• Friday, March 29, 2024
businessday logo

BusinessDay

Downstream woes revealed by negative stock returns in 10yrs

Stocks

Listed companies in Nigeria’s downstream oil and gas sector have recorded negative returns in the last 10 years compared to their peers in other sectors, pointing to a myriad of challenges bedevilling the sector.

While firms operating in the financial services, agriculture, Fast Moving Consumer Goods (FMCG) and other sectors have seen their share price improve in the last 10 years, six listed firms in the oil and gas downstream sector have recorded less than spectacular performance.
Apart from Total whose share price recorded 1 percent increase from January 15, 2009 to January 15, 2019, the share price of five other listed companies in the sector stayed in the negative territory over the period.

Conoil’s share price recorded -70 percent, MRS’ share price recorded -83 percent, while 11 plc (formerly Mobil Oil Nigeria plc), OVH Energy and Forte Oil recorded -44 percent, -94 percent and -90 percent, respectively, according to a report by Major Oil Marketing Association of Nigeria (MOMAN) titled ‘Making the Downstream Sector Work – An Investor’s Perspective’.

Stakeholders blame this negative performance on old perennial environmental, operational and regulatory challenges. These include poor governance and management of refining assets, low operating margin for operators leading to low Return On Equity (ROE), huge debts/receivables on account of unpaid accumulated subsidy and unpaid interest, and foreign exchange differentials on product importation.

To overcome these challenges, the umbrella body for the major oil marketers suggested some important strategic steps which include introduction of corporate governance, full deregulation of the sector, and introduction of guilds which will increase availability of skilled workmen and artisans in the industry.

In the 16-page report, MOMAN also suggested “improved regulations of fuel standards, improved customer service, improvement in port reception logistics, development of transport infrastructure, and improved security”.

On quick wins needed to address challenges facing the sector, it recommended that operators adhere to strict governance standards which will attract financing for working capital and investments for expansion, while also emphasising the need for implementation of fuel monitoring systems such as self-dispensing fuel pumps.

“There is a need to upgrade the jetties and pipelines in use at the ports. Operators need to reduce the wait times of vessels at the ports,” MOMAN said in the report released March 2019.
Nigeria as the largest market in Africa offers unique opportunities for investment in the petroleum downstream sub-sector, according to leading global consulting firm PricewaterhouseCoopers (PwC).

“However, the government needs to create the necessary business environment through price liberalisation and strong independent regulation,” PwC said in a report titled ‘Nigeria: looking beyond oil’.

“In addition, challenges around pipeline infrastructure, technology, supply consistency and capital need to be addressed,” it said.

MOMAN in the report said petroleum products demands/consumption in Nigeria grew at a Compound Average Growth Rate (CAGR) of 4.35 percent between 2015 and 2018 despite a drop in 2016. It expects demand for petroleum products to continue to grow in line with the Nigerian economy with average daily consumption of PMS expected to increase to 84 million litres in 2023, from 54 million litres in 2018.

“PMS will continue to account for the highest consumption in forecast period; this will be followed by AGO while the demand for DPK (kerosene) may reduce,” it said.
Analysis of activity for the 12 month period ending December 31, 2018 showed the oil and gas industry under-performed in the NSE All Share Index (ASI) by 27.2 percent while year to date also decreased by -1.38 as at April 1, 2019.

The Nigerian downstream sector, broadly categorised into the refining and marketing segments of petroleum products, has continued to underperform despite opportunities for growth.
Nigeria’s inability to refine adequate petroleum products domestically in order to meet local demand has continued to render the downstream sector vulnerable to foreign exchange volatility, particularly for independent petroleum marketers.

Recent efforts to revive the local refineries have failed as they have struggled to refine up to 30 percent of their installed capacities despite the huge amount ($1.6 billion) reportedly spent on repairs and maintenance over the past 19 years.

The tough business operating landscape in the marketing segment, however, slightly improved in 2016 as petroleum importers enjoyed relative higher margins due to the special exchange rate of N285/$1 (parallel market rate stood at c.N305/$1) provided by the government. Lower oil prices (average of $49.00) meant lower associated cost of importation and higher pump for petrol (from N87 to N185).

This was, however, short-lived as oil prices began to rally in Q4 2016 implying higher landing costs for petroleum marketers. In addition, the unending delay in subsidy payments which limited access to credit facilities from banks while interests accrued on loans that were obtained worsened the financial capability of petroleum marketers to import.

Given these arrears, at different times, marketers cut short the supply of fuel to retail stations, particularly during periods of expected high demand for petroleum products as their operations became unsustainable.

The advent of Dangote Refinery, which is set to produce 0.65mbpd of refined products, and other modular refineries will significantly impact the current landscape in the downstream sector. Upon completion, Dangote Refinery will refine in excess of domestic consumption levels and subsequently export excess refined products to neighbouring African countries.

 

DIPO OLADEHINDE