It was not too long ago when market analysts feared crude oil prices could drop below $20 for the first time since 1999 as global supply glut rose to a record high between 2015 and 2016.
Today, what sounds like an overly bearish forecast was a near reality for oil producers around the world after crude oil prices had tumbled from as high as $114 per barrel in June 2016 to around $30 per barrel in January 2016, representing a decline of almost 74% at the depth of the price collapse.
Major oil companies around the world suffered billions in loses and Nigerian oil firms were not spared as the eight publicly listed energy companies in Nigeria suffered a combined loss of N39.18 billion in 2016.
Two years later, dooms day prediction failed to materialize, oil prices rebounded sharply, and these 8 companies reported a combined profit after tax in 2017 and 2018 totalling up to N222.64 billion, marking one of the biggest turnarounds in the oil industry.
The eight listed oil firms in the Oil and Gas sector include Seplat, Oando, Total, Conoil, Forte Oil, Eterna Oil, MRS Oil and 11 Plc.
“The price collapse was truly a big scare, many oil companies were forced to lay off workers to reduce their overheads as revenue declined rapidly between 2015 and 2016. The pain seems to be in the past now as profits have returned on the back of higher oil prices in the market today,” said Jeremiah Ejemeyovwi, an energy economist.
“In 2016, it almost felt like things will never recover, many forecasted that the days of crude oil at $100 per barrel is over and $20-$30 per barrel may become the new normal but now with the benefit of hindsight we say they were maybe $40 below an accurate forecast,” Ejemeyovwi added.
In 2017, average crude oil prices had risen from $43 in 2016 to $54.09 in 2017, helping the big 8 move from a combined loss position of N39.18 billion in 2016 to N127.5 billion in 2017 as the industry benefited both from rising prices and government tax credits. The recovery continued the following year as the industry profit rose to N95.11 billion, helped by rising crude oil prices which had reached an average price of $72.66 but hurt by a decline in tax credits for industry players.
While the effect of the rally in crude oil prices gives soothing relief to the squeezed profit margins of upstream energy firms, the downstream oil companies are left feeling the pain of the price recovery. At year end in 2016, indigenous oil producers, Seplat and Oando posted a combined loss of N70.77 billion compared to N31.59 billion in earnings for downstream operators who generally benefit from lower oil prices, helping to reduce to industry loss in 2016 to N39.18 billion.
As energy prices recovered, Oil Energy & Production companies (E&P) profits for 2017 and 2018 rose in line with the increase in crude prices reaching a total of N222.64 billion at the end 2018 even as downstream profits declined by 17.59 percent annually from 31.59 billion in 2016 to N21.45 billion in 2018 on the back of higher oil prices.
However, gradually declining from its 3 year high of $84 in October 2018, energy companies are once again becoming worried. At the end of the first quarter of the year, the average oil price had declined by 8.01 percent year on year from $70.86 to $65.18 which led to Nigerian oil companies on the stock exchange posting a combined profit of N16.96 in the first quarter of 2019, bringing annualized earnings of these companies is at N67.8 billion which is almost N30 billion less than the FY earnings of 2018
Q2 results are expected be released in the coming weeks and some market analysts have forecasted that the 8 companies are set to post lower profits year on year as oil prices have declined by 8.26% from last year’s average price of $75.13 per barrel to $68.9 recorded in the second quarter of 2019.
However, not all market analysts are worried that the price decline in the past few months should be a major cause of concern for oil investors.
“The outlook on oil prices is considerably stable into the future and OPEC+ has maintained a body language that tells us they are ready to cut output in order to keep oil prices away from 2016 levels. This is a good thing for E&P companies as it opens up an opportunity to hedge oil prices over a considerable length of time. With a stable hedge, these companies can maintain profitability going into the future.” Obinna Uzoma, a Lagos-based economist explained to BusinessDay.
Whether or not another storm sets in the oil sector, oil companies will be expected to fair better during the next bearish market as efficiency levels have significantly improved since the last price crash.
IFEANYI JOHN
