Working capital management is argued to positively influence profitability of firms across various sectors of an economy. Nevertheless, this is very difficult task for financial managers because of opposing interest of various stakeholders. For example, profit can be maximized if accounts payable are settled after a long period. However, this is against the interest of the creditors. In addition, higher prices and prompt collection of accounts receivable will fetch greater returns but customers will be hurt by such moves. These complexities are even worsened by the volatile nature of the oil and gas industry especially in Nigeria. A sound and robust working capital management is thus needed. Thus, this study seeks to establish the effect of working capital management on profitability of oil and gas industry in Nigeria. The study sampled ten firms out of which two are listed in the Nigeria stock Exchange, one is government owned while the other seven are privately owned. Balanced panel data covering 2012-2017 period across the ten firms was obtained from respective firms’ annual financial reports and other relevant secondary sources. Data was collected on these firms’ Net profit after tax, accounts receivable, accounts payable, sales, purchases, inventory, current assets and current liabilities, total debt and total assets. Pooled ordinary least squares method was used to establish the effects of various WCM components on firm profitability measured using ROE. Correlation analysis was also be used as a complimentary analytical procedure. The study found out that days payables outstanding (DPO) has a significant positive impact on profitability of firms in the Nigerian oil and gas industry. Days sales outstanding (DSO) and days inventory outstanding (DIO) were found to have no significant impact in determining profitability. Liquidity, measured using current ratio, and debt-equity ratio used as control variables were found to be important determinants of profitability; the two ratios had a positive and negative relationship respectively with ROE. The study concludes that WCM is important in determining performance of firms in the oil sector. Finance managers should focus on making appropriate decisions that enhance efficiency in WCM. Supply agreements that allow the company long credit periods to settle their obligations are encouraged as this will affect profits positively. The study recommends that government and other policy makers should come up with a policy that allows oil marketing companies reasonable timelines to settle their obligations on imported products as this will cushion such companies from working capital deficits and losses related to finance charges.

1.1. Background
During the recent times, working capital management (WCM) has gained popularity as the way to go in ensuring that a firm operates optimally so that it make reasonable financial gains. WCM deals with optimization of a firm’s current assets and current liabilities. Maintaining an optimal balance of inventory holding, debtor balances, creditor balances and short term borrowings is key in ensuring continuity of a firm’s daily operations and consequently has direct effect on profitability and liquidity of firms. Maintaining optimal stock levels ensures the firm does not run into shortage while minimizing cost of holding excess stock. Quick collection of accounts receivable ensures the company has cash to pay for obligations but this should be done in a manner that does not harm credit customers who prefer favorable credit terms. Lengthening payable deferral period is favorable to the liquidity of the firm but could harm the firm’s credit reputation and relationship with key suppliers and as such should be managed at an optimal level. Inappropriate WCM procedures can breed bankruptcy even when books of account indicate positive returns, for example having high level of working capital means a lot of funds, which could otherwise be invested in long term assets, are tied. Thus, firms should strive to maintain an optimal working capital that maximizes shareholders’ value.

A number of theories can be used to explain the relationship between working capital management and profitability. These are agency theory, stakeholder theory, stewardship theory and Baumol model of cash management. These theories provide a theoretical basis upon which this study is anchored on. The agency theory as formulated by Coase (1930) and popularized by Ross (1979) and Jensen and Meckling (1976) focuses on the relationship between the agents and their principals. The agents and principals have divergent interests. Going by the Agency theory, the agents should maintain optimum levels of working capital in order to serve the profit maximization interests of the principals. The stakeholder theory prescribes that the agents serve the interests of various stakeholders such employees, customers, debtors, creditors and shareholders. These stakeholders have varying interests and thus the agents should ensure an optimal balance. According to the stakeholder theory, agents should properly manage working capital to ensure shareholders wealth is maximized while taking care of the interest of customers, creditors and other stakeholders. Similarly, appropriate WCM practices require an optimal level of working capital which ensures maximum profit to the shareholders while keeping customers and creditors happy. The Baumol model is relied up on when determining the optimum cash balance a firm should hold in conditions of certainty. Baumol (1952), proposed a model for determining optimum mix between cash and short term investments while considering the market interest rates and the transactional cost of placing and redeeming investments. Cash management is an important component of working capital management and as such Boumal model was a key reference point for this study.

Currently, crude oil is one of the most essential resources in man’s daily life. More so, the oil industry is one of the most powerful branch in the global economy. The annual global production of oil is at least 4 billion MT with Middle East producing nearly one third of this. Saudi Arabia and the US are the global leading producers of oil with each accounting for about 13% while Russia producing over 12% is the world’s third largest oil producer (Statista, n.d). The oil and gas companies are among the largest corporations globally with 6 out of the top 10 companies worldwide based on revenue are in oil industry. The last decades have experienced a steady rise in both the demand and consumption of oil. United States doubles as a global leading consumer and importer of oil, followed by China in consumption. Due to rising global demand, oil prices remained relatively high until June 2014. In deed the oil prices from 2011 to 2014 were quadruple those in 2001 (Statista, n.d). However, in 2015 and 2016, prices declined significantly. In March 2017, the prices of crude oil as set by OPEC were averagely US $ 50.32 per barrel after dropping from an average annual price of US $ 52.03 per barrel in 2016. Nevertheless, the long term viewpoint of the oil industry looks more promising. For example a greater proportion of the worldwide top oil producing countries recorded distinct higher production ceilings in 2020 than it was in 2011. It is also projected that the world will experience an increase in demand of oil until at least 2035. Daily global consumption of oil is expected to increase from 89 million barrels in 2012 to about 109 million barrels in 2035 (Statista, n.d).

1.1.1 Working Capital Management
According to Gitman (2002), working capital implies that part of a company’s assets which can be easily varied from one type to another during the firm’s daily operations. Working capital can simply be described as the net of current assets less current liabilities. Current assets include cash, inventory, account receivable, short term investments and prepaid expenses among others. On the other hand, current liabilities include account payables, short-term borrowings and current tax liabilities. Working capital management (WCM) is ideally the decision making process by financial managers concerning current assets and liabilities (Khalid et al., 2022). It deals with managing various components of working capital at optimum levels to ensure maximum financial benefit to the company.

Eljelly (2004) and Harris (2005) pointed out that working capital management is greatly involved with maintaining firms’ liquidity during their daily operations in order to ensure that they are smoothly run as well as meet their obligations when they fall due. The success of business entities is largely driven by the ability of financial managers to ensure that receivables, inventories and payables are effectively managed (Filbeck & Krueger, 2005). Reduction of financial costs of firms as well as increase in their funds available for expansion projects can be made possible through minimization of the investment amount locked up in current assets. Lambern (1995 cited in Nazir & Afza, 2009) argued that, financial managers allocate most of their time and efforts towards restoring optimal levels of current assets and current liabilities whenever non-optimality exists. This process requires unceasing monitoring to preserve a suitable level of different working capital components while ensuring that business operations are both efficient and profitable. Without proper WCM practices, a company is likely to have high working capital levels whose opportunity cost is equally high since funds which would otherwise be invested in long term investments are held as current assets. Relationships with other stakeholders such as customers and creditors could be at risk where the firm targets prompt collection of debts while lengthening payables settlement period. On the contrary, maintaining thin stock holdings could land the firm into costly shortages which could lead to loss of clients. It is therefore clear that companies need to put in place appropriate WCM practices for them to remain profitable and as such maximize shareholders wealth.

According to Sharma and Kumar (2011), WCM is popularly measured using cash conversion cycle (CCC). This is the duration between when expenditure for purchase of raw material is made and when payments from sales of finished products are collected. Investment in working capital (WC) increases with an increase in this time lag. In addition to cash conversion cycle, there are other ratios which are used to measure WCM and these include day’s sales outstanding, average age of inventory, day’s payable outstanding, operating cycles among others. The development of the concept cash conversion cycle is accredited to Richards and Laughlin (1980). The CCC implies the number of days that elapses from the time when a firm incurs expenses for its raw materials up to when it collects cash from the sale of its finished products (Sharma & Kumar, 2011). Richard and Laughlin (1980) asserted that CCC is an important tools employed while assessing the efficiency of WCM. According to Bieniasz and Golas (2011), CCC is a synthetic tool formed from three partial cycles. In a similar manner, it
was asserted by Alipour (2011) that CCC has been introduced by renowned researchers such as Shin and Soenen (1998) as a measure of effective WCM. The accounts receivables, accounts payables and inventories are the major constituent parts of working capital. Deloof (2003) argued that for firms to maximize their profits and/or increase their values, these parts should be managed in different but efficient ways. Aminu, and Zainudin (2015) summarizes the CCC as follows

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