May 21, 2024
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Oil and Gas Stocks Post Massive Returns After Fuel Subsidy Removal – Analysis Shows

Barely three months after the fuel subsidy removal and the unification of the exchange rate by President Bola Ahmed Tinubu, businesses, sectors, industries, and the Nigerian populace have been actively grappling with the decision’s consequences.

Nairametrics reports that analysis indicated that in the context of the effect on specific sectors, the oil and gas sector still recorded growth amidst the impact of these policies as reflected in their profit before tax, share price YtD gains, and the overall performance of the sector index.

It stated that the Oil and Gas index, comprising Conoil, Eterna, MRS Oil, Seplat, and Total Energies, outperformed other NGX indices in the half year of 2023 with a gain of 67.76%. Particularly noteworthy is the fact that about 52% of this growth was achieved in Q2, coinciding with the introduction of the policies.

As of the market’s close on August 24, 2023, the share prices of these five companies have continued their impressive surge, posting an average Year-to-Date (YtD) gain of 246%. Notably, MRS Oil has achieved an exceptional YtD gain of 676%, securing the top position on the NGX for year-to-date performance.

This remarkable trend in share price growth could be attributed to investors’ optimistic expectations for the sector, even in the face of the broader impacts of these policies.

Except for Conoil, Eterna, MRS, Seplat, and Total collectively reported net foreign exchange losses totaling N96.01 billion in H1 2023. This substantial amount highlights the challenges these companies have encountered due to currency fluctuations.

Despite these challenges, the substantial share price gains suggest that investors may be responding positively to the potential long-term benefits of policy changes and improved revenue and earnings performance within the sector.

During the reviewed H1 2023 period, the companies collectively recorded an average pre-tax profit growth of approximately 31%.

However, there were exceptions among the companies. While Eterna Oil reported a pre-tax loss of N5.54 billion, Seplat Energy recorded a significant decline of about 50% in pre-tax profit.
Despite these exceptions, the remaining three companies displayed impressive pre-tax profit growth, which in turn lifted the index’s average pre-tax profit growth

MRS Oil drove the index’s pre-tax profit growth. Driven by impressive revenue growth, particularly in its petroleum product segment, and a low/reduction in net finance costs, the company recorded an impressive year-on-year (YoY) growth of 543% in pre-tax profit.

However, the company reported a net foreign exchange loss of N2.429 billion. This loss, constituting approximately 49% of the administrative expenses, contributed to the significant 124% year-on-year (YoY) growth in administrative expenses.

Conoil also reported a remarkable 222% increase in pre-tax profit, reaching N7.83 billion in H1 2023. This growth was driven by impressive revenue growth, notably in Q2, where Conoil achieved an outstanding 73% growth in revenue. This led to a half-year revenue of N87 billion, representing 55% year-on-year (YoY) growth. Impressively, 97% of this revenue was generated from the company’s white products, suggesting a better outlook.

A distinguishing factor is that Conoil did not report net foreign exchange losses. This, combined with controlled costs, contributed to the company’s impressive bottom-line performance.

Total Energies experienced a relatively modest year-on-year (YoY) pre-tax profit growth of 5.84% in H1 2023. This growth was hindered by factors such as higher costs of sales, net finance costs, and net foreign exchange losses.
The company encountered foreign exchange losses on trade payables and receivables amounting to N36.361 billion, along with foreign exchange gains on loans and borrowings totalling N27.75 billion. These transactions resulted in a net foreign exchange loss of N1.50 billion.

Seplat Energy reported the highest pre-tax profit of N43.45 billion. However, the company reported a decline of about 50% in pre-tax profit, largely attributed to “other losses.” These losses were primarily driven by N30 billion in overlifts and N17.209 billion loss related to foreign exchange fluctuations.

Eterna Oil is the only company that reported pre-tax loss. The company disclosed a pre-tax loss of N5.54 billion. This loss was significantly driven by substantial net foreign exchange losses of N9.80 billion, marking a substantial year-on-year (YoY) growth of about 12,745%.

The notes to the financial statements highlight that as of June 2023, included in the Foreign Exchange Loss is N9.6 billion attributed to foreign exchange revaluation loss due to the collapse of the Nigerian FX market into a single window by the Central Bank of Nigeria (CBN) on June 14, 2023.

Overall, a common feature among the companies’ financials is revenue growth, with all of them reporting increased revenue. Collectively, the average revenue growth stands at an impressive 34.86%.

Furthermore, the market seems to view the share prices of these companies as undervalued in relation to their sales performance. This observation is supported by the companies’ low price-to-sales (P/S) ratio. The average P/S ratio for the index is 0.24x.

If a stock appears undervalued based on its sales, it can be considered a potential signal that the stock might be a good buy. However, the decision to buy a stock should not be solely based on a single ratio like the price-to-sales (P/S) ratio. It is important to consider a range of factors before making an investment decision

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