DEBT INDICES AND FINANCIAL PERFORMANCE OF OIL AND GAS FIRMS IN NIGERIA

Abstract

This study examined the effect of debt indices on financial performance of oil and gas companies in Nigeria. The specific objectives are to evaluate the effect of debt ratio (DR), debt to equity ratio (DER) and interest coverage ratio (ICR) on return on assets (ROA). The study anchored on the Trade-off theory and agency theory. Ex-post facto research design was adopted wherein secondary data sourced from audited financial statements of three (3) chosen oil and gas companies (Total Nigeria Plc, 11 Nigeria Plc and Oando Nigeria Plc) listed on Nigerian Exchange Group. A period of 12 years (2010–2021) was used for the analysis. The results of the panel data regression analysis revealed that the predictor variables of DR had negative (-0.218419) and significant (0.0012) effect on ROA; DER had a negative (-0.001717) and nonsignificant (0.6430) effect on ROA; while ICR had a positive (1.85E-06) and nonsignificant (0.5160) effect on ROA of oil and gas companies in Nigeria. The implication of the finding is that a higher interest coverage ratio is associated with better financial performance in terms of ROA. The study concluded that among the explanatory variables examined only the interest coverage ratio had a positive effect on the financial performance of oil and gas companies in Nigeria. The adjusted R-squared (R2)of the study is 31%. The study recommended amongst other things that oil and gas companies should maintain a balance debt structure and avoid taking excessive debt that could strain their ability to generate profits. They should also aim at maintaining a healthy interest coverage ratio to ensure that they can comfortably meet interest payment obligation and avoid financial strain.