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Markets Warm to Seplat, Oando as Oil Rally Supports Shaky Earnings

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Analysts and investors are optimistic that rallying oil and gas prices will increase the chances of indigenous oil and gas companies like Seplat and Oando delivering strong earnings this year.

Brent crude price in the international market recently peaked at $56.22 per barrel; and that compares with $18.89 as of March. That was the period when the coronavirus was spreading like a California wide fire and the world was put under lockdown that paralyzed economic activities.

This recent surge in oil follows the announcement by Saudi Arabia to voluntarily cut its oil production by 1 million barrels per day in February and March above its current quota and the news of a further fall in the United States’ supply of the commodity to the market, creating an artificial add-on to the cartel’s most recent cut.

In the short term, the higher oil and gas prices will give these beleaguered companies the much needed cash injection to pay bumper dividends, reduce debt burden and fund the drilling of new wells.

Seplat stock is already up 34 percent in 2021, while Oando is down -5.1 percent.

Last year, Seplat Petroleum Development Corporation Company Plc posted a net loss of N33.81 billion and suffered 10.69 percent reduction in sales while cost of sales spiked by 47.05 percent, as the oil giant lost its resilience on market downturn.

Oando Oil Plc, the second largest indigenous oil and gas firm by market capitalization, is reeling from spiraling debt burden as production cost continues to erode profitability.

Without an income tax credit of N22.13 billion and reversal of impairments charge of N11.26 billion, the company could not have recorded net income of N13.06 billion as of September 2020. In short, it posted a pretax loss of N9.23 billion.

Oando has incurred N409.46 billion in total production cost, which is 99.03 percent of N413.46 billion revenues, according to MoneyCentral calculations.

The company’s total borrowings stood at N193.07 billion in the period under review, though 10.88 percent lower than 2019’s N214.66 billion. It had accumulated losses of N118.09 billion as at September 2020.

Seplat’s operating loss of N27.74 billion means it does not have enough earnings to absorb the finance cost of N18.82 billion.

Similarly, Oando has an interest coverage ratio of 0.57 times earnings, that’s lower than the 1.50 times generally accepted international benchmark.

The NSE oil and gas Index was one of the worst performing sectors as Seplat returned (-33 percent) year to date in 2020.

Months of underperformance have left Oil and gas stocks trading at low valuation as the precipitous drop in oil price of last year dented demand for petroleum products and tipped the country into its second recession in five years.

While banks, telecoms, and the cement makers added to the Nigerian Stock Exchange 30 Index last year, Seplat and Oando combined had N116.02 billion wiped out of the index.

The roll out of vaccines to cure the virus and gradual reopening of the economy are expected to underpin future earnings as travel and leisure activities begin with alacrity.

However, there are many challenges that lie ahead for the industry as United States’ president elect Joe Biden lends support for greener energy sources.

Also, there are indications electric cars will soon likely proliferate, which could make oil worthless in the nearest future.

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