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Equity Analysts Get Bullish on Total Nigeria

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Equity analysts just keep getting more bullish on Total Nigeria Oil, as a market based price regime is expected to boost earnings needed for the company to pay dividends to shareholders.

Analysts at Cordros Securities in a note to clients had a Buy recommendation on the stock of Total Nigeria.

Analysts are growing increasingly hopeful that a vaccine roll out will bolster the demand for white products to the pre-pandemic levels as the economy re-opens.

“We forecast the price of PMS to average between NGN165.00/liter and N175.00/liter in 2021. Our view is hinged on our higher average oil price assumption ($45.00 – $50.00/bbl.) in 2021,” said Cordros Securities.

The reactivation of the monthly market-based price regime is laudable and total deregulation of the downstream stream oil and gas industry will help spur or attract the desired foreign investment necessary to unlock the potentials in the industry.

Interestingly, the decline in crude oil prices gave the Federal Government the opportunity to somewhat remove the controversial fuel subsidy regime, as the Nigerian National Petroleum Corporation (NNPC) reported over-recovery.

Expectedly, the Petroleum Product Pricing Regulatory Agency (PPPRA) implemented a monthly market-based pricing regime, to provide prices reflective of market reality for Oil Marketing Companies (OMCs).

While Total Nigeria can honor or meet its obligation under current income, it still has some backlog of debt in its capital structure.

The good tiding is that it is not about to default on loans and there are no threats to going concerns. Interest coverage ratio for the company was 3.47 times as at September 2020, or three times the annual interest expense. But the ratio was benign in 2017 when operating income covered interest expenses 183.65 times.

The interest coverage ratio measures how many times a company can cover its current interest payment with its available earnings. In other words, it measures the margin of safety a company has for paying interest on its debt during a given period.

While the proportion of debt in Total Nigeria’s capital structure has slightly reduced as evidenced by a reduction in debt to equity ratio to 95.10 percent as at September 2020 from 140.90 percent in 2019, MoneyCentral calculations shows the ratio is way high compared to 7.1 percent recorded in 2016.

The downstream oil and gas firm’s so called “quick ratio,” which measures its ability to use assets to meet short term obligations, increased to 0.65 at the end of September 2020 from 0.54 in the corresponding period of 2019, according to MoneyCentral data.

A quick ratio of 1 or above is typically considered healthy. To bolster its working capital position and fund future expansion plans, Total Nigeria has tapped the debt market to raise capital in an era of ultra-low yield and pandemic induced headwinds.

FMDQ Securities Exchange Limited has admitted for listing the quotation of the Total Nigeria Plc N2.25bn Series 1 and N12.75bn Series 2 Commercial Papers under its N30bn CP Issuance Programme.

The issue attracted significant demand from a wide range of investors – resulting in a subscription level of over four times the initial issue size – a demonstration of investor confidence in the company.

The programme was set up to enable the company to further broaden its sources of capital by accessing funding from the Nigerian debt capital markets, while also reducing its overall funding costs.

Analysts at United Capital in a recent note to clients however said they expect the margins of Total Nigeria and peer rivals to be constrained as the NNPC will continue to be the sole importer of petroleum products.

There are indications that Nigeria could be back to the subsidy era because the recent rally in crude price on the back of a vaccine roll out and OPEC + output cut means the pump price of petroleum products will go up.

The subsidy era was controversial because it was fraught with corruption while monies that ought to have been deployed to plunge the huge infrastructure deficits were used to pay marketers for bringing in the product into the country.

For instance, between 2006 and 2018, the Federal Government spent close to N10 trillion – which is N800 billion short of the 2020 budget- to help subsidize imported petroleum products.

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