How are Nigerian oil stocks performing?

There is a global oil boom or doom, depending on how you look at things. Oil-producing giants like Russia, which make about $1 billion from daily energy exports, are smiling to the bank due to rising oil prices and robust production.

The Organisation of Oil Producing Exporting Countries (OPEC) mentioned in its June 2022 report that Russia has managed to keep exporting its oil despite the pressure from sanctions. The explanation is that Russia’s crude exports to Asia are estimated to outpace the decline in exports from the country to the rest of Europe. However, an oil-producing giant like Saudi Arabia has a local demand 3x lower than its total daily supply and can flood the global market with more oil to bring down prices.

But the incentives to do so are not much. For one, higher prices mean greater oil revenues. Also, Saudi believes the oil supply is adequate, and prices are rising due to global panic.

This supply and demand dynamic is important because it influences energy commodity prices. With western countries trying to boycott Russia for their energy supply, there is a sense of urgency to ramp up the supply of energy commodities for productive activities. For example, commuters return to offices or the coming winter. So, with supply yet to meet demand, energy prices are going up. 

Boom vs gloom

On the consumer side, this situation is not funny for people who have resigned to buying gas, petrol and diesel at prices multiple times higher than they did one year ago. Last week, the average price for one gallon (approximately four litres of fuel) was $5.01, according to the latest data from the American Automobile Association (AAA). That’s a 53-cent increase from last month and almost $2 more than a year ago when the national average was $3.07.

In Nigeria, fuel prices are somewhat stable because the government subsidises the cost.  Still, one litre of fuel is now ₦173, which is  ₦7 higher than its 2021 ₦166 price, and the price of other petroleum products has skyrocketed.

Beyond countries that are or should be (cue in Nigeria) smiling to the bank and consumers frowning at petrol stations, other stakeholders are worth taking a closer look at. For instance, oil companies such as producers, refiners, and distributors contribute to the events shaping the oil and gas value chain.

At the moment, these companies (especially upstream listed firms) are making significant profits amidst the global oil dilemma. UK’s Guardian noted that companies like Shell and Exxon made $9 billion each from January to March this year—a nearly threefold profit increase compared to the same time in 2021.
 

Meanwhile, some oil companies have come under much criticism from several channels, including the American president Joe Biden for booking high-profit margins.

But, consumers now paying higher energy costs might be compensated if they receive part of these companies’ profits as investors of the oil firms. For instance, Shell’s dividend of 25 cents per share for Q1 2022 was 44% higher than Q1 2021’s 17 cents per share.  The company paid out £4.3 billion to shareholders (another stakeholder worth considering) and said it plans to dish out roughly the same in the next three months.

So what is the situation for Nigeria-based oil and gas firms? Are they and their shareholders susceptible to the profits now being made, or do they suffer the same plagues brought on by the low economic performance in the country?

Performance of Nigeria oil companies

​​​The economic performance I mentioned is about Nigeria not being able to reap the rewards of being an oil-producing country. You can read more about this issue here, but a brief explanation is that the country is paying more for subsidies and producing less crude with higher oil prices. This means that oil revenue is not as great as it should be for Africa’s giant.

Still, Nigeria is crawling with oil and gas firms that should benefit from the global oil boom. And thankfully, several of them can give us a clue into how they are faring within the context of the global oil disruptions and price hikes. This is because these firms are listed on stock exchanges. So, they should share their financial performances with the public.

The tricky part is that most of them operate in the downstream sector and the ones that operate upstream such as Total and Seplat have announced plans to transition, adding "Energies" to their name to reflect a portfolio beyond petroleum.

As a company in the energy sector, you can choose to play in the upstream, midstream, downstream or across all levels. Upstream players are usually concerned with the exploration and exportation of oil. This means that they may not refine, and they just dig crude from the sea or the earth and sell it to buyers. International firms that should come to mind include BP, Shell, and co.

In Nigeria, Seplat is one indigenous firm playing in the upstream space. Ideally, higher global energy prices are favourable to the firm because it is only concerned with producing and selling crude oil and natural gas. And so, even without increasing production, the company gains higher revenue and profits because prices are higher than they used to be. For instance, its Q1 2022 revenue was 74% higher than Q1 2021.

This is unlike other petroleum firms operating downstream or midstream, where there is no price liberalisation because the Nigerian National Petroleum Corporation (NNPC) controls prices and retail margins.

I mean that, although petrol prices are rising, petroleum distributors in the country cannot charge consumers higher prices and make more revenue. This is because oil companies don’t import refined petrol; the NNPC does and dictates how much of a margin (usually between ₦5-₦10) the downstream oil firms can make.

In practice, the NNPC imports refined oil at the average rate of ₦360 per litre but sell to the downstream players at ₦160. It then instructs these oil firms to not sell above ₦170 because it’s trying to get citizens to access fuel at a cheaper rate. The ₦200 difference between the ₦360 NNPC buys refined oil and the ₦160 it sells amounts to the trillions of naira subsidy the government pays.

So, there is no price liberalisation, which means the oil companies are bound by the regulator to keep prices within the Petroleum Products Pricing Regulatory Agency (PPPRA's) recommended bandit. And if the major source of revenue is through the sale of PMS) which the NNPC subsidises, this can significantly cap their profit potential.

A review of the companies' results explains things better. Of the ten actively traded and regulatory-compliant oil and gas stocks in the country, five have released their financial reports for Q1 2022, which show mixed levels of impact.
 

As I mentioned earlier, Seplat's Q1 2022 revenue was two times better than the company's record in 2021, when revenue grew by 36%. This positively impacted profit before tax that also increased from ₦11 billion in Q1 2021 to ₦35 billion in Q1 2022.

This is good for the firm. But, the company recorded a 12% decline in its profit after tax because it booked about ₦19 billion of taxes it had deferred earlier. For some shareholders, this might not be good news. Profit after tax matters to shareholders, and in most cases, it is what they share as dividends, and it helps measure how well their investment has performed for any period.

Unfortunately, Seplat’s tax payment for Q1 2022 was 22x bigger than what it paid in the same period of last year. This effectively halved equity holders’ earnings per share (how much money a company makes for each share of its stock) from ₦23 in Q1 2021 to ₦11 as of Q1 2022. But even though the company’s earnings per share reduced, the strong revenue performance has impacted its share price which is up 95% year to date.

Meanwhile, most of the other listed oil and gas firms operate in the downstream space, and of the selected, all except MRS booked profits. Will this translate to significant benefits for their shareholders? Let’s see.
 

The interesting details with downstream petroleum companies

First, with the downstream companies, the profit recorded is not necessarily due to the rising oil prices.

For instance, TotalEnergie’s revenue from lubricants and other products grew by 91% in the review period compared to 34% in the revenue from petroleum products. But even under revenue classified as income from petrol, a breakdown of the income shows it is largely a result of the company’s network effect. This entails income from its Bonjour shop, rent, vendor management fees and other miscellaneous items. This is similar to the ecosystem of services a company builds, e.g. Apple’s ApplePay, Apple Card, Apple Pay Later, etc., to serve its core business (buying Apple devices).

So similar to Seplat, which had higher revenues this year, TotalEnergies revenue was also nearly ₦100 billion for Q1, growing by 46% compared to last year.

Earnings per share for TotalEnergie’s investors improved 47% from ₦8.75 in March 2021 per share to ₦12.86 in March 2022. The company’s share price, which settled at ₦264.90, also grew 87% within these periods I’ve been comparing.

For Conoil, which made a lower revenue but higher profit, the company’s results show a significant reduction in its cost of sales. This boosted its gross profit margins and, in turn, net profits. However, selling white products like petrol still constituted a significant chunk (90%) of income. Lubricants, on the other hand, accounted for the remaining 10%.

Essentially, the story for oil and gas investors in Nigeria is not as straightforward as the ones their colleagues in the US, Australia or Canada tell. The dynamics are even more intriguing when we assess MRS, another downstream player. The company posted huge losses—as shown in the earlier chart—even though its revenue was flat (no significant change in the review period).

You might remember that Nigerians began the year with the news of contaminated petroleum, and while MRS has debunked its involvement in the scandal, its Q1 2022 financial performance raises concerns. A closer look at the company’s books showed that receivables worth almost ₦2 billion are part of the culprit for its latest woeful performance.

Historically, MRS has been making losses. Last year was the first time the company made a profit in eight years, but this result shows that things have quickly changed. First, the company explained it is assessing the recoverability of trade and other past-due receivables. The total receivables were ₦2.2 billion, some of which are being owed by government institutions, e.g. Petroleum Equalisation Fund (PEF) and other parties that are members of the MRS group. For context, the PEF is a government fund to regulate the cost of distributing petroleum products across the country at a uniform price. 

So, with a company like MRS that uses almost 80% of their revenue as cost of sales for petrol alone and the PEF owing them coupled with other parties struggling to pay, profit-making becomes tricky. In addition, interests or (finance costs) being paid on loans the company took to stay afloat are also eating deep into whatever revenue it makes. Investors in this company need a lot of patience and maybe prayers if they will reap the benefits other investors in both domestic and international oil firms are gaining. Meanwhile, having huge receivables written off is a norm in the industry. The difference with MRS was just that it was significantly higher in the first quarter of this year compared to Q1 2021.

Finally, the last company under the radar is Eterna, which recorded a higher revenue growth than any of the companies analysed. The firm stood out because of all its revenue components—fuel, lubricants, and other trades—revenue from fuel also doubled in the review period, thanks to increased market share. 
 

Share prices are a beautiful camouflage

Essentially, very different scenarios play out with these companies, and it’s up to investors to figure out which firm is worth investing in instead of blindly buying oil stocks because the commodity price is soaring. 

Ironically, the price of US-listed energy stocks has begun to fall. For instance, the S&P 500 Energy is down 11% in June alone, suggesting that the demand for energy firms is declining.

Energy analysts believe this is due to the imminent global recession and current bearish market but argue that even with a recession in the picture, they are confident of higher oil demand as economies continue to ease movement restrictions in industries like aviation.
 

Meanwhile, share prices of listed oil stocks in Nigeria are closer to their 52-week high. As of 10th June, the NGX Oil and Gas index had the highest month-to-date, quarter-to-date, and year-to-date growth across all sectoral indices. We can say this is largely due to Seplat which is pulling the heaviest weight in the sector.

But does that mean oil and gas investors benefit from the oil boom? As we’ve seen, the biggest benefactors for Nigeria-based oil firms are those operating in the upstream. Essentially, your answer depends on the investor you are asking and the oil stocks they’ve invested in.