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Forte Oil Plc: Investors in Frosty Step up

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  • Forte Oil Plc: Investors in Frosty Step up

Investors in the Nigerian Stock Exchange, NSE, last week, took some frosty steps towards the stock of one of Nigeria’s leading indigenous oil sector conglomerates, Forte Oil Plc (FO), moving the share price by 15.72 per cent in just two consecutive trading dates, the fastest since the company’s last results announcement, first quarter 2017 (Q1’17).

However, it remains to be seen how far they can go this week in sustaining their bull run, as it closed flat last Friday, just a day after the two-day push.

The investors have been, rather faint-hearted over the company’s Q1’17 results on the back of persisting pressures from the operating environment.

Consequently, a near price stagnation and some reversal of gains have been recorded since mid last month until last week’s short-lived bull stunt.

Stockbrokers believe the push last week was a fall out of the pervading band wagon effect of the general bullish trend that hit the market three weeks ago on the heels of many impressive corporate results announcement and the general expectation that economic rebound was around the corner.

But same brokers are also foreseeing profit taking reversing the capital gains in most of the stocks any moment from this week and this may also effect FO it it moves further up, judging from its fundamentals.

Indeed some investment analysts reversed their target price (TP) for FO stock based on both the sector outlook and the company’s result.

Q1’17 Performance Review

Forte Oil Plc (FO), one of the Nigeria’s leading indigenous oil sector conglomerates, reported a 7.0% year-on-year (YoY) decline in its first quarter 2017 (Q1’17) turnover to N33.0 billion at the backdrop of a significant sales decline in its cash cow product line, premium motor spirit (petrol) division.

However, the company recorded a strong revenue growth in the Power (+119% YoY) and Lubricant (+50% YoY) segments against Q1’16 records of 21% and 30% respectively.

It is believed the Power and Lubricant segments’ performance was buoyed by stronger pricing in the divisions.

Consequently the increased contributions from the higher margin businesses, beefed up gross margin for the period to 17% from 13% in Q1’16.

The company’s earnings also got a boost from conservative OPEX headings with the impact of the improvement in gross margin further strengthened by a sizable improvement in operating expenses as Earnings Before Interest and Tax (EBIT) margin rose to 9.5% as against Q1’16 position of 6.8%; and FY’16 position of 6.3%).

OPEX to Sales ratio was down to 8.0% (Q1’16: 8.3%; FY’16: 8.5%) on the back of a sizable reduction in freight costs (-45%).

Although the company’s operating performance was quite impressive especially in light of the tough operating environment, Q1’17 bottom line received an additional boost from a lower effective tax rate of 8.1% as against Q1’16 and FY’16 rates of 26.7% and 45.9% respectively. Consequently, the company reported an after-tax profit of N1.8 billion in Q1’17 – 98% YoY growth.

2017 Outlook still hazy

2016 had been a mixed bag of fortune for the petroleum marketing sector as retail price mark up earlier in the year heralded opportunity for bottom-line growth. But this came at the backdrop of a pressured purchasing power forcing down general demand while impacting volume of sales in the petroleum products adversely.

This situation was further compounded by the Naira devaluation along with foreign exchange supply constraint, a development which effectively knocked out the ability of oil marketers to import and sale their products. The situation was also compounded by the perennial indebtedness of government to the marketers on the outstanding subsidy claims which compounded the debt burdens of the marketers to their bankers. FO operated under this industry challenges last year.

Though some analysts see industry dynamics likely to be different this year given the central bank’s increased ability and willingness to provide forex, concerns regarding the current pricing template exist. Whilst the government is not expected to increase pump price some stakeholders in the template are demanding increased margin. At least the logistics group has gotten away with a promise to effect such without concomitant increase in pump price. Consequently, the federal government will persist with its modulated pricing mechanism for as long as it is possible. If this is not sorted out participation of FO and other marketers in importation of products may still be restricted through the year.

Some analysts believe that since local refining capacity remains lackluster increased competition and lower unit volume sales would continue.

In addition, diesel, kerosene and aviation fuel prices have somewhat moderated relative to the last quarter. This, analysts believe, would lead to a significant drop in revenue from FO’s petroleum division to N100.1 billion for full year 2017 (FY’17).

Power segment to remain up-beat

Power segment to benefit from overhaul, improved gas supply and recent reforms.

A reasonable level of stability has returned to the gas supply and consequently power generation sector at the backdrop of the overhauled and increased facility capacity run by FO Power.

Consequently, the Management has set a capacity utilisation target of 70-85%. Some analysts see revenue from the power division skyrocketing to N23.7 billion with the sector’s contribution to overall revenues rising to 16% from 9% in FY’16.

But it is not yet clear how Settlement issues would be resolved this year though Federal Government appears to be intervening in the power sector liquidity crises. Outstanding debt for 2016 was estimated at N7.7 billion as distribution companies (Discos) settled only N2.7 billion from a total invoice of N10.4 billion. It is only hoped that the Power Assurance Guarantee should address this situation when it eventually kicks off.

Chemicals, lubricant segment still challenged

Some analysts had hoped that with a sustained uptick in crude oil prices, activities would pick up in the upstream sector where FO chemical business is hinged. But this has not yet happened, five months into the year and season of oil price uptick.

The Exploration & Production companies are believed to be frosty-footed on capital expenditure and E&P due to equally frosty outlook of the implementation of the country’s new energy policy initiatives.

But FO’s management, according to the observers, is believed to be on the pursuit of opportunities with new and existing clients. However, due to the many uncertainties it is estimated that a 25% drop in revenue may be recorded from its Production Chemicals division to N1.9 billion during the year.

Meanwhile the lubricant business segment is expected to continue to benefit from the Naira devaluation which curbed imports from Asia and allowed local producers to increase prices and run on better margin. Therefore, over 30% rise in revenue from this segment is expected in the year.

Analysts’ Projections and Valuation

Against the backdrop of a mixed operating environment analysts at Cardinal Stone Partners Limited, a Lagos based investment house, has this to say concerning the outlook for FO in 2017: “We expect aggregate revenue to remain flat with the anticipated rise in revenue from the Power and Lubricant divisions just sufficient enough to stem the weakness in contributions from the Fuel and Production Chemicals division. We therefore project a 5% YoY drop in revenue to N141.2 billion.

“Production costs as a percentage of sales dropped to 82% from 87% in Q1’16 and barring any material devaluation, we expect gross margin to improve to 18% from 14% in FY’16.

“Net finance costs should rise by 35% to N5.8 billion and could increase further if the company is able to raise the additional tranches of its N50 billion bond issuance program within the year. We think new capital raising requirements may be on the horizon.

“The Nigerian Electricity Regulatory Commission (NERC), is set to release a minimum recapitalization level required to be met by core investors in the power sector. Details are sketchy but investors that fail to meet this criterion will need to shore up the capital base with debt or equity contributions.

“We project a 129% rise in net profit to N6.6 billion. We have revised our target price to N110.17 (Previous: N202.87) due to the impact of a reduction in aggregate revenue and earnings growth over our five-year forecast horizon.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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