performance.

Petrojam’s trade receivables declined

8.8. Petrojam’s trade receivables reflected a trend decline to US$127.16 million in FY2017/18 from

US$170.6 million in FY2013/14, despite an upward movement between FY2016/17 and FY2017/18, based

on a 13 per cent expansion in sales. This was reflected in a marginal decline in trade receivables turnover

ratio to 10.17 from 10.99 over the review period. Petrojam’s days receivable outstanding fell to 31 days

82 Working capital refers to the cash available for day-to-day operations. 83 Petrojam’s assets consist mainly of property, plant and equipment, inventories, accounts receivables, cash and cash deposits.

2013/14 2014/15 2015/16 2016/17 2017/18

Sales Revenue 117.33 100.28 61.14 58.94 69.49

Cost of Sales 111.2 96.17 54.03 52.45 63.26

Gross Margin 6.13 4.11 7.11 6.49 6.23

0 20 40 60 80

100 120 140

Sales Revenue Cost of Sales Gross Margin

Financial Statements Analysis of Petrojam

Page 98 Compendium of a Review of Aspects of Petroleum Corporation of Jamaica

(PCJ) and a Petrojam+Limited">Comprehensive Audit of Petrojam Limited December 2018

in FY2016/17 from 34 days in FY2013/14 and in FY2017/18, the days outstanding increased to 44 days.

Petrojam’s credit policy requires its credit management system to automatically restrict deliveries to

customers who would have utilized 100 per cent of their credit lines and any overdue receivable balance.

Petrojam reduced overall outstanding obligations over review period

8.9. Petrojam lowered its total liabilities by 29 per cent to US$316.24 million at end FY2017/18 relative

to FY2013/14. The fall in obligations primarily reflected total repayment (US$285.9 million) of amounts

due to related entities in FY2013/14 for the purchase of crude oil and petroleum products, particularly

Petroleos de Venezuela (PDVSA) and the PetroCaribe Development Fund (PCDF)84. Additionally, a 19 per

cent reduction in Accounts Payables contributed to the decline in liabilities, underpinned by repayment

of suppliers. The fall in liabilities facilitated an improvement in the entity’s net worth over the period,

which grew by 34 per cent to US$173 million at end FY2017/18 relative to FY2013/14 (Table 30).

Table 30 Petrojam’s Total Liabilities and Assets - FY2013-14 to FY2017-18

Financial Year ($JM) 2017/18 2016/17 2015/16 2014/15 2013/14

Accounts Payables 102.8 125.9 77.0 72.7 127.0

Total Borrowings 202.5 135.6 99.5 136.8 23.3

Due to Related Party 2.9 11.1 23.2 126.6 285.9

Total Liabilities 316.2 281.7 207.3 339.5 442.4

Total Assets 489.2 434.2 338.4 455.4 572.0

Net Worth 173.0 152.5 131.1 115.8 129.5

Source: Petrojam’s Financial Statements

8.10. Despite the decline in total liabilities, Petrojam’s outstanding debt grew by 769 per cent to

US$202.5 million at end FY2017/18 relative to FY2013/14. Consequently, Petrojam’s debt ratio, which

measures short and long-term debt as a percentage of total assets, rose sharply to 0.41 for FY2017/18

from only 0.04 for FY2013/14 (Figure 9). This indicated that it would require resources equivalent to 41

per cent of Petrojam’s assets to meet outstanding debt obligations when compared to 4 per cent in the

earlier period.

84 PDVSA is the minority (49 per cent) shareholder in Petrojam Ltd.