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Wednesday, March 29, 2023

Oil and Gas Stocks are Worst Performing as United Capital Clings to Sell Ratings

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The recent stock market rally buoyed by an accommodative monetary policy environment has eluded the oil and gas firms as investors have continued to dump their shares due to the Covid-19 crisis.

Analysts at United Capital Limited in a recent note to clients have upheld their  “Sell ratings” on the stocks of Seplat Petroleum, Total Nigeria, and Mobil Oil, which underscores investors’ apathy towards the industry.

The Oil and Gas Index has a year to date return of -15.90 percent, which underperforms the Nigerian Stock Exchange (NSE) and All Share Index (ASI) gains of 30.63 percent, according to data compiled by MoneyCentral.

The Banking, Industrial Goods, Insurance, and Agric Indexes have returned +8.80 percent, +50.60 +26 percent and +47.46 percent respectively, as investors bought shares in hunt for assets with attractive yields.

The coronavirus pandemic has blown a big hole in the energy market as the virus crippled economic activities across the globe and sent oil prices crashing to unprecedented low levels, while companies have cut back on expansion plans due to deteriorating earnings.

Before the outbreak of the virus the oil majors were already hit by lower oil prices brought on by an influx of the products into the international market that caused a supply glut, That prompted OPEC+ allies to agree on an output cut to stabilize prices.

For the downstream sector, the decision by the federal government that Nigerian National Petroleum Corporation be the sole importer of the product undermined the margins of operators who had already been hit by huge debt caused by delay in subsidy payment by the federal government.

While the template has been changed and policy makers have liberalized the downstream industry, companies have not recovered from the damage caused by poor regulations.

Seplat Nigeria recorded a loss of N45.16 billion in the nine month to September 2020, and the last time it was in precarious situation was 2016 when it was hard hit by a sudden drop in crude oil price and attacks on its facilities by Niger Delta militants.

To adapt to current market conditions, the company has embarked on cost reduction such as shrinking travel costs as well as suspending drilling activities, with all non-essential capex under review to consider only activities that can be supported in the new oil price environment.

As a result of the economic uncertainties of the Cov-19 crisis, Seplat booked a provision charge of about N55.33 billion across all financial assets.

Oando Nigeria Plc, the oil and gas major reeling with N118.09 billion accumulated losses, has to deleverage its balance sheet as total operating profit of N19.76 billion can’t cover finance cost of N43.05 billion.

That translates to an interest coverage ratio of 055 times, which is lower than the 1.5 times internationally accepted benchmark.

Total Nigeria, one of the largest downstream oil and gas industries  recorded a loss of N334.18 million in the period under review, while it has an interest coverage ratio of 0.50 times, according to data compiled by MoneyCentral.

ADOVA Plc, a player in the downstream oil and gas industry, saw net income dip by 64.18 percent, the first drop at the bottom line in five years.

Mobil Nigeria also suffered 35.15 percent drop in net income to N4.12 billion as at September 2020, according to MoneyCentral data.

Analysts say the delay in the passage of the petroleum Industry Bill, PIB, is stifling growth in the oil and gas industry, as they added that the Federal Government has not been nimble enough to unlock opportunities in a sector that is the backbone of the economy.

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