Oil and gas stocks underperforming despite higher crude oil prices

Investors on the Nigerian Stock Exchange (NSE) are obviously not impressed with the higher crude oil prices in the international markets.

Oil prices have been trading largely above US$55 for most of this year and there are signs that that Nigeria’s crude oil production levels are higher than we did last year, but the oil and gas index is now the worst performing on the stock exchange this year with a total negative return to date of 6.0 percent well below the average negative 2.6 percent return made by the All Share Index for the same period.

With an average price to earnings (p/e) ratio of 43.2 well above the market’s average p/e ratio of 14.3 and dividend yield of 2.1%, which is below the market’s average of 4.4 percent, investors apparently believe stocks in the sector are already over priced and are not willing to pump more money into the sector.

The mixed blessings higher crude oil prices present to the Nigerian economy explains the oil sector’s underperformance. The worst performing stocks in the sector are the companies with the most exposure to the downstream sector. FO, is down 21.2 percent this year already. Total is down 6 percent, Mobil is down 1.1% and MRS is flat.

These stocks, with significant exposure to the downstream, are dragged down by the uncertainty on whether the government is going to reintroduce subsidies on fuel prices or not considering that the current N145 per litre price is no longer realistic. Oando and Seplat, which have some significant exposure to the upstream, have not faired that badly. Oando is down 2.8 percent while Seplat is down 3.9 percent. Both stocks will benefit if crude oil prices sustain its current higher prices in the international markets and if the peace moves in the Niger Delta helps improve crude oil production.

Waiting for the FG’s economy recovery plan
A smart advice usually given to people is that when in a hole, stop digging. Nigeria needs just that advice to get out of the recession hole in which it has been plunged. The world is impatiently waiting for Nigeria to come out with an economic plan that will get it out of its current recession but the country is not in a hurry.

Nigeria is taking all its time to put the plan together. Initially, the plan was to be released in November of 2016 but it never came. Now acting president Yemi Osinbajo, speaking at the World Economic Forum (WEF) has promised that the plan will be ready in February, which is really a missed opportunity since the WEF was the perfect platform for Nigeria to reveal its “get out of recession” strategy to the thousands investors that were gathered at Davos and also listening in from around the World.

But the lack of a recovery plan is also stalling the federal government quest to borrow N1.3 trillion externally this year. Both the World Bank and the African Development Bank (AfDB) have said that they will not deal on the loan request until they see a clear economic recovery plan.

Nigeria is in negotiation with the World Bank for a US$2 billion facility and also expects a balance of US$400 million from the AfDB. If the country is unable to get these loans, funding of the 2017 budget could become a challenge. It will also jeopardise the plan to get out of recession because of the country’s aim to “spend its way out of the current recession.’ But putting together an economic recovery plan should normally not be rocket science, so its baffling that about a year into recession, the government is still not able to prepare an economic plan to get us out of a recession.

GDP growth-whose report shall we believe?
There is a consensus among economists that the Nigerian economy will see a positive growth this year. What they do not agree on is the rate of growth that the economy will likely experience. The Economist Intelligence Unit (EIU) forecast that the Nigeria economy would grow by 1.0 percent. The World Bank agrees with the EIU forecast for Nigeria’s economic growth in 2017 but the International Monetary Fund (IMF) is on the conservative side, forecasting that the economy will only grow by 0.6 percent in 2017.

However, the federal government is expectedly the most optimistic about Nigeria’s economic growth this year forecasting that the economy will achieve a minimum of 2 percent growth this year. The general assumption underlying the growth projection is the expectation that crude oil prices will remain above US$50 and that Nigeria could boost production after reaching some peace agreement in the Niger Delta.

Basically, the country is banking on crude oil to get us out of recession. This is expected since the plunge in crude oil prices and drop in production largely plunged the country into its current recession. But even if the country “technically” gets out of recession based on better oil prices and production, it is not expected to have much impact on the larger Nigerian population since oil now makes up less than 10 percent of Nigeria’s economy.

Bismark Rewane, Chief Executive Officer, Financial Derivative Company (FDC) has called it the illusion of prosperity versus the frustration of misery in trying to explain a situation where the Nigerian economy figures turn positive but Nigerians see no change in their living circumstances.