THE IMPACT OF CAPITAL EXPENDITURE ON FINANCIAL PERFORMANCE OF LISTED OIL AND GAS COMPANIES ON THE NIGERIAN STOCK EXCHANGE
Abstract
ABSTRACT
This study investigated the impact of capital expenditure on the financial performance of all nine oil and gas companies listed on the Nigerian Exchange Group (NGX) over the period 2014–2024. The specific objectives were to examine the contemporaneous and lagged effects of capital expenditure on Return on Assets (ROA), Return on Equity (ROE), and Net Profit Margin (NPM). Secondary data were sourced from the audited annual reports of the sampled firms and the NGX Factbooks. The study employed both static panel data techniques (Pooled OLS, Fixed Effects, and Random Effects) and the two-step System Generalized Method of Moments (System GMM) to address potential endogeneity and dynamic relationships. Capital expenditure was measured as CAPEX-to-Total Assets and CAPEX-to-Sales ratios, while control variables included firm size, leverage, Brent crude oil price, exchange rate, and firm age. Findings revealed that capital expenditure exerts a significant negative effect on ROA, ROE, and NPM in the same year, reflecting the capital-intensive and long-gestation nature of oil and gas projects. However, lagged capital expenditure (particularly at t-1 and t-2) shows a strong positive and statistically significant impact on all three performance indicators, with the two-year lag producing the strongest effect. The positive influence of lagged CAPEX is significantly amplified during periods of high oil prices and relative exchange rate stability. The Petroleum Industry Act (PIA) 2021 dummy also indicates modest improvement in performance post-reform. The study concludes that capital expenditure remains a vital long-term driver of financial performance in the Nigerian oil and gas sector, but its benefits are delayed by approximately two to three years and are highly sensitive to oil price and foreign exchange conditions. Recommendations include adopting longer investment horizons, securing long-term financing to mitigate short-term profitability dips, sustaining PIA implementation, and stabilizing the naira to enhance the returns on capital investments.
Keywords: Capital expenditure, financial performance, lagged effect, oil and gas, Nigerian Exchange Group, System GMM, Petroleum Industry Act
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