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Now is the best time to buy downstream oil and gas stocks and add to your portfolio as the abrupt removal of the subsidy on Premium Motor Spirit (PMS) by the newly elected president Bola Ahmed Tinubu is expected to bolster sector players’ earnings, which paves the way for them to pay bumper dividend.
Already, these firms are among the best performers on the NGX all share index (ASI), which means investors had wagered on them and anticipated sector reforms that are ongoing.
Totalenergies shares have gained 44.20 percent since the start of the year. MRS, (+284.40 percent); Eterna, (+83.11 percent); and Conoil, (+201.5 percent).
It is noteworthy that MRS and Conoil are among the top 10 performers on the NGXASI lists.
It is worth noting that these four firms beat analysts’ earnings expectations. Their combined operating profit spiked by 69 percent to N14.53 billion as at March 2023 from N8.60 billion as at March 2022, according to data compiled by MoneyCentral.
Also, combined net profit increased by 63.25 percent to N9.74 billion in March 2023 from N5.96 billion the previous year. The average industry profit margin increased to 5 percent from 2.61 per cent the previous year, according to MoneyCentral calculation.
As experienced in recent years, the downstream oil and gas sector remains plagued by operational challenges, such as inadequate infrastructure, FX liquidity constraints, and most recently, (PMS) supply shortages.
Despite these challenges, sector players have been able to maintain a healthy balance sheet and as they can easily pay interest on debt outstanding.
The median interest coverage ratio for downstream oil and gas firms stood at 18 as at March 2023, substantially higher than 4 that was recorded in 2022, according to data from MoneyCentral.
The figure is a measure of a company’s ability to repay its debts, with a ratio of at least 2 generally considered the minimum acceptable amount for a company with solid revenues. Analysts typically prefer a coverage ratio of 3 or higher.
There had been calls by the IMF and the World Bank for the Nigerian government to abrogate the subsidy regime that was a huge liability to the country as savings from the subsidy removal be used to bridge the infrastructure deficit and fund welfare packages.
A Dataphyte review of the proposed expenditure, according to the approved 2022 budget has shown that, Nigeria spent an equivalent of 74.07% of its capital expenditure for 2022 on subsidy payments, according to budget documents. It plans to spend N6.72 trillion in 2023.
However, analysts say the removal of subsidies will bring untold hardship on millions of people who are living in poverty if palliatives are not put in place.
Most petrol stations across the country sell PMS at between N500 and N600 per litre.