Anticipation that gradual ease of lockdown will increase spending on transportation spurs oil and gas stocks
Oil and gas firms listed on the main and premium boards of the nation’s equity market reported a gain of about N40.597 billion in the month of October 2020, as the country continues gradual ease on lockdown over coronavirus pandemic.
Checks by New Telegraph revealed that the oil and gas sub-sector gained N40.594 billion or 10.22 per cent to close at N437.733 billion in market capitalisation on October 31, in contrast to opening figure of N397.139 billion at the beginning of trading on October 2.
Market watchers believe the investors are taking positions on oil and gas stocks following anticipation of fair Q3 results being declared by the oil firms and also anticipation that gradual ease of lockdown will increase spending on transportation.
The consequences of the coronavirus (COVID-19) outbreak had threatened the resilient outlook for Nigeria’s economy mainly supported by the oil and gas sector. A recent survey conducted by REACH Technologies, a Nigeria- based fintech, on behalf of FBNQuest, indicates a substantial decline in household spending on transportation.
According to respondents, spending on all forms of road transportation – private and public modes – declined by around -20 per cent y/y.
The decline in aviation fuel consumption is even more severe given the closure of the international airspace to passenger flights and halting of commercial domestic flights, the survey did not extend to gauging spend on air travel during the pandemic for obvious reasons.
Given relatively softer petroleum products demand in H1’20, the near term outlook for the sector is certainly subdued. However, long term prospects appear more promising.
The downstream oil and gas business is typically a low margin one. However, other factors, mainly constraining policies, have led to historically low investments in the sector over the last decade. “In our view, the fortunes of the sector could change with the growing possibility of full pricing deregulation.
“We believe the re-introduction of a market-friendly pricing template for gasoline in March and the central bank’s current attempt at unifying foreign exchange rates increase the prospects of the end of mandated gasoline price ceilings.
“The newly adopted pricing template takes into consideration several factors such as the petroleum product cost and the foreign currency conversion rate at which oil marketing companies import petroleum products. “We expect the recent adjustment of the Naira official FX rate from N306/US$ to N380 to test the durability of this template within this quarter.
Assuming all other inputs remain constant on the most recently published PPPRA gasoline pricing template, an adjustment of the FX rate assumption to current levels raises ex-depot prices by approximately 20 per cent.
“Competition within major marketers is growing with new ownership/management. Ardova (formerly Forte Oil, not covered) and 11 Plc (formerly Mobil Oil, not covered) are leading the charge,” survey said.
In Q1, Ardova and 11 Plc became the leading distributors of gasoline (23.8 per cent) and aviation turbine kerosene (27.2 per cent) respectively, positions previously occupied by Total Nigeria (Total).
“In the event that the FG decides to continue with the new pricing template, effectively deregulating the sector, we see competition intensifying over the long term.
Under this scenario, reach and distribution will be a key competitive advantage. As such, Total and Ardova are presently in the best position to capture growth. “In the near term, we expect the industry to take a hit from measures adopted to stem the spread of the COVID-19 pandemic.
“The implementation of a total lockdown, followed by a partial economic re-opening in key states – Lagos, Ogun and the FCT – should result in declining gasoline consumption in Q2.
“We estimate a gasoline consumption contraction of between 40-45 per cent in Q2 even though product importation grew 8 per cent y/y to 5.3bn litres in the prior quarter,” the report noted.