Outlook 2021: How Sectors of the Economy Fared in 2020 - Oil and Gas Sector

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Thursday, February 18, 2021   /04:40 AM / By Proshare Research/ Header Image Credit: EcoGraphics


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The Oil and Gas sector suffered a twin hit in 2020. Plunging oil demand brought about by the COVID-19 and the price war between Russia and Saudi Arabia further worsened the financial position of an already vulnerable sector. The fall in oil prices heavily impacted the Nigerian economy. The sector accounts for over half of the economy's revenue and is the highest forex earner of the country.

 

In Q1 the sector grew by +5.06%, at this time, the sector was yet to feel the impact of the pandemic. However, Q2 and Q3 2020 recorded a consecutive decline in growth. Its contribution to GDP has also seen a steady decline from the beginning of the year. In Q3 2020, its contribution to GDP stood at +8.73%. Comparing the latest result released by NBS to Q3 2019, growth of the sector declined Y-o-Y by -13.89% while its contribution to GDP declined by -10.64% Y-o-Y (see Chart 37). 


Chart 37: Oil & Gas Sector Growth and Contribution to GDP 2014 - 2020 (%)

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Source: NBS, Proshare Research

 

Case Study

 

Seplat Petroleum Development Company (SPDC)

 

SPDC, an upstream player in the Nigerian oil and gas sector which is listed both on the Nigerian Stock Exchange and London Stock Exchange. The latest result of the Company shows the revenue and profit of the Company are recovering from the severe impact of the COVID-19 pandemic which it recorded in Q2 2020. Also, technical analysis of the Company, i.e., its share price movement was heavily impacted as year-to-date (YTD) performance of the share price recorded a -32.99% decline.

 

At the beginning of the year, the share price of the company was well above N500, in July 2020 prices went as low as N312. With the gradual reopening of both the global and domestic economy, the share price of SPDC has also picked up although still below the pre-COVID-19 era (see Chart 38).

 

Chart 38: SPDC's YTD Share Price Movement as of 30 Nov. 2020

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Source: NSE, Proshare Research

 

SPDC' Revenue

In Q1 and Q2 2020, the revenue of the company declined when compared to Q1 and Q2 2019.  However, Q3 2020 results show growth even higher than what was recorded in Q3 2019.

 

Its revenue grew by +47.27% Q-o-Q to N55.52bn for Q3 2020, this was against N37.69bn recorded in the preceding quarter. On a Y-o-Y basis, revenue increased by +29.39%, from N42.91bn in Q3 2019. This was majorly driven by a +37.61% Y-o-Y increase in crude oil sales, while gas sales grew marginally by +2.84% (see Chart 39). The company did not record revenue from gas processing as it has ceased to process gas for Nigerian Petroleum Development Company (NPDC)


Chart 39: SPDC's Revenue 2019 - 2020 (N'bn)

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Source: SPDC's Financial Statement, Proshare Research

 

SPDC' Profit Before Tax

The latest result released by the company shows profit before was below pre-pandemic levels. On a Q-o-Q basis, PBT significantly improved in Q3 2020, PBT grew by +76.77% Quarter-on-Quarter (Q-o-Q), from a loss of N18.73bn recorded in Q2 2020 to a gain of N4.35bn. This was majorly driven by a +180.20% growth in operating income (see Chart 40).

 

Chart 40: SPDC's Profit/Loss Before Tax 2019 - 2020 (N'bn)

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Source: SPDC's Financial Statement, Proshare Research

 

SPDC Current Ratio

Its current ratio for 2020 recorded a decline in the three quarters consecutively. In Q3 2020, the current ratio declined to 1.43 from 1.52 in Q2 2020. On Y-o-Y, the current ratio also declined from 2.59 in Q3 2019 to 1.43 in Q3 2020. Although the results released by the company show a decline in its current ratio, the current ratio is still above 1.5 which is the preferred current ratio for an oil & gas company. This shows indicated that the company can still meet up with its short-term obligations (see Chart 41).


Chart 41: SPDC's Current Ratio 2019 - 2020

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Source: SPDC's Financial Statement, Proshare Research

 

SPDC Quick Ratio

The quick ratio for Q3 2020 declined to 1.26 from 1.36 Q2 2020. Y-o-Y, its quick ratio also recorded a decline from 2.27 in Q3 2019. For a player in the upstream segment of the oil and gas sector, which is heavily invested in fixed assets, a quick ratio of 1.26 shows the company has a well-managed liquidity position (see Chart 42).


Chart 42: SPDC's Quick Ratio 2019 - 2020

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Source: SPDC's Financial Statement, Proshare Research

 

SPDC Leverage Ratio

The leverage ratio of the company has been on a steady path of growth since 2019. This is because of the steady increase in total debt of the company. The leverage ratio for Q3 2020 declined to 0.41 from 0.48 in Q2 2020. This was driven by a -8.90% Q-o-Q decline in total debt. On Y-o-Y comparison, the debt-to-equity ratio (leverage ratio) increased from 0.20 in Q3 2019 to 0.41 in Q3 2020, this was also driven by a +139.60% Y-o-Y significant increase in total debt of SPDC (see Chart 43).


Chart 43: SPDC's Leverage Ratio 2019 - 2020

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Source: SPDC's Financial Statement, Proshare Research


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