Vitol report reveals struggle for margin in oil trading

Thu Feb 28, 2013 7:00am EST

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* Posts second highest profits ever in 2011

* Margins, cash flows at 4 year lows

By Dmitry Zhdannikov and Emma Farge

LONDON, Feb 28 (Reuters) - Vitol, the world's biggest oil trader, returned its second-highest profits on record in 2011 on a steep increase in revenue, but its profit margin and cash flow fell to their lowest in four years, the private firm disclosed.

The annual filing showed the challenges that trading houses face in turning growth into profits. In their constant quest to conquer new markets and secure bigger volumes, they rarely end up generating a higher rate of return.

Until now, Vitol has provided scarce information about its 2011 performance. A year ago, it said revenues soared by 44 percent to $297 billion as energy prices rose and its sales volumes of oil and other forms of energy increased by 15 percent.

Now a year later, a more complete report shows that net profit for 2011 was $1.7 billion, up from $1.5 billion in 2010, and the second highest ever after $2.3 billion in 2009.

That was good news for some 330 shareholding employees of Vitol, including Chief Executive Ian Taylor.

In between the top and bottom lines of the report, however, comes not such good news. Vitol's gross margin fell for a fourth consecutive year as the cost of sales rose steeper than revenues.

Gross profits rose only by around $100 million to $2.438 billion, generating an overall gross margin for the year of 0.8 percent, down from 1.1 percent in 2010, 2.7 percent in 2009 and 1.2 percent in 2008, according to Reuters calculations.

By adding some $90 billion of additional revenue in 2011, Vitol increased its gross profits only by about $100 million, which means that the margin on that extra revenue was around one tenth of 1 percent.

Vitol's biggest rival, Glencore, has said its margins in the oil sector are below 1 percent.

"There's lots of volume and sadly small margins. I think that's one of our concerns - it remains incredibly competitive," Vitol Chief Executive Ian Taylor told Reuters in an interview last year.

Vitol declined to comment on its profit and loss report and cash flow statement for 2011.

CASH FLOW DWINDLES

The cash flow statement showed that despite higher net profits, operating net cash flow also fell by over 70 percent to a four-year low of $526 million from $1.868 billion in 2010.

That was mostly due to the fact that its receivables - or money owed to Vitol - exceeded liabilities - money owed by Vitol - by a much bigger amount than in 2010.

In 2010 receivables and liabilities nearly cancelled each other out, but in 2011 receivables exceeded liabilities by almost $1 billion.

That means Vitol funded some additional business activities in 2011 internally, which tied up over $1 billion in working capital and led directly to a reduction in cash generated by operating activities.

In one possible explanation, the $1 billion figure roughly coincides with the value of oil products Vitol supplied Libyan rebels during the revolution, according to statements by the rebels at the time.

Libya has made repayments on the debt by supplying crude oil since then, and it remains unclear whether it has been fully paid.

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