The Impact of Financial Risk Factors on Key Performance Variables in the Nigerian Petroleum Industry

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