Dwindling crude prices likely to hit Oil & Gas operators earnings estimates

Oil prices have been volatile since the start of the third quarter, driven by demand-inclined factors and unprecedented disruptions in world supply, Vetiva Research has noted.

It is observed that 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 Q4’18 average), despite increasing output from the 200 kb/d Egina offshore field that came on-stream 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: Analysts expect lower crude prices to drag earnings

With the movement in prices of oil recorded in the third quarter, analysts have estimated to see drag on Seplat Petroleum Development Company revenues.

Vetiva Research stated that it expects third quarter (Q3’19) oil output to improve to 1.6 million bbls compare to 1.4 million bbls in the second quarter (Q2’19), on the back of increased drilling activities during the quarter.

However, it estimated a marginal quarter on quarter (q/q) decline in oil revenue to $97.6 million as against $98.3 million in Q2’19, as we expect average realised oil price to come in weaker at $61/bbl. It was $69/bbl Q2’19.

The firm said: “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).

The investment research unit however 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, it expects to see gross and operating margins to decline to 51% compare to 64% in Q2’19 and 38% as against 54% in Q2’19 respectively.

Read: https://dmarketforces.com/opec-failure-to-cut-supply-put-nigerias-economy-in-danger/

Analysts projected Q3’19 finance charges to come in at $8 million compare to $9 million Q2’19, 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: Analysts say Finance charges to further suppress earnings in Q3

As market awaits third quarter earnings release, analysts estimated that Total Plc earnings would be suppressed by its finance charges.

Vetiva Research said it expects a modest y/y growth in Q3’19 sales of petroleum products to ₦58.3 billion (+1% y/y), translating to a 3% q/q drop, in line with industry trend of weaker sales volume in Q3.

It expects TOTAL’s lubricants operations to post an impressive growth of 7% y/y to ₦13.6 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%.

It stated that it presumes relatively high landing costs of petroleum products to further weigh on margins in Q3’19.

That said, Vetiva Research foresee Q3’19 gross margin to moderate to 11.9% compare to 13.8% in Q3’18.

In a similar vein, we expect operating margin to come in lower at 3.2% as against 5.7% in Q3’18, Vetiva Research stated.

Given its high exposure to leverage (mainly bank overdrafts), analysts expect finance costs to further suppress TOTAL’s earnings in Q3’19.

For context, Vetiva Research expects Q3’19 finance charges to come in at ₦1.9 billion compare to ₦1.3 billion Q3’18, 83% of our Q3’19 estimate for profit before interest and tax.

Following the aforementioned, analysts say they expect after-tax earnings to plummet y/y to ₦335 million as against ₦2.0 billion in Q3’18, translating to a 9M’19 profit after tax of ₦465 million compare to ₦7.7 billion 9M’18.

FO: Analysts expect Lubricants operations to post decent growth in Q3

At the downstream, analysts said Forte Oil would post decent growth this earnings season.

According to Vetiva Research, there is an expectation that FO’s sales of fuels to advance 21% year on year to ₦35.7 billion in Q3’19, riding on the expansion of its retail network. However, on a q/q basis, it expects fuels sales to moderate 1%.

The firm forecast a 28% y/y jump in lubricants sales to ₦4.3 billion in Q3’19, largely supported by increasing demand for its newest synthetic lubricants brand (Havoline Oils).

In the review, the investment firm stated similar to its expectation for TOTAL, it foresee that Q3’19 gross margin would 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 as against 2.4% in Q3’18, despite our expectation of improved operational efficiency -operating expenses/sales ratio expected to pitch at 6.2% in Q3’19 as against 7.4% in Q3’18”, analysts at Vetiva Research reckoned.

In Q2’19, FO’s earnings were dragged by high finance charges.

Vetiva Research expects a similar fate to unfold in Q3’19, on the back of expected decline in finance costs which is forecasted to come in at ₦799 million (-24% y/y), culminating in a profit before tax of ₦81 million.

Nonetheless, this implies an improvement from a loss before tax of ₦14 million in the corresponding quarter of 2018.

11 Plc: Rental income to support Q3 earnings, analysts think

For 11 Plc, analysts said that rental income is expected to support earnings in the third quarter of financial year 2019.

Specifically, Vetiva Research stated that it expects MOBIL’s Q3’19 revenue to come in at ₦46.5 billion, which is 19% higher than the figure posted in Q3’18. It stated that it forecast, however, shows a flattish q/q performance.

The firm expects gross margin to come in weaker at 8.4% compare to 8.8% in Q3’18, resulting in a gross profit of ₦3.9 billion as against ₦3.4 billion Q3’18.

Analysts at Vetiva Research expects operating expenses to inch up to ₦2.7 billion in Q3’19 as against ₦2.6 billion in Q3’18.

Analysts is of the view that 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, there is expectation that the other income line -mainly rental income- to print at ₦2.1 billion (Q3’18: ₦2.1 billion), culminating in an operating profit of ₦3.3 billion compare to ₦3.5 billion in Q3’18.

Another major plus for MOBIL is its debt-free balance sheet, which erases the pressure of finance charges on earnings.

Vetiva Research maintains that the firm expects Q3’19 profit after tax to come in at ₦2.2 billion, compare to ₦2.4 billion in Q3’18.