Published On: Sun, Aug 12th, 2018

Stocks: Oil sector stocks defy economic downturn in 2nd Quarter


Despite a mild economic recovery in 2018, Oil sector stocks listed on the main board of Nigeria’s stock exchange are only recently shaking off the anguish of last year’s sector melt down. Indeed of the six leading Oil-related companies that have published 2nd quarter results in 2018, Seplat beat the blues by posting a top line growth of 160 per cent, from N40 billion in half year (H1) 2017 to N105 billion in half year 2018, while Eterna Oil, one of the oldest indigenous oil groupings, grew corporate top line by 117 per cent from N79 billion in H1 2017 to N172.9 billion in H1 2018. Total Oil, on the other hand, saw top line revenues rise by a paltry 2 per cent from N159.2 billion in H1 2017 to N156.3 billion in H1 2018.

Even an Oil service company like Japaul has seen its revenue slide up as the company’s gross income climbed from N544.3billion in H1 2017 to N662.7 billion in H1 2018, a rise of 21.8 per cent. Not to be left out of the revenue hunting season indigenous oil major, Conoil, saw its top line tip up from N44.9 billion in H1 2017 to a fatter N54.5 billion in H1 2018. The rise in oil sectors revenues reflects a general uptick in the local business which has climbed on the back of rising global oil prices which has been fuelled by the United States of America’s restored oil sanctions on Iran and worries about escalating balance of trade problems between the USA and its traditional trading partners.

Global oil prices, for the most part of the second quarter of 2018, have held up nicely at over $70 per barrel and still hover at about $72 per barrel in August. Several analysts see this as a dominant trend in both the third and fourth quarters of the year as Iran-related issues continue to fester and a trade clash with China, Canada and Europe drag America into a beggar-thy-neighbour tariff war. With the United States trading down its huge oil reserves on growing fuel exports, the world seems to be in for a sustained period of crude oil prices beyond $70 per barrel for the rest of the year. According to Segun Atere, chief research analyst at Apel Assets and Trust, ‘’the international oil market looks pretty much set on a course for a market price beyond $70 per barrel, but this is a double-edged sword. Buyers may begin to feel the pressure of imported inflation, but even sellers that do not refine their own exports will begin to sweat inflation-induced fever a lot more faster’’, he argues. According to Apel’s senior analyst, ‘’in a place like Nigeria where domestic petroleum price is subsidized the deadweight loss of the subsidy could prove devastating to fiscal stability. The subsidy could spiral into a whirlwind leaving the government in a position of dealing with an historic budget wreckage’’.

Atere’s view is supported by Nana Chikezie big cap securities analyst at Gaduniya Investment and Trust, according to Chikezie, ‘’the oil market rebound does, on the surface, look rather cheerful as several majors see their top and bottom line figures look up, but for the country as a whole what is gained by increased fiscal inflows is taken away by rising international refined product costs, ballooning subsidy expenditure and a wider fiscal deficit’’. Be this as it may for the companies in the sector Christmas seems to have come early.

 Seplat’s jumping jack

For Seplat, half year 2018 was a fairy tale. The company saw its operating profit rise by a staggering 24 times or 2,000 per cent. It’s operating cash flow rose 134 per cent from N32 billion in H1 2017 to N75 billion in H1 2018; suggesting that the company not only improved profitability but also shored up liquidity making earnings believable and sturdy. But was this all good? Not necessarily. Seplats half year performance reflects a painful recovery rather than blazing growth as the company has still had to tackle high finance costs which rose from N10.6 billion in H1 2017 to N12.7billion in H1 2018, or about one fifth or 19.8 per cent. With interest rates likely to rise further in the last quarter of the year this could put a break of Seplats forward shuffle. Nevertheless, the company seems to have gotten a handle on its sales cost as sales costs as a proportion of net sales fell from 59 per cent H1 2017 to 49 per cent in H1 2018. According to Oluwarinu Olawale head of operations at Capital Express Securities, ‘the indigenous oil producer is proving to be a head-turner as it gradually remodels its balance sheet and profit and loss account, although this may prove to be more of good fortune than hard work as global oil price continue to rise. But like in a game of soccer, luck is a tricky factor, and the more you have of it the better you are, or so it seems’’.

Total Nigeria Plc in slow motion, but…


In terms of assets, Sepla’ts asset turnover in H1 2018 was 0.13 as against 0.05 in H1 2017, a rise of 200 per cent. In other words the oil driller was able to squeeze more revenues per unit of assets in 2018 than it did in 2017.

At the level of investors Seplat may yield a tidy bundle for equity holders if oil prices can stay up in the course of the year. The equity is the second highest priced after Nestle Nigeria Plc, the oilers equity price stood at N650 per share as at Friday’s trading close last week. This meant that the company was trading at 3 times it last earnings per share as against the main boards P/E of 10. In other words the market is still doubtful about the underlying earnings strength of the company and continues to discount the firm.

Atere of Apel thinks this is a mistake for most oil stocks. Says the market maven, ‘’the oil sector appears to be past its worst and the heavy price discounts on future earnings is a reflection of exuberant pessimism. We think this is wrong interpretation of trading realities’’, he insists.

Totally unrecovered, but…

As with Seplat not so with Total, the petrol marketer is far from oil sector recovery. Total’s problem is that unlike Seplat that is mainly into upstream production activities; Total is a downstream retailer selling white products at virtually government-fixed prices or regulated margins.  This explains the opposite fortunes of both companies. As oil prices edge forward, the prices of imported fuel at the pumps barely changes, especially for petrol, this, according to sector analysts has choked operating profits and hurt retailers top line earnings numbers. Total, for example, saw its net sales rise by a miserable 2 per cent growing from N152.9billion in H1 2017 to N 156.3 billion in H1 2018. Profit after tax, however, did a lot better as the company pushed down on costs and squeezed an accounting profit of N5.7 billion in H1 2018 as against N4.6 billion in H1 2017, or what came to a profit after tax growth of 23 per cent. This according to Gaduniya’s Chikezie, ‘’shows that tight reins put on expenses can make up for slow progress in net sales growth.’’ This may be so, but Total seems to have a worrying problem with its receivables (debt owed by its product buyers) as trade receivables rose from N32.7billion in H1 2017 to a troubling N57.6 billion in H1 2018, a growth of 76 per cent year-on-year. The company has equally had less cash to conduct its business as its cash position fell from N12.2billion in H1 2017 to N6.9billion in H1 2018, a surprising 43 per cent drop.

For investors, Total Nigeria’s ability to keep its operating expenses in check is admirable but its fall in revenues leaves a dark cloud over its business. Investor anxiety is palpable as they stare helplessly at oil prices spiking in months ahead. At a recent price of N185 and a P/E ratio of 6.91 the stock looks rather heavily priced with strong down-side potential if international crude prices keep going up. This perhaps explains the stocks year-on-year return of -20.24 per cent. However, the company’s dividend yield of 9 per cent is a warming influence over its otherwise cold statistics.

Conoil and its disappearing headaches

With its principal owner, Mike Adenuga, known for his niggardliness in dividend payments, Conoil is not usually much of a rallying point for investors. But the company’s H1 2018 results still has analysts taking a peek. The company’s top line earnings grew by a robust 21.3 per cent as rising oil prices helped the company shore up operations. The company’s after tax profit rose year-on-year by an impressive 28.9 per cent from N427.2 in H1 2017 to N550.7 billion in H1 2018. Even the most skeptical of traders seem to have given the company thumbs up for effort.

Conoil’s recovering confidence

If oil prices stay where they are or even rise, then Conoil and its confederates of oil producers can expect to see both earnings per share and prices rise significantly as a growing number of equity traders buy into the enthusiasm of a bullish international oil market. So far the sleek oil business looks darn well attractive to both foreign and local portfolio investors, as the Iran-US conflict bonus keeps prices up and cash tills ringing, how far this will go is any ones guess, but

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