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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.

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Crude Oil

Goldman Sachs Revised Down Brent Oil Forecast for Q3 2021

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Brent crude oil - Investors King

Goldman Sachs Group, an American multinational investment bank and financial services company, has revised down its Brent oil price projection for the third quarter (Q3) of 2021 by $5 from $80 per barrel previously predicted to $75 a barrel following the surge in Delta variant COVID-19.

The investment bank predicted that the surge in Delta variant COVID-19 cases will weigh on Brent oil price in Q3 2021 even with the expected increase in demand.

However, the bank projected a stronger second half of 2021, saying OPEC+ adopted slower production ramp-up will offset 1 million barrel per day demand hit from Delta.

Goldman said, “Our oil balances are slightly tighter in 2H21 than previously, with an assumed two-month 1 mb/d demand hit from Delta more than offset by OPEC+ slower production ramp-up.”

The leading investment banks now projected a deficit of 1.5 million barrels per day in the third quarter, down from 1.9 million barrels per day previously predicted.

Therefore, Brent crude oil is expected to average $80 per barrel in the fourth quarter, a $5 increase from the $75 initially predicted and the bank sees 1.7 million barrels per day in the fourth quarter.

The oil market repricing to a higher equilibrium is far from over, with the bullish impulse shifting from the demand to the supply side,” the bank said.

Goldman added that even if vaccinations fail to curb hospitalisation rates, which could drive a longer slump to demand, the decline would be offset by lower OPEC+ and U.S. shale output given current prices.

Oil prices may continue to gyrate wildly in the coming weeks, given the uncertainties around Delta variant and the slow velocity of supply developments relative to the recent demand gains,” it said.

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Crude Oil

Oil Extends Gains on Thursday on Expectations of Tighter Supplies

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Crude Oil - Investors King

Oil prices rose about $1.50 a barrel on Thursday, extending gains made in the previous three sessions on expectations of tighter supplies through 2021 as economies recover from the coronavirus crisis.

Brent crude settled at $73.79 a barrel, up $1.56, or 2.2%, while U.S. West Texas Intermediate (WTI) settled at $71.91 a barrel, rising $1.61, or 2.3%.

“The death of demand was greatly exaggerated,” said Phil Flynn, senior analyst at Price Futures Group in Chicago. “Demand is not going away, so we’re back looking at a very tight market.”

Members of the Organization of the Petroleum Exporting Countries and other producers including Russia, collectively known as OPEC+, agreed this week on a deal to boost oil supply by 400,000 barrels per day from August to December to cool prices and meet growing demand.

But as demand was still set to outstrip supply in the second half of the year, Morgan Stanley forecast that global benchmark Brent will trade in the mid to high-$70s per barrel for the remainder of 2021.

“In the end, the global GDP (gross domestic product) recovery will likely remain on track, inventory data continues to be encouraging, our balances show tightness in H2 and we expect OPEC to remain cohesive,” it said.

Russia may start the process of banning gasoline exports next week if fuel prices on domestic exchanges stay at current levels, Energy Minister Nikolai Shulginov said, further signalling tighter oil supplies ahead.

Crude inventories in the United States, the world’s top oil consumer, rose unexpectedly by 2.1 million barrels last week to 439.7 million barrels, up for the first time since May, U.S. Energy Information Administration data showed.

Inventories at the Cushing, Oklahoma crude storage hub and delivery point for WTI, however, has plunged for six continuous weeks, and hit their lowest since January 2020 last week.

“Supplies fell further by 1.3 million barrels to the lowest level since early last year, theoretically offering support to the WTI curve,” said Jim Ritterbusch of Ritterbusch and Associates.

Gasoline and diesel demand, according to EIA figures, also jumped last week.

Barclays analysts also expected a faster-than-expected draw in global oil inventories to pre-pandemic levels, prompting the bank to raise its 2021 oil price forecast by $3 to $5 to average $69 a barrel.

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Energy

RES4Africa, Enel Green Power and the European Investment Bank Encourage African Youth to Find Green Energy Solutions to Community Challenges

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European Investment Bank - Investors King

The second Micro-Grid Academy Young Talent of the Year Award today acknowledged energy innovation from across Africa that can accelerate the green transition and improve economic opportunities.

Backed by the RES4Africa Foundation, Enel Green Power and the European Investment Bank the yearly competition encourages young energy entrepreneurs from across the continent to develop projects that expand enegy access, enable greater use of renewable eneryg and accelerate sustainability.

Young finalists from across West, East and Southern Africa presented their innovative ideas to expert judges from the RES4Africa Foundation, Enel Green Power and the European Investment Bank.

The 2021 edition of the Micro-Grid Academy Young Talent of the Year Award has arrived to its final steps. Today, the eight young African innovators selected as finalists out of nearly 50 applicants presented to the international public their disruptive projects for the first time. The presentation took place during the event Public Competition for the MGA Young Talent of the Year 2021 finalists, and represents a preparatory step for the announcement of the three winners, that will be held the 28th of September in the framework of the Precop26.

The three entities strongly believe that renewables and innovation will be the response to the climate changes and energy deficit that Africa faces. In this deeply needed path towards its just energy transition, the continent can and must rely on one of its most precious resources : its youth. With this joint initiative, RES4Africa, Enel Green Power and the European Investment Bank put together their efforts to support those young people from all Africa countries who are committed and motivate to create a real change in their communities.

These are the finalists identified by the selection committee, who publicly presented their project ideas and among which there are the three future winners:

• Adekoyejo Ifeoluwapo Kuye, 26 years old from Nigeria, introduced a project focused on a sustainable cold chain for food;

• Alex Makalliwa, 31 from Kenya, presented his initiative of electrical tricycles for heavy loads in Nairobi;

• Benson Kibiti, 34 also from Kenya, performed an overview on an PV-powered trolley for heating up food and providing power;

• Lucas Filipe Tamele Junior, 24 from Mozambique, focused on waste management, biofertilizers and biogas;

• Matjaka Ketsi from Lesotho is 28, and presented an initiative aiming at building solar-powered Learning Centres for rural communities;

• Shedrack Charles Mkwepu is instead 26 and comes from Tanzania: he designed a system that allows farmers to control irrigation and other soil parametres from a mobile phone;

• Carol Ofafa, 32 from Kenya, proposed the installation of a PV system for health facilities;

• Kumbuso Joshua Nyoni, 34 from Zambia, envision an integrated Water-Food-Energy model for PV power and a water pumping system.

The webinar benefitted from the presence of Salvatore Bernabei, President of RES4Africa and Head of Enel Global Power Generation, as well as of Maria Shaw Barragan, Director of Lending in Africa, Caribbean, Pacific, Asia and Latin America, European Investment Bank. They introduced the objectives of the MGA Young Talent of the Year Award, while reflecting upon youth’s impact on the just energy transition.

Moreover, after the finalists’ presentation, a final feedback was provided, with closing remarks, by Roberto Vigotti, Secretary General at RES4Africa Foundation, Carmelo Cocuzza, Head of Corporates Unit, European Investment Bank, and Silvia Piana, Head of Regulatory Affairs Africa, Asia and Australia Area at Enel Green Power.

“The ability to generate innovation will be a fundamental driver to pave the way for a transformation that goes well beyond the dynamic of the Energy sector” commented Salvatore Bernabei “We are here give voice and visibility to young talents, innovators, entrepreneurs promoting the best innovative ideas to stimulate socio-economic progress from within and free the creativity of the younger generations in designing the Africa of tomorrow”.

Increasing energy access and enabling more sustainable energy use is crucial to unlock opportunities for communities across Africa. The finalists in this year’s Micro-Grid Academy Young Talent Awards all demonstrate inspirational and innovative thinking that combined world-class energy expertise with unparalleled understanding of local energy needs and all deserve to win. The European Investment Bank is pleased to join RES4Africa and Enel Green Power to support talented young innovators and encourage them to become green energy leaders of the future.” said Maria Shaw-Barragan, European Investment Bank Director for Global Partners.

RES4Africa Foundation (Renewable Energy Solutions for Africa) envisions the sustainable transformation of Africa’s electricity systems to ensure reliable and affordable electricity access for all, enabling the continent to achieve its full, resilient, inclusive and sustainable development. The Foundation’s mission is to create favourable conditions for scaling up investments in clean energy technologies to accelerate the continent’s just energy transition and transformation.

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