Company Analysis

Sectoral Watch: As 2016 Winds Down, Petroleum Stocks Offer Investors Hope

With less than two weeks to crossover to 2017, the oil and gas sector-led rally continues to drive the expected recovery in the coming year even as experts and market analysts see a reversal of the trend in the coming year.

This hope for market recovery is hinged on the fact that the benchmark All-Share Index of the Nigerian Stock Exchange (NSE) has suffered heavy decline in consecutive years beginning from 2014, when it was the world’s worst equities’ market to be in. This three-year losing streak, analysts recall is the first of its kind in the history of Nigeria’s stock market, leaving its wake several stocks priced at their five-year lows in some cases.  With such stocks becoming attractions to bargain hunters, expectations are that they would become beautiful brides, beginning with those in the petroleum sector, helped by the rise in crude oil prices at the international market.

This is why one of the hottest sectors so far has been the petroleum sector.

As a pointer to what is expected, the NSE’s oil and gas index has risenby 24.07%since the November 30, 2016 agreement by members of the Organisation of Petroleum Exporting countries (OPEC) to cut supply for the first time in the last decade.

Since then, oil price had continue to rally, remaining above $52 per barrel amidst expectation that it would hit $60 and above in the new year. This is especially at a time non-OPEC members like Russia also agreed to cut output.

If you observe recently, you will notice that the prices of stocks in the oil and Gas sector especially the companies operating in the upstream sub-sector and earn revenue in US Dollars have rallied despite their negative numbers before the OPEC deal. The downstream companies that are into marketing of finished products and lubricants have equally in the year posted strong numbers, following the federal government’s removal of subsidy on Premium Motor Spirit, otherwise known as petrol. This, asexpected, hasimpacted the bottom lines of the operators in petroleum marketing business, particularly because crude oil and petrol are always in high demand for energy, power and transportation purposes.

The dividend history of the sector and the profit driver of the companies indicates that the petroleum and financial  sectors are  likely to lead the recovery in 2017 as the current exchange rate will boost their performance in terms of profitability. This is a potential driver of equity prices of the companies in those sectors.

Many of the companies had stood the test of time and demonstrated strength due to their performance and consistent dividend payment for years. The recent performance as revealed by their latest Q3 results, if sustained, will impact upon and positively boost their share prices and reward to shareholders in the nearest future.

The rally in the petroleum sector could however be related to some strategic acquisition moves in the sector, which led to a hike in the demand of shares of those companies with attendant effects on other companies therein.

The sale of 60% stake by its core investor and parent company- ExxonMobil Corporation in Mobil Nigeria Plc at a premium to its market value to product retail giant- NIPCo is already in the news. This isto enable the U.S energy giant concentrate on its upstream business and earn more foreign exchange. At this to the strong numbers posted by Mobil Oil Nigeria, driven by its diversification into real estate that had pushed the share price up significantly.

At the sametime, over 12 investors are bidding for the majority holding in Total Nigeria from its core investor at a premium and the company has significantly grown its earnings power with additional new products in its lubricant group that have become a household names. The company is also very visible in products transportationand its solar power lamp that is penetrating the market speedily as a result of poor electricity in the country.

In the current financial year, Total Nigeria has paid N10 as interim dividend on a strong earnings of N30.26 per share as of third quarter. There is a strong pointer to the  that the company at the end of this financial year would likely pay total dividend of N20 which is likely to push the price above N400.

Forte oil as the only downstream oil company that posted weak earnings for the last quarter suffered huge price decline to level of retracement in the price as a result of seeming low price attraction and rebounded powerfully on market forces meaning that FO will continue to oscillate until the company earnings improved to support price coupled with its shareholding structure to stabilized.

The transparency of the two companies in the upstream business of the oil and gas sector to their shareholders and investing community have become a major concern.

Seplat and Oando, two companies involved in crude oil prodction and export in the third quarter, recorded losses in third quarter. They are expected to earn revenue in foreign exchange to boost their bottomlines.

Yes, there are challenges in oil pricing at the global market, added to militancy in the nation’s Niger Delta region.

In all of these, Seplat continues to create value for stakeholders in term of price appreciation despite its negative earnings position due to goodwill, seeming confidence on the management and better prospects, especially with the recent OPEC deal that may see oil price jump to $60pb in the new year.

Despite these potential Oando Plc shares with Seplat, investor confidence in the company and its management has been reflected on its share price.  This company is the only one in the sector that has grown and expanded the value to its shareholders as revealed by numbers generated. It is time the company’s management repositions it again to harness all the potentials it is endowed with thereby ensuring that it rekindles the needed market confidence again. This is in realisation of the fact that Seplat’s future is bright, especially in the area of crude lifting, gas that has been dollarized, besides petroleum products marketing.

The positive performance of other players likeConoil, MRS Oil Nigeria and Eterna so far in the year can be attributed to increase in pump price and independence of the oil marketers to sell not above the government pump price of N145per liter. This marginal boost in operating margins due to an increased portfolio of higher margin products.

However, we note that the rally of share prices in the sector exceeded our projection when the government announced the increment of fuel price that were later adjusted by the bearish trend in the market, resulting in retreating prices. The stock prices of some players remained resilient due to their traditional illiquid nature, the minimum exchange requirement of 50,000 units for stocks below N100 and 10,000 units for equities with market value aboveN100 per share for a price change to be effected the unwillingness of market players to take up the stock at their present prices.

For the sector’s earnings performance, see the table below.

  Earnings Position of Petrolum Stocks To Watch    
  Dividend Released Date Qtr1 Qtr2 Qtr3 LAST FY Current Div Yield
SECURITIES Interim Final Current EPS Current EPS Current EPS Current EPS EPS PE Ratio  
SEPLAT 7.96 7.90 27-Oct-16 -7.87 -22.73 -23.62 23.08   (17.36)        9.89
OANDO     31-Oct-16 0.34 -2.24 -4.67 -1.50      (0.93)  
CONOIL   3.00 24-Oct-16 -1.36 1.50 2.61 3.33     13.07        8.80
ETERNA   0.25 31-Oct-16 0.22 0.75 1.29 0.98       2.44        7.94
FORTE OIL PLC   3.45 13-Oct-16 0.56 1.71 2.13 4.11     54.57        2.97
MOBIL OIL NIG.   7.20 27-Oct-16 5.08 12.27 15.93 15.52     17.58        2.57
MRS OIL NIGERIA   1.10 28-Oct-16 1.58 3.58 4.61 2.94       9.87        2.42
TOTAL NIGERIA 10.00 9.00 26-Oct-16 6.68 26.31 30.26 31.13       9.16      13.25

 

 

Sector Outlook For 2017

As always, the direction of government policy with regards to the sector is expected to significantly model the business and activities of the operators and petroleum marketers in the new year.  With the government’s commitment to reform the sector with improved local content and passage of the Petroleum Industry Governance Bill (PIGB) to further business in the industry. It will also foster transparency and reduce cost of operation, thereby having positive effect on the economy at large.

However, due to the expected recovery of crude oil price in the international market as a result of cut in supply and improving production with the proposed government and   Niger Delta militants’ dialogue for peace.

The likely increase in crude prices in 2017 would significantly improve the working capital of petroleum industry operators, ensuring that many will be able to service their debts. They would also be able to discuss new credit lines for financing their businesses, as we expect petroleum marketing companies to diversify, while boosting profitability and income streams in the coming year.

Investors should keep their gaze on this sector.

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