Oil Majors to Defy Slower Growth in H2, Say Analysts


Kunle Aderinokun

FBN Capital, an investment banking and research arm of FBN Holdings Plc, have predicted that, for the major oil marketing firms, the expected sluggish growth in the industry in the second half of the year would not hurt their performance.

Analysts at FBN Capital, which released their Nigerian Oil & Gas update for September 2016, titled Capitalising on market dislocations noted that they expected slower top-line growth and a contraction in gross margin, down to normalised levels, in H2, more so for Q4, following the floating of the naira in June.

They, however, added that, “the impact of slower growth in Q4 is likely to be negligible to overall growth given that H2 2015 was a difficult period for the sector.”
As such, the analysts forecast, “an average sales and EPS growth of 44 per cent year-on-year and 165 per cent year-on-year respectively in 2016E.”

The FBN Capital analysts pointed out that, there had been significantly improved fundamentals. According to them, “Nigerian major oil marketers have recorded significant gains in 2016, a year in which other sectors continue to struggle. Mobil Oil Nigeria (Mobil) and Total Nigeria (Total) posted average sales and EPS growth of 44 per cent y/y and 161 per cent y/y respectively in H1 2016.”
The analysts attributed the primary driver behind the sales growth to “market share gains due to comparatively better access to FX for product importation compared with independent marketers.”

“Furthermore, the re-pricing of gasoline in May supported growth in Q2. The Petroleum Product Pricing Regulatory Agency (PPPRA) raised the FX assumption in its pricing template by more than 40 per cent to N285/US$ to better reflect market realties. This led to a q/q improvement in gross margin for both names during the quarter, thanks to relatively cheap inventory,” they added.

The analysts explained that, “in addition to top-line growth, the government’s decision to adopt a price modulation policy, thereby discontinuing the petroleum subsidy regime, improved balance sheet efficiency for both firms.”

For instance, they pointed out, “Total delivered the stronger growth of the two, with sales up 30 per cent y/y while EPS grew by 271 per cent year-on-year. Mobil’s top-line and EPS grew by 58 per cent y/y and 52 per cent y/y respectively.”

Industry-wide, FBN Capital said the sector outperformed the broader market.
They explained that, “To an extent, increasing M&A activities this year contributed to the improved visibility the sector currently enjoys”, however, expressing the belief that, “The extent of the strong positive earnings surprises recorded in H1 by both Total and Mobil is the principal driver behind the significant improvement in investor sentiment.”

“Year-to-date, Total’s share price has doubled (+104 per cent), outperforming both oil & gas peers and the NSE ASI by 74 per cent and 105 per cent, respectively. In addition to the strong EPS growth delivered, the market’s reaction was also boosted by a surprise N3.00 interim dividend in Q2, which implied a dividend yield of 2 per cent at the date of the announcement. The stock is up 65 per cent since the Q2 2016 results were published. Total typically declares interim dividends in Q3. Mobil shares are also up, by 12 per cent year-to-date,” they added.

However, FBN Capital downgraded Total to ‘Underperform’. “Given the magnitude of the recent rally in Total shares we have downgraded our rating on Total from ‘Neutral’ to ‘Underperform’,” they said.
But they added: “Our recommendation on Mobil is Neutral. Although we still expect Total to deliver strong results in H2 2016 on the back of market share gains, we find the market disproportionately pricing in these gains while neglecting similar benefits for Mobil. An average dividend yield of 8.9 per cent in 2016E for our coverage universe is quite attractive. Our price target for both stocks are unchanged. At current levels, we see a downside of -27 per cent for Total.”


Crude Oil
Despite the decision of the Organisation of Petroleum Exporting Countries (OPEC) to cut crude oil production by 200,000-700,000 barrels per day to achieve price recovery, oil prices again fell after the gains recorded on Wednesday.
OPEC agreed last Wednesday to implement modest oil output cuts in the first such deal since 2008, with the group’s leader Saudi Arabia softening its stance on arch-rival, Iran, amid mounting pressure from low oil prices.

Concerns have also been raised over how much sway the cartel now has over a market still brimming with crude from around the world.
The group reached an understanding at a meeting Wednesday in Algeria that there was a need to scale back production.
However, analysts also argued that the scope of the reduction—between 200,000 and 700,000 barrels a day—was inadequate to arrest the supply growth and bring balance back to the supply-demand dynamics.

Freight Duties
The Executive Director/Chief Executive, Nigerian Export Promotion Council (NEPC), Mr. Olusegun Awolowo , has lamented the inability of the Nigerian Maritime Administration and Safety Agency (NIMASA) to release the 10 per cent levies on freights collection to NEPC as stipulated by law.
He said the delay constituted a major handicap to providing export incentives to proposed beneficiaries.

He also disclosed that the country’s oil export earnings had dropped by 40 per cent, largely due to the country’s inability to improve on the quality and standard of it s primary export products .
He said most of the country’s export products were currently in non-processed level, making it difficult to generate the much needed foreign exchange as the country looks to diversify its revenue base from oil.

According to him, a total of about N300 million is currently being owed the council by NIMASA.
In his paper delivery titled: “ Towards Efficient Institutional Arrangements for Non-oil Export Finance in Nigeria”, Awolowo said the non-oil sector holds enormous foreign exchange potentials for the country but had not been fully exploited despite being endowed with solid minerals and agriculture.

Illegal Mining
The House of Representatives last Thursday in Abuja said illegal mining of solid minerals had deprived the country of about 500,000 jobs.
Illegal mining of solid minerals had deprived the country of 500, 000 jobs, the House of Representatives has stated following a unanimous adoption of a motion moved by Rep. Solomon Maren (PDP-Plateau).

Maren stressed the need to curb the activities of illegal miners in the country adding that the mining and solid mineral sector was a multi-billion naira sector that was being undermined by the activities of illegal miners.
He said: “These illegal miners are reducing Nigeria’s stake in solid minerals and other raw materials and also depriving the country of about 500,000 jobs for the teeming unemployed youths.”