Report calls for cautious investment in Nigeria’s oil industry

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Analysts at Agusto & Co, a credit rating and research company have urged investors in Nigeria’s oil and gas industry to be guarded in their investments in the sector, following recent rally in oil prices and a somewhat stability in oil production in the country.
The report indicated that though certain favourable conditions could continue to exist in the industry in the near term, investors should avoid excessive leveraging in their commercial commitments to the sector, adding that this could help them withstand possible shocks from price changes and other uncontrollable factors.
The experts explained that Nigeria’s oil industry sustained a healthy margin from recoveries it made in 2017. It added that the industry posted some good results in the year ended 2017 and that most industry operators grew their top lines.
“We are of the opinion that the current rally in crude oil prices as well as the relatively stable operating environment in the Niger Delta should continue in the near term.
“In addition, the regulatory uncertainty which has stalled capital investments especially in offshore exploration and development is being addressed with the eventual passage of the PIGB.
“However, industry players should be cautious in engaging in over-investing and excessive leverage, which might make it difficult for them to withstand any shocks in oil prices and other uncontrollable factors highlighted,” said the report.
It further stated: “All things considered, we are hopeful that the performance momentum in the upstream industry should be sustained in the short term to medium term.”
Detailing the performance of the industry in past year, it explained that: “After the challenging operating environment that dotted 2016, the Nigerian oil and gas (upstream) industry has rebounded, posting relatively better results in the financial year ended 31 December 2017 (FYE 2017).
“This was quite evident in the fact that most industry players grew their topline in 2017 on the heels of the depressing results of 2016. The change in the fortunes of most operators was attributed to the rally in crude oil prices in 2017 after the global oil price crash of 2014 to 2016. For instance, one of the key players in the Nigeria oil and gas (upstream) industry, Seplat Petroleum Development Company Plc grew its turnover by 106 per cent year-on-year (YoY) to $417.4 million in 2017.
“In the same vein, Oando Plc grew its exploration and production (E&P) business to N103.5 billion in 2017, representing a 34 per cent YoY rise over prior year. The scenario also plays out for the global oil majors such as Shell, ExxonMobil and Total, who equally recorded relatively exciting results over the last one year.”
It added that these players rode on the momentum in 2018 to post also impressive nine months’ results.
“Seplat’s turnover rose by 104 per cent YoY to $568 million for the nine months ended 30 September 2018. As a result, Seplat posted an impressive gross profit margin of 54 per cent in nine-month 2018 and profit before tax margin of 37 per cent on the back of a loss before tax margin of 0.9 per cent recorded in the corresponding period of 2017.
“Similarly, Oando Plc’s E&P turnover grew by 56 per cent year-on-year in nine month 2018.
“Movements in oil price volatility remain the single most important determinant of upstream industry’s performance,” the report noted.
According to the report, the recovery in top line performance among industry players could be attributed first to oil price.
It stated thus: “There is a strong positive correlation between the industry’s earnings growth and oil prices. Periods of sustained oil price regime are almost always associated with the boom period for industry operators and the converse is sadly very true for them.
“Higher oil prices not only result in generally better profit margins for operators, they also encourage the players to invest in profitable capital expenditure to develop and expand their oil reserves. This ultimately assures of the sustainability of earnings and invariably the going concern of the E&P companies.”
It explained again that another key factor that influenced the industry’s performance was geo-political risks associated with the incidence of militancy in the oil-rich Niger Delta region of the country.
According to the report: “It is a known fact that militant activities in the region have been responsible at various times for disruptions to production, leading to declaration of force majeure by E&P companies. These activities also result in pipeline vandalism, making it difficult for operators to export their crude oil for sale to their foreign trading partners.
“In May 2016, the country recorded a low crude oil production of 1.67 million barrels per day (mbd) due principally to pipeline vandalism and production disruption linked to militant activities.”

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