Abstract
The Nigerian petroleum industry is central to the sustainability of the economy of Nigeria as it is the greatest contributor to Gross Domestic Product (GDP) and foreign exchange. The recurring nature of price risk and other financial risks in the petroleum industry suggests that uncertainty, driven by oil and gas price changeability, causes incessant apprehension to all stakeholders who suggest a need for effective management if sustainability of the industry is to be achieved. Risk management is said to be in a rudimentary stage in Nigeria and, at best, evolving. Previous literature in this area mostly focuses on the impact of each risk on the company's stock and exporting countries' economies. Research on integrated financial risks’ impact on key operational variables in the Nigerian petroleum industry is scarce. This study was, therefore, conducted to fill that gap by contributing to the literature on financial risk management. It examined the impact of financial risk factors on key performance variables, such as profitability, cash flow, the cost of doing business, workforce cutting and project shelving in the Nigerian petroleum industry. This study adopted a mixed-method research design with a philosophical stand, which is associated with the pragmatism paradigm. Qualitative and quantitative data were collected by conducting semi-structured interviews with five senior management staff and distributing questionnaires to 70 financial risk managers. Descriptive and inferential statistics, such as the Pearson correlation coefficient, were used to determine the significance of the relationship. These results indicated that there was a significant relationship between financial risk factors and key performance variables such as profitability, cash flow and the cost of doing business at a value of P<0.05. These results are important to the financial risk managers and stakeholders of the industry as it will help them understand how to manage their exposure for sustainability. Keywords: Nigerian Petroleum Industry, Financial Risks, The Impact of Financial Risks, Exchange Rate Exposure and Price Risk Exposure DOI: 10.7176/EJBM/12-14-10 Publication date: May 31 st 2020
Highlights
The determination of financial risks' impact on businesses' objectives has been a subject of numerous studies as the knowledge of the magnitude of the effect of these risks guides management's response as financial risks impacts the financial well-being of companies, including the Nigerian petroleum industry
The main aim of this study was to determine if financial risks, such as oil prices, foreign exchange rates, interest rates, supply and demand, and liquidity and equity risks have a significant impact on the key performance variables, such as profitability, cash flow, the cost of doing business, project completion and workforce cutting in the Nigerian petroleum industry
Is the widespread workforce cutting with a mean score of 3.60 and lastly, the shelving of projects has a mean score of 3.54. These results indicated that the combined financial risk factors had a negative influence on companies' ability to achieve their strategic objectives in the Nigerian petroleum industry
Summary
The determination of financial risks' impact on businesses' objectives has been a subject of numerous studies as the knowledge of the magnitude of the effect of these risks guides management's response as financial risks impacts the financial well-being of companies, including the Nigerian petroleum industry. Oil prices affect exchange rates through both supply and demand channels (Nikbakht, 2010). Oil price upsurges impact production negatively since oil is a basic ingredient of production resulting in short supply and high demand for a non-productive factor which in turn impacts exchange rate and prices. Petroleum production and exportation have become the backbone of the Nigerian economy The revenue derived by the Nigerian government from the exportation of petroleum products accounts for 96 per cent of total exports according to the International Monetary Fund (IMF) in 2012. In addition to export revenue, Nigerians depend heavily on the petroleum industry for their energy needs, transportation, cooking, power and micro-industries that assist in reducing unemployment (Odularu, 2007)
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