Forte Oil Plc - Harnessing the Benefits of a Liberalised Market Regime

Proshare

Friday, August 12, 2016 3:21pm /CardinalStone Research

Following Forte Oil's H1'16 results, we met with management to align expectations and outlook for the company. The key highlights of our meeting are summarized below;

Access to FX key to H1 performance
Forte Oil's downstream segment helped cushion revenue in H1'16 at the time that revenues from the power segment were abysmally affected by unavailability of gas as a result of vandalism.  We understand that volume growth was the primary driver behind the improved sales during the period as independent marketers were unable to meet import allocations as result of FX shortages.


The company took full advantage of available FX supply from related entities, following attempts by the federal government to encourage upstream companies to supply FX to major marketers. Looking ahead, we believe FO's access to FX (at close to the official rate) is advantageous amidst FX constraints.

Lube sales soar
Due to currency weakness, importers of lubricants (lubes) have raised prices to cover for the increased costs. This has forced consumers to switch to local variants and the effect of this switch in consumer preference towards local variants reflected in the company's six-month earnings. Sales from the lubricants division grew by 64% to N5.2 billion with associated volumes rising by 61% to 10.8 million litres.

The currency remains under pressure at both the official and autonomous market and this would only mean more pressure on imports, consequently pushing demand towards local products further north. The company manufactures its lubricants at its blending plants in Apapa and Ghana.

FO, amongst other big local players in the lubricant industry, stands to benefit further from the improved demand going forward. Compared with white products, lubes are a higher margin product.

Power Division: Reeling from fuel supply disruptions
The persistent gas shortages that have rocked the year thus far again came to the fore in FO's six-month earnings. Revenue for the power division was down by 10% YoY to N4.4 billion.  QoQ performance revealed significant production constraint in Q2 with revenue declining by 54% to N1.4 billion.

About 80mmscfd of gas is needed to power each turbine (240mmscfd in total), but pipeline vandalism has seen supply drop to as low as 30mmscfd. No firm guidance was provided with respect to when gas supply will return to normalcy. Recent comments by the Minister of Power, Works & Housing that power supply will be steady when the bombings stop affirm the company's position.

Nonetheless, we note attempts at converting the power plant to use alternative sources of fuel supply i.e. converting the power plant to use LPFO, diesel, kerosene as well as gas. However, the current electricity tariff regime make this proposition unfeasible.

Other titbits
FO announced plans to raise N50 billion through the debt capital market in the second half of the year to finance its expansion programme. This transaction would be in tranches, with the company raising a maximum of N15 billion in the first tranche. Proceeds from the capital raising exercise would be applied towards expansion projects.

FO intends to add about 30 - 40 new filling stations annually to its portfolio over the next five years (18 have been added so far this year). A portion of the proceeds will also be utilized in improving its working capital position which is negative as at H1'16.

Valuation
Following the earnings outperformance, we have raised our estimates to reflect the Q2 run rate. Our FY'16 revenue is now revised upward to N202 billion (Previous: N158 billion) whilst EPS is raised to N6.60 (Previous: N3.13).

In our view, the liberalisation of the downstream market has improved the scope for Majors to boost earnings in the near term. The counter presents a 21% upside to our TP of N202.87 and thus we have a "BUY" recommendation on the stock.

Related News
1.       FO Declares N2.23 billion PAT in Q2 2016 Result SP N175.50k
2.      Dr. Mrs. Grace Ekpenyong Retires As a Non-Executive Director from the Board of Forte Oil Plc
3.      Forte Oil Q1 16 - Fair value of share is N92.39 SELL   
4.      FO declares N954.24 million PAT in Q1 2016 Result SP N275.12k
5.     
MOMAN elects Forte Oil Plc GCEO Akin Akinfemiwa as Chairman
6.      FO Holds 37th AGM on 22nd April 2016
7.      FO Joins United Nations Global Compact Corporate Responsibility Initiative

8.     Forte Oil Board approves 2015 accounts - N5.8bn PAT, N3.45k Div

9.      Forte Oil Plc Holds Investors Conference; Strategizes on Diversification of Revenue Base

10.  FO declares N4.29 billion PAT in Q3 15 result SP N270.00k 

11.   FO declares N2.53 billion PAT in Q2 15 result SP N188.00k 

12.  FO declares N783.1million PAT in Q1 15 result SP N204.25k 

13.  FO declares 250k dividend per share in 14 Audited result SP N222.00k 

14.  Forte Oil Plc Issues Update on Bonus Issue to apply same March 2016   

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