April 18, 2023/Cordros Report

In this report, we update our views on the Nigerian oil and gas sector, with a key focus on downstream operators. As experienced in recent years, the downstream oil and gas sector remains plagued by operational challenges, such as inadequate infrastructure, FX liquidity constraints, and most recently, Premium Motor Spirit (PMS) supply shortages. Thus, we remain neutral on the sector. Nonetheless, across our coverage, TotalEnergies Marketing Nigeria Plc (TOTAL; “BUY”, NGN384.03/s) remains our preferred pick as we feel the marketer will remain resilient, leveraging on its (1) solid market leadership across the key product lines, and (2) vast storage and distribution network. Thus, we maintain our “BUY” rating on the stock. Meanwhile, we have a negative outlook on Ardova Plc (ARDOVA; “HOLD”, NGN15.79/s) as the near-term risks to operating margins and earnings remain high. However, the conclusion of the company’s proposed buy-out of minority shareholders may be value accretive for current holders of the stock, if the current lawsuit on the proposed buyout price is successful. We have a “HOLD” rating on the stock.  

PMS Subsidy Remains a Headwind

With the Federal Government (FG) unable to fully deregulate the downstream oil and gas sector following protests by labour unions, it has continued to incur expensive subsidy payments through NNPC under-recovery costs. Overall, the under-recovery in 2022 amounted to c. NGN4.39 trillion – 3.0x higher than the 2021FY total (NGN1.45 trillion). Notably, the current divergence between deregulated (Cordros estimate: NGN363.00 per litre) and regulated (NGN185.00 per litre) prices is a key contributing factor to the supply crisis currently being experienced in the domestic market. This is because the steep difference in prices (coupled with FX illiquidity issues) makes it impossible for marketers to source products individually amid the drop in supply from the NNPC. For 2023FY, we estimate the subsidy cost will settle at c. NGN3.69 trillion – H1-23: NGN2.88 trillion; H2-23: NGN810.00 billion.

Revenue & Earnings Growth Trajectory are Sustainable

In our view, Nigeria’s oil and gas marketers will maintain another year of positive revenue growth, driven specifically by (1) a possible increase in PMS prices, following our expectation of a partial stoppage of PMS subsidy in June; and (2) a sustained heavy local consumption of petroleum products. We expect revenue for our coverage companies, TOTAL and ARDOVA, to grow by 16.6% and 20.3%, respectively. Over the medium term (2023E – 2027E), we forecast a revenue CAGR of 8.5% (TOTAL) and 12.0% (ARDOVA). On earnings, we expect TOTAL’s EPS (+2.5% y/y to NGN48.67) to recover from last year’s slump and grow at a CAGR of 13.7% over a five-year period. Meanwhile, we expect ARDOVA will continue recording losses (2022FY loss per share: NGN2.71) till 2024E. We expect ARDOVA’s earnings to turn positive in 2025E (NGN0.54) and grow at a CAGR of 94.0% over 2025E to 2027E.

We Remain NEUTRAL

Our investment case for the sector is hinged on (1) the potential removal (partial or full) of PMS subsidy and (2) coming onstream of the Dangote refinery in H2-23. While we acknowledge that the actualization of the aforementioned portends tailwinds for the sector, we note that the factors that have inhibited the sector’s growth still pose threats. Such factors include, supply shortages, poor sector infrastructure (storage and distribution), ballooning cost pressures from volatile crude oil prices amid operating headwinds like high inflation and FX illiquidity. Thus, while we believe the sector may be threading a positive path, issues still abound; hence, our NEUTRAL stance.

TOTAL (“BUY”, TP: NGN384.03) – Our Preferred Pick

Building from the aforementioned growth in top line, we see TOTAL’s gross margin resilient at 12.6% (2022FY: 12.5%) with gross profit up by 17.9% y/y, buoyed by the faster growth in revenue (+16.6% y/y) relative to costs (+16.4% y/y). In addition, we expect 2023E EPS to come in at NGN48.67, recovering from last year’s slump (-2.5% y/y to NGN48.40). On our estimates, TOTAL trades at a 2023E P/E and EV/EBITDA of 4.5x and 0.9x, a discount to the MEA peer average of 18.7x and 11.0x, respectively.

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