Oil and gas companies have grown from one of the worst performers last year to best year to date, as their earnings grew at a faster pace compared to other companies even amid sluggish economic growth and global political risk.
The cumulative net income of the five oil and gas (upstream and downstream) firms that have released third quarter (Q3), 2018 results (Total, Mobil, Forte Oil, Mobil, and Seplat) – surged by 198.83 percent to N63.0 billion from N21.12 billion the previous year.
On the other hand, the 10 members of the banking index- Access, Ecobank, GTBank, First Bank Holdings, Stanbic IBTC Holdings, United Bank for Africa (UBA), Union Bank of Nigeria, and Zenith Bank- saw cumulative net income grow by 15.44 percent in September 2018, compared to the previous year.
Also, the Industrial Goods Index, represented by Dangote Cement and Lafarge Africa saw combined net income fall by 16.05 percent to N147.90 billion in the period under review, brought on by a N10 billion loss recorded by Lafarge Africa and a 2.23 percent increase in Dangote Cement’s net income.
READ ALSO: Recession looms with 47.15% of NSE 30 firms in decline
The consumer goods index components – Dangote Sugar, Flour Mills, Guinness Nigeria, Nigerian Breweries, Nestle, PZ Cussons, Nascon Allied Industries, and Unilever – saw cumulative net income fall by 29.34 percent to N97.83 billion, as only Unilever, Nestle and Guinness recorded profit for the period.
While the NSE oil and gas index has shed -11.24 percent this year, it has outperformed all others including the NSE ASI Index which has returned negative 15.80 percent, NSE Banking Index -12.22 percent, NSE consumer goods Index -25.50 percent, and industrial goods Index of -31.88 percent, according to data compiled by BusinessDay.
Analysts say upstream oil and gas firms have continued to meet production targets while taking advantage of the tail wind in crude oil price, which is why they have recorded strong financial performance and profitability.
For the downstream players, experts are of the view the new Nigerian National Petroleum Corporation (NNPC) policy as sole importer of petrol, has allowed them leverage their brand and wide service stations to distribute product while at the same time increasing volumes and growing profit.
“Since the change of template, NNPC dictates your margins, and the only way to make money is to increase your volume,” said Jubril Kareem – Acting Head of Energy Research at Ecobank.
Kareem added that the benefit for investors are mixed, as the companies are no longer borrowing to cover subsidy cost; meaning they can better manage liquidity without the need to fight the government for prompt payment.
“Also the interest usually accrued from such borrowing will also decline,’’ said Kareem.
While the prognosis is positive for oil and gas firms as far as commodity price remains at current levels and government holds on to the current template, other companies are ensnarled in a myriad of challenges undermining growth.
For instance, Dwindling purchasing power among consumers, insecurity in the northern part of the country, decrepit infrastructure, high incidence of smuggling, counterfeiting locally manufactured products, and the menacing grid lock at the Apapa Ports have made it practically difficult for consumer goods companies to make profit or bolster margins amid sky high cost of production.
According to a recent World Bank data, 92.10 percent of Nigerians live at below $5.50 a day, meaning majority have low disposable income to purchase basic goods, further casting cloud on profitability for consumer firms.
Christian Orajekwe, equity research analyst at Cordros Capital said that Nigerians suffered significant erosion from Naira devaluation and increase in price of fuel while wages are yet to increase with inflationary consequences of those events.
“After the recession, a lot of middle income class left the country in search of greener pastures thus dampening sales volumes as patronage reduced,” said Orajekwe.
Nigeria’s economy remains fragile as GDP grew by 1.50 percent in the second quarter of 2018, down from 1.95 percent expansion recorded in the first quarter.
As a result of the above stumbling blocks, Dangote Flour Mills, NASCON and Flour Mills net income fell by 75 percent, 37 percent, and 46.0 percent in the third quarter of the year.
Banks have also seen interest income grow at a slow pace due to lower yield environment.
BALA AUGIE
