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Tuesday, March 28, 2023

Nigeria’s Downstream Sector to Deliver Decent Returns Amid Negative Sentiment

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Nigeria’s Downstream oil and gas firms who are victims of lack of transformation policy on the part of the government are expected to sustain their resilience and deliver decent returns to investors even amid poor valuations.

Analysts at Afrinvest Securities in a recent report stated this as they maintained their Buy ratings on the stocks of Total Energies Marketing Nigeria Plc, Conoil Nigeria Plc, and Ardova Nigeria Plc, but Ardova posted a net loss in the first half of the year.

Compared to selected market peers (downstream) with an average P/E ratio of 14.1x, the Nigerian downstream oil companies (3.1% of total NGX equities capitalisation as of  30/06/2022) is priced at 3.5x, according to data gathered by Afrinvest Securities.

The poor valuations stemmed from investors’ lack of confidence in an industry beset by price ceiling on the price of petroleum products imposed by the regulator, delay in the passage of the delay in the Petroleum Industry Bill (PIA), moribund refineries, and incessant attacks on oil facilities.

Of course, the share price of sector players would have been rallying and earnings consistently growing if the government had removed jettisoned its command and rule policies that are hamstringing foreign investment.

Ardova’s shares have not gained so far this year. TotalEnergies’ and Conoil’s shares returned 5.19 percent and 17.85 percent respectively, which underperformed the NGXASI Year to Date (YTD) of 18.74 percent.

Oil marketers are losing money because the Nigerian National Petroleum Corporation (NNPC) is the sole importer of the petroleum products.

Companies avoided importing fuel into the country because they were incurring losses, as they could not land the product for which they were going to sell and make profit.

According to the latest NNPC annual statistical bulletin, the daily petroleum products consumption increased 5.0% year on year (y/y) to 77.9 million litres in 2020 compared to 74.1 million litres in 2019. Based on the consumption data analysis, PMS accounted for a 77.1% (60.0 million litres) share of the petroleum products, while kero[1]sene and diesel accounted for 22.0% (17.1 million litres) and 1.0% (0.7 million litres) respectively.

“We estimate daily petroleum product consumption to have increased by 5.1% in 2021 (to 81.1m litres) due to the complete lifting of pandemic restrictions and sustained epileptic power supply to businesses and households,” said analysts at Afrinvest Securities.

The continuous dominance of the government despite partial deregulation and lack of clear cut plans to completely deregulate the downstream sector has prevented investors from investing their money in the sector.

Of course, even if the policy maker wakes up from its slumber and completely deregulates the industry, sector players will be struggling with foreign exchange scarcity, a quagmire that is bleeding businesses and undermining economic growth.

“We can import products. Marketers, depot owners are all ready to get into the business and make it beneficial,” said Billy Gillis-Harry, National President of Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN).

“But you cannot invest money in a business that you are going to lose. There is no deregulation that the government cannot still regulate some part of it. So why delay?” said Harry.

Despite these challenges, the downstream sector benefited from the rising oil prices, as this has trickled down into the prices of Diesel, Aviation Turbine Kerosene (ATK), and other petroleum products.

The National Bureau of Statistics (NBS) reported that Diesel prices grew by 132.94% from N288.09 in January to N671.08 in May. National Household Kerosene (NHK) also recorded an uptick of 55.46% from NGN437.11 at the start of the year to N679.54 in May 2022

Analysts are propitiously auspicious about the future earnings of CONOIL, TotalEnergies, Ardova, and CONOIL.

“On a balance of factors, we expect both revenue and earnings growth for the majority of the downstream players. Given that international oil prices trends northward, this would translate to retail prices of deregulated petrol products staying elevated,” said analysts at Meristem Securities.

“Improved economic activities would also translate to higher volume sales, further pushing increasing turnover. This would in turn impact earnings for the period,” said the analysts.

Investors crave for Conoil’s stock because of the company’s steady dividend policy and attractive yield as analysts expect an effective implementation of cost control to underpin future earnings. It saw net income surge by 70.50 percent to N1.81 billion in the first six months from N1.06 billion the previous year. Sales were up 16.80 to N56.24 billion as at June 2022.

TotaleEnergies’ revenue increased by 38 percent to N209.01 billion in the first six months of 2022, and analysts expect the company’s strong presence in the Aviation Turbine & Kerosene (ATK) and Lubricant markets alongside a solid cost structure to deliver quality earnings growth.

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