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Industry woes deflate appetite for oil & gas companies’ shares

Return on Investment down 3.3% year-to-date

Operators point to declining margin, forex crises, …

By Nkiruka Nnorom

INVESTORS in the nation’s capital market have continued to demonstrate low appetite towards shares of companies in the oil and gas sector of the Nigerian Stock Exchange, NSE, as the sector’s performance year-to-date, ytd, lagged largely behind the other sectors in the market.

Financial Vanguard’s analysis of activity for the 12 month period ended December 15, 2017 showed that, apart from under-performing other sectors, the oil and gas industry also under-performed the All Share Index, ASI, which rose sharply by 43.02 per cent within the same period.

Return-on-Investment, RoI, in the sector went down by 3.3 per cent between January 2, 2017 when the market opened for transaction and December 15, 2017, a development, investment bankers attributed to poor perception of the sector among international and other high networth investors.

Investment bankers, who spoke to Financial Vanguard, pointed to myriads of problems, including low oil prices in the international market space, effect of the recession, which the country just exited, and unavailability of foreign exchange to import their products with the attendant low margin as some of the problems.

The problems, according to them, combined to dull activity and subsequently, negating return in the industry during the one year period.

The operators also insisted that investors stake money only in sectors where returns in terms of either capital appreciation or dividend payout is guaranteed, and argued that the oil and gas sector does not guarantee any of this at the moment.

Sectoral performance

Further breakdown showed that activity in the oil and gas sector fell to 302.53 points from 312.68 points, representing 3.25 percent decline, impacted by huge price decline in five of the companies, including Forte Oil Plc, Mobil Oil Nigeria Plc, MRS Oil Nigeria Plc, Conoil Plc and Total Nigeria Plc.

However, the banking sector recorded the highest return on investment at 71.13 percent, closing at 469.44 points from 274.32 points. This was followed by the consumer goods sector, which recorded 37.7 percent return to close at 981.34 points from 712.65 points on January 2, 2017.

The industrial goods sector was the next with 25 percent increase to 1,953.80 points from 1,595.33 points in January, while the insurance sector appreciated marginally by 8.8 percent to 137.35 points from 126.29 points.

RoI of individual companies

Further inquest into the activities of the companies showed that the lackluster performance pervaded the entire oil and gas entities including those listed in Alternative Securities Market, ASeM. Of the three downstream petroleum marketing companies in the AseM Board, (Anino International Plc, Capital Oil Plc and Rak Unity Petroleum Company Plc) prices remained unchanged within the review period.

For those listed in the Main Board, only two out of the seven companies emerged investors darling and hence recorded  positive return.

Forte Oil recorded the worst return during the period as its price fell by 47.2 percent within the review period, followed by Mobil Oil Nigeria (11) Plc which depreciated by 39.1 percent. MRS Oil ranked third, dropping by 36.6 percent, while Conoil Plc and Total Nigeria Plc were down 25.3 percent and 20.7 percent respectively.

Surprisingly, Oando Plc, which has been engulfed in crisis in the last few months and is presently undergoing forensic audit by the Securities and Exchange Commission, SEC, posted 34 percent return, though the share price has been on technical suspension since October 23, 2017 due to the on-going auditing of the company’s book.

Eterna Plc towered above all the companies, recording 34 percent returns during the one year period.

Operators’ take

In his view, Mr. Patrick Ezeagu, Managing Director/CEO, Solid Rock Securities, said that besides the general lull in the economy which affected the sector, the individual companies have been posting low margin as a result of the prevailing foreign exchange crises and shortage of supplies.

He said: “If you look at what is happening in terms of scarcity; there are no regular supplies. It appears that it is only Nigerian National Petroleum Corporation, NNPC, that imports fuel and it also appears that the margins of the companies are going down and when margin goes down, it affects the bottom-line.

“Investors are looking at markets where they can make maximum returns in terms of either capital appreciation or dividends. But when there is no apparent prospect that any or either of the two is going to happen, people begin to grow wary of the sector. If we are having the kind of situation we have in Oando, international investors will always want to minimise their risk”.

He added that most other oil marketing companies are not doing so well, arguing that the margins from their activities are very poor. “The margin they used to make from subsidy has equally disappeared. So, their operating environment has been very harsh more or less,” Ezeagu added.

In his own contribution, Tola Odukoya, Chief Executive Officer, FSL Asset Management Limited, said that besides low oil prices and forex issues, the sector is equally over-regulated, especially with regards to the prices of PMS.

He emphasised that the share price of the stocks were a bit high with the exception of Eterna Plc, which trades at about N4 per share, saying that the pricing could also be another contributory factor. “The companies are heavily reliant on forex to import their products and their prices are strictly regulated unlike other sectors where companies would have the privilege of adjusting prices if there is an increase in the price of raw material inputs.

“NNPC appears to be the sole importer of fuel due to inability of the companies to secure foreign exchange despite the concessionary price given to them by the Central Bank of Nigeria.

“So, these are the issues that created a lot of headwinds that affected them within the year. Lack of availability of forex and lower oil prices. As it is, they are complaining that they are not making enough margins though oil prices are beginning to go up,” Odukoya said.

Forex and lower oil prices

In midst of all of this, investors will naturally become wary of the sector given that the challenges of importation, foreign exchange exposure and the inability to get forex has affected both their activity and investors perception of their performance. And remember there are other sector that have posted better results than the downstream marketing companies, some in the banking sector, some in the consumer goods sector. So, those are naturally the headwinds that contributed to the lackluster performance recorded by the sector, he explained.

Outlook for 2018

Odukoya said he does not foresee any major change in the sector ‘because as we go into the election year, the government would not want to tamper with the prices of PMS. So, we will continue to see this trend going forward’.

Ezeagu noted that 2018 may pose more challenges to the sector due to the decision by some of the major economies to phase out hydrocarbon driven automobiles from 2020 and beyond.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.