Thursday, October 03, 2019 /04:50 PM /Vetiva Research / Header Image Credit: economictimes
Q3'19 Earnings Preview
Oil prices have been volatile since the start of the third quarter, driven by demand-inclined factors and unprecedented disruptions in world supply. In early August, Brent price plunged to a seven-month low of $57/bbl, after escalating trade tensions between Washington and Beijing intensified concerns over slowing oil demand.
Meanwhile, in mid-September, a short-lived surge drove Brent price to a peak of $70/bbl, after attacks on Saudi's oil infrastructure drained about 5.7 mb/d-5% of world crude supply-from the oil market. Following subsequent news of the imminent restoration of Saudi's damaged facilities, Brent swiftly pared gains to find stability around the $63/bbl mark towards the end of September. So far in 2019, Brent price has averaged $65/bbl, at par with our forecast for the year.
Although the Nigerian National Petroleum Corporation (NNPC) is yet to release its Monthly Performance Data for July and August, preliminary data from OPEC shows that Nigeria's oil output (excluding condensates) averaged 1.82 mb/d in the two-month period. With the inclusion of condensates, Nigeria's crude output is expected to average 2.12 mb/d, indicating an improvement from 1.98 mb/d published by the National Bureau of Statistics (NBS) in Q2'19.
Nonetheless, we highlight that Nigeria's crude production remains plagued by crude theft incidence. For context, Nigeria's average crude output in Q2'19 came in at 1.98 mb/d (almost equivalent to Q418 average), despite increasing output from the 200 kb/d Egina offshore field that came onstream in January 2019.
For the downstream segment, we envisage that sales of petroleum products will moderate further q/q across our downstream coverage in Q3'19, given the downstream trend where Q3 sales always emerge the weakest. However, we expect the lubricants segment to post flattish to modest q/q growth, amidst the drive by major oil marketers to support their margins through higher lubricants sales.
Due to their relatively high exposure to debt (mainly bank overdrafts), we expect high finance charges to further impact Q3'19 earnings of major oil marketers (TOTAL and FO).
Seplat Petrol. Devt. Com. Plc (SEPLAT)
Lower crude prices to drag oil revenue
We expect Q3'19 oil output to improve to 1.6 million bbls (Q2'19: 1.4 million bbls), underpinned by increased drilling activities during the quarter. However, we estimate a marginal q/q decline in oil revenue to $97.6 million (Q2'19: $98.3 million), as we expect average realised oil price to come in weaker at $61/bbl (Q2'19: $69/bbl.
Elsewhere, we project that Seplat's total gas output will edge higher to 14.0 Bscf (Q2'19: 13.4 Bscf), following the expansion of its Oben gas processing plant. In the same line, we expect average realised gas price to rise to $2.9/Mscf (Q2'19: $2.28/Mscf), translating to a gas revenue of $41 million (+34% q/q).
However, we expect all profitability margins to come in weaker in Q3'19, as the gas tolling income recorded in Q2'19 ($67 million) created a strong base for comparison. Notably, we expect gross and operating margins to decline to 51% (Q2'19: 64%) and 38% (Q2'19: 54%) respectively.
Meanwhile, we expect Q3'19 finance charges to come in at $8 million (Q2'19: $9 million), resulting in a profit before tax of $47 million (-53% q/q). That said, we expect after-tax profit to decline to $36 million in Q3'19 from $87 million in Q2'19.
Total Nigeria Plc (TOTAL)
Finance charges to further suppress earnings in Q3
We expect a modest y/y growth in Q3'19 sales of petroleum products to N58.3 billion (+1% y/y), translating to a 3% q/q drop, in line with industry trend of weaker sales volume in Q3.
Meanwhile, we expect TOTAL's lubricants operations to post an impressive growth of 7% y/y to N13.6 billion in Q3'19, despite the stiff competition in the lubricants sphere. However, on a q/q basis, this indicates a paltry growth of 1%.
We expect relatively high landing costs of petroleum products to further weigh on margins in Q3'19. That said, we expect Q3'19 gross margin to moderate to 11.9% (Q3'18: 13.8%). In a similar vein, we expect operating margin to come in lower at 3.2% (Q3'18: 5.7%).
Given its high exposure to leverage (mainly bank overdrafts), we expect finance costs to further suppress TOTAL's earnings in Q3'19. For context, we expect Q3'19 finance charges to come in at N1.9 billion (Q3'18: N1.3 billion), 83% of our Q3'19 estimate for profit before interest and tax.
Following the aforementioned, we expect after-tax earnings to plummet y/y to N335 million (Q3'18: N2.0 billion), translating to a 9M'19 profit after tax of N465 million (9M'18: N7.7 billion).
Forte Oil Plc (FO)
Lubricants operations to post decent growth in Q3
We expect FO's sales of fuels to advance 21% y/y to N35.7 billion in Q3'19, riding on the expansion of its retail network. However, on a q/q basis, we expect fuels sales to moderate 1%.
Likewise, we foresee a 28% y/y jump in lubricants sales to N4.3 billion in Q3'19, largely supported by increasing demand for its newest synthetic lubricants brand (Havoline Oils).
Meanwhile, similar to our expectation for TOTAL, we expect Q3'19 gross margin to fall to 6.4% from 8.4% recorded in Q3'18, dragged by the persisting high importation costs of regulated products. In like manner, we expect operating margin to moderate to 1.6% in Q3'19 (Q3'18: 2.4%), despite our expectation of improved operational efficiency (operating expenses/sales ratio- Q3'19E: 6.2%, Q3'18: 7.4%).
In Q2'19, FO's earnings were dragged by high finance charges. We expect a similar fate to unfold in Q3'19, as we expect finance costs to come in at N799 million (-24% y/y), culminating in a profit before tax of N81 million; nonetheless, this implies an improvement from a loss before tax of N14 million in the corresponding quarter of 2018.
11 Plc (MOBIL)
Rental income to support Q3 earnings
We expect MOBIL's Q3'19 revenue to come in at N46.5 billion, 19% higher than the figure posted in Q3'18. Our forecast, however, shows a flattish q/q performance. Meanwhile, we expect gross margin to come in weaker at 8.4% (Q3'18: 8.8%), resulting in a gross profit of N3.9 billion (Q3'18: N3.4 billion).
Furthermore, we expect operating expenses to inch up to N2.7 billion in Q3'19 (Q3'18: N2.6 billion). However, unlike other downstream players, MOBIL's operations remain partly shielded from the harsh downstream environment, as rental income from the company's real estate property continues to support its earnings. In Q3'19, we expect the other income line (mainly rental income) to print at N2.1 billion (Q3'18: N2.1 billion), culminating in an operating profit of N3.3 billion (Q3'18: N3.5 billion.
Another major plus for MOBIL is its debt-free balance sheet, which erases the pressure of finance charges on earnings. All in, we expect Q3'19 profit after tax to come in at N2.2 billion (Q3'18: N2.4 billion.