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Tuesday, June 6, 2023

Subsidy Removal May Trigger Rally in Total, MRS, Conoil Shares

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This could be the time to buy the stocks of downstream oil and gas firms as the adoption of a market –based price regime by government allows them import petroleum product and set their own price.

The Nigerian Stock Exchange (NSE) Oil and Gas index is the worst performer so far this year among sectors, as it is down -27.2 percent year to date and may be due for a reversal.

Experts have said that the new model pricing of Premium Motor Spirit (PMS) could rejuvenate the beleaguered downstream sector and accelerate the construction of new refineries since investors are sure of getting a return on their investment.

The old template where government is the sole importer of the product has been deleterious to operators in the industry who are struggling to deliver returns higher returns to shareholders in form of share appreciation and bumper dividend.

The cumulative net income of the five dominate companies in the industry- Total Nigeria Plc, II Plc, ARDOVA Nigeria Plc, MRS Nigeria Plc and Conoil Plc- slumped by 81.63 percent to N823.56 million as at March 2020, the lowest in five years according to Money Central Started data.

Drilling down into the figures showed the dip was largely caused by Total Nigeria’s N163.14 million loss, and N1.05 billion loss suffered by MRS Oil.

These firms are not turning each Naira invested in sales into higher profit as industry average net profit margin hit (0.43 percent) in March 2020 as against 1.43 percent the previous year.

Revenues have been declining as evidenced by a 58.35 percent drop in cumulative operating profit to N3.60 billion in the period under review from N8.66 billion as at March 2020.

Saidu Abdulkadir, Executive Secretary of Petroulem Pricing Regulatory Agency (PPRA) said deregulation of the sector is in the country’s best interest because it ensures that companies place a tight rein on production cost such that wastes that could be passed on to consumers in form of high prices are eliminated.

Money Central calculates that the average industry cost of sales ratio of the five firms stood at 93.34 percent as at March 2020, and what this means is that on average a company spent N93 on production cost to generate N100 in sales.

In Absolute terms, the five largest firms had combined sales of N232.58 billion as at March 2020, but they incurred N215.97 billion in cost of sales, leaving them with slim margins.

Analysts at United Capital Research have raised concerns around policy back-flip as they fret about government backtracking on the market-based price regime once oil prices start tracking higher and pressure on consumer wallets begin to mount.

The subsidy regime was notorious for acrimonious situations between the petroleum oil marketers and the Federal Government over unpaid subsidy arrears that led to accumulated losses.

Total Nigeria’s operating cost can no longer finance cost as times coverage ratio stood at 0.82 times, which is lower than the generally accepted benchmark of 1.50 times.

More creditors are financing the balance sheet of the company than investors’ money as debt to equity ratio stood at 133.98 percent as at March 2020.

The money government uses to subsidy PMS will be deployed to fund infrastructure project such as rails, schools.

Nigeria needs an estimated sum of $100 billion or N36 trillion annually to address the infrastructural decay in the country, according to Minister of Finance, Budget and National Planning, Zainab Ahmed.

Federal Government has set aside N450 billion as subsidy arrears in the 2020 budget, according to a recent data from PPRA.

On July 1, the PPRA had announced a pump price band of N140.80k and N143.80k per liter for PMS. This was an increase by N20.30 from the June price of N121.50 per litre.

Abdulkadir attributed the rise in the pump price of the commodity to cost of petroleum products in the international market and the cost of acquiring foreign exchange (FOREX).

The decline in crude oil prices gave the FG the opportunity to somewhat remove the controversial fuel subsidy regime, as the Petroleum Product Pricing Regulatory Agency (PPPRA) implemented a monthly market-based pricing regime, to provide prices reflective to market reality for Oil Marketing Companies (OMCs).

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