Oil stocks surge amid Nigeria energy deficit woes

Stocks in the oil and gas industry are the best performers’ year to date (YTD) as they position to benefit from Nigeria’s woeful energy deficit.

Investors are bidding up shares of energy firms such as Seplat, which provides gas to power plants and Oando and Forte oil (FO) that supply companies’ diesel to power their operations.

“We have seen significant positive sentiment by investors in the Oil and Gas space this year – leading to impressive YTD gains in oil stocks with FO (111.8 percent) and Seplat (25.1 percent) leading the pack,” said Kayode Omosebi, a research analyst at UBA Capital Plc, in a response to questions.

“The oil and stocks portend significant upside potential; given the power sector reforms and the country’s infrastructure needs. The energy deficit in the country keeps growing, which will drive the oil and gas companies as they position to meet this demand,” Omosebi said.

The Nigeria Stock Exchange (NSE), oil and gas index which comprises the most capitalized and liquid companies in the sector has risen by 33.63 percent in the year to July 3, outpacing a 3.29 percent gain for the wider NSE-All Share Index, according to data from the bourse.

The maximum electricity generated on the grid has averaged has less than 4,000 megawatts daily for the past three months, according to data from the Nigerian Electricity Regulatory Commission (NERC).

Nigeria targets a generation capacity of at least 40,000 megawatts (MW) by 2020, according to the Ministry of Power.

To work around the inadequate power supply, Nigerians have resorted to generating electricity themselves, using diesel and petrol‐powered generating sets.

The Ministry of Power estimates that total electricity generated through these methods accounts for up to about 6,000 MW, more than the total commercial power generated and supplied to the grid.

Global Business Intelligence (GBI) – a research firm – estimates that Nigerians spent about $455m (N70.5 billion) on generators in 2011.

Nigeria is turning into an energy deficit economy very quickly as it grows at 7 percent per annum, according to Ildar Davletshin, an energy analyst at Renaissance Capital.

“Seplat benefits by supplying gas to the domestic market. We expect Seplat’s earnings to double by 2017 as the company brings its 2C resources into production and ramps up gas supply,” Davletshin said in a recent research note.

Seplat is forecast to generate over $400mn in profits in 2014E, according to Davletshin, buoyed by domestic gas prices that are expected to rise close to export parity by the end of the year.

Domestic gas prices currently at $1.00 /Mscf, are scheduled to increase to $2.00/Mscf David Ige, group executive director, Gas and Power, NNPC said at a recent conference.

Oando – Nigeria’s largest Oil and Gas Company by revenues – recent acquisition of Conoco Phillips Nigerian assets should lead to a 730 percent increase in production levels and a 378 percent increase in earnings to N49.9 billion in FY 2014, according to a June 23 report by Chapel Hill Denham research.

Forte Oil, part of a consortium that paid $132 million for the 434 MW Geregu powerplant is the best performer on the NSE, as its shares have risen 111.7 percent YTD.

A handful of these companies will require funding to scale up production capacity and acquire oil assets.

Oando has raised in excess of $1.95 billion in the past two years to finance acquisition of oil assets and refinance existing debt obligations.

Seplat raised about $500 million in April 2014 to acquire and develop new onshore and shallow offshore acreages, assets and joint venture farm-ins.

Forte Oil may also approach the market for capital raising, to fully turnaround the Geregu Power Plant for capacity optimisation.

Investors should distinguish between oil companies focused on downstream petroleum marketing and those with a diversified business line, said Abiodun Keripe, Head, research and Strategy at Elixir Investment.

 “The prospect for growth is solid…Nigeria’s gas market is clearly untapped, given the quantum of gas being flared daily. A business model that provides pas-to-power in the presence of shaky electricity supply will be a cash cow,” Keripe said.

PATRICK ATUANYA