Downstream Oil & Gas Sector: Upgrading sector bias following market liberalisation

Proshare

Friday, June 03, 2016 4:37PM / Vetiva Research

·         Liberalisation, a game changer

·         Majors well positioned to dominate market

·         FY’16 EBIT forecast raised by 6% across coverage names

·         EPS raised by an average 7% through 2018

·         Ability to source FX will differentiate players


Following the 11 May 2016 announcement of the liberalization of the Downstream Oil & Gas market (See our 12 May 2016 note), we have raised our sector bias to BUY as we expect the development to be more favourable to Majors. We recall that the Government announced that it is liberalising the downstream market to address the persistent fuel shortages that had rocked the country for the past year.

The new framework sets petrol (PMS) at N145 per litre, and any Nigerian entity is now free to import the product subject to existing quality specifications and other guidelines issued by regulatory agencies. In addition, Petroleum Marketers are now required to procure FX from autonomous sources and accordingly, the Petroleum Product Pricing & Regulatory Agency (PPPRA) template will reflect this in the pricing of products. Since then, queues have virtually vanished from retail stations.

We expect economies of scale to come to play with the “survival of the fittest” scale tilting well in favour of Majors given their wide distribution network, reputable brand names and what we believe will be better access to forex with support from upstream sister companies/partnerships. We have upgraded our TP on TOTAL to N225.90 BUY (Previous: N218.77 BUY), MOBIL N181.96 HOLD (Previous: N150.46 SELL) and OANDO to N11.29 BUY (Previous: N9.94 UNDER REVIEW).

Earnings upgrade across coverage names  
We have revised our FY’16 revenue growth by an average 15% y/y (Previous: -5%) with the most growth coming from MOBIL. We now see aggregate EBIT growth of 51% (Previous: 43%) across our coverage names. However, EBIT margins are expected to contract by as much as 100bps across coverage due to the following reasons. (1) Product mix will show increased contribution from low margin PMS (2) We expect OPEX to rise in line with increased throughput. Our coverage EPS is raised by an average 7% through 2018.

TOTAL: Following from strong Q1’16 bottom line performance, we have raised our FY’16 revenue by 10% y/y (Previous: -5%) but EPS is little changed from N20.59 to N20.90.  

MOBIL: After shying away from importation of petroleum products in recent years, management disclosed that it imported products in Q1’16 which supported the 37% y/y revenue growth for the quarter. In light of recent development, we expect MOBIL to actively resume importation and forecast FY’16 revenue growth of 35% y/y (Previous: 1%). EPS is revised upward from N14.33 to N16.13.

OANDO: Although our model only recognizes OANDO’s expected equity share (49%) of Oando Downstream in view of the proposed sale to HV Investments (Helios and Vitol JV), the liberalization of the sector does create some upside for our Sum-of-the-Parts valuation of the Group. However, upside from downstream is watered down by risks to upstream production given recent wave of attacks on oil & gas facilities by militant group the Niger Delta Avengers. We forecast net loss of N7.8 billion in FY’16.



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