Oil & Gas Sector Update - Capitalising on Market Dislocations

Oil & Gas
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Wednesday, September 28, 2016 10:02am / FBNQuest Research

Significantly improved fundamentals
Nigerian major oil marketers have recorded significant gains in 2016, a year in which other sectors continue to struggle. Mobil Oil Nigeria (Mobil) and Total Nigeria (Total) posted average sales and EPS growth of 44% y/y and 161% y/y respectively in H1 2016.

The primary driver behind the sales growth was market share gains due to comparatively better access to fx for product importation compared with independent marketers.

Furthermore, the re-pricing of gasoline in May supported growth in Q2. The Petroleum Product Pricing Regulatory Agency (PPPRA) raised the fx assumption in its pricing template by more than 40% to N285/US$ to better reflect market realties.

This led to a q/q improvement in gross margin for both names during the quarter, thanks to relatively cheap inventory.

Slower H2 growth unlikely to hurt full year 2016 performance
In addition to topline growth, the government’s decision to adopt a price modulation policy, thereby discontinuing the petroleum subsidy regime, improved balance sheet efficiency for both firms.

Total delivered the stronger growth of the two, with sales up 30% y/y while EPS grew by 271% y/y. Mobil’s topline and EPS grew by 58% y/y and 52% y/y respectively. We expect slower topline growth and a contraction in gross margin, down to normalised levels, in H2, more so for Q4, following the floating of the naira in June.

Nonetheless, the impact of slower growth in Q4 is likely to be negligible to overall growth given that H2 2015 was a difficult period for the sector. As such, we forecast an average sales and EPS growth of 44% y/y and 165% y/y respectively in 2016E.

Sector outperforming the broader market
To an extent, increasing M&A activities this year contributed to the improved visibility the sector currently enjoys. However, we believe the extent of the strong positive earnings surprises recorded in H1 by both Total and Mobil is the principal driver behind the significant improvement in investor sentiment.

Year-to-date, Total’s share price has doubled (+104%), outperforming both oil & gas peers and the NSE ASI by 74% and 105% respectively. In addition to the strong EPS growth delivered, the market’s reaction was also boosted by a surprise N3.00 interim dividend in Q2, which implied a dividend yield of 2% at the date of the announcement.

The stock is up 65% since the Q2 2016 results were published. Total typically declares interim dividends in Q3. Mobil shares are also up, by 12% ytd.

Downgrading Total to Underperform
Given the magnitude of the recent rally in Total shares we have downgraded our rating on Total from Neutral to Underperform. Our recommendation on Mobil is Neutral.

Although we still expect Total to deliver strong results in H2 2016 on the back of market share gains, we find the market disproportionately pricing in these gains while neglecting similar benefits for Mobil.

An average dividend yield of 8.9% in 2016E for our coverage universe is quite attractive. Our price target for both stocks are unchanged. At current levels, we see a downside of -27% for Total.

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