Cash-flow Challenges Cast Dark Cloud Over Oil & Gas Stocks as Sector Bleeds

Tuesday, December 11, 2012 / The Analyst

A review of the listed companies in the Oil & Gas Sector of the Nigerian bourse (an oil producing nation) in 2012 was gloomy, with an average -40.4% return YTD. This will suggest that all is not well with operating business model of the listed firms in that sector as investors continued to sell down their stakes in those quoted companies. This may further affect shareholders' loyalty as the falling trend signals a possible crisis of confidence in the sector. All the stocks trading in this sector are really bleeding with an average year-to-date loss of -40% as at November 7th 2012. This unimpressive performance, compared against the markets YTD gain of 30.48%; a pointer to strong negative sentiments in the sector throughout the year which we expect to be extended into 2013; as the Sectoral Outlook further reflects unhealthy trading psychology towards the Oil & Gas companies.

Oil & Gas Sector: Snapshot of Performance Trend

Year-To-Date Performance Previous Year Comparable Period
30-Dec-11 YTD Stocks MRS 59 25.01 -57.61% OANDO 22 12.1 -45.00% ETERNA 2.96 1.65 -44.26% CONOIL 31.5 20.05 -36.35% TOTAL 188.1 121.68 -35.31% JAPAULOIL 0.9 0.59 -34.44% FO 11.6 7.98 -31.21% MOBIL 133.91 109.25 -18.42% Source: NSE, Proshare Research / The Analyst Current Price 4-Jan-11 9-Dec-11 %Change

Year-on-Year Performance
9-Dec-11 10-Dec-12 YoY

66.56 67 4.92 36.44 234 1.47 21.9 141

63.86 24.85 3.46 33.25 198 0.72 14.25 133.95

-4.06% -62.91% -29.67% -8.75% -15.38% -51.02% -34.93% -5.00%

63.86 24.85 3.46 33.25 198 0.72 14.25 133.95

25.01 12.1 1.65 20.05 121.68 0.59 7.98 109.25

-60.84% -51.31% -52.31% -39.70% -38.55% -18.06% -44.00% -18.44%

Understanding Patterns, Trends and Correlations The unimpressive trend in the sector gave impetus to the need to find out the correlation between the current performance of the sector and the ongoing reforms in the sector. Whereas, the impact of the reforms on these companies is not the primary focus of the enquiry; the data however revealed that investors and shareholders of those companies are either responding to the current reforms or possible future crisis envisaged in the sector. For a market consider inefficient, this is the nearest to information asymmetry as we can get. Beyond judgment, we are of the opinion that the series of probes, inquiries and public discontent with the management of the sector has impacted the cashflows that drove the business model for the sector. Needless to add, we welcome the attempt at reform in the sector but this is yet uncharted, thus adding to the ongoing uncertainty that opens the confidence trap for the sector. It is not the case that the myriad of uncoordinated interventions are not scaring investors away from sector; indeed, it has seemingly helped in casting more doubts around the future performance or going-concern of some of these companies in the face of financing challenges that is paralysing business. Some of the big players seemed to have devised short to medium term methods of tackling the prevailing challenges, but most have failed to evolve a new business approach, not unsurprisingly because of the lingering lack of decisiveness about what the reform is and about. Developments in the Sector

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Recently, Oando Plc laid out plans to raise additional funds of N35billion through another right issue - this it posits, is aimed at strengthening the company's balance sheet, reducing their debt portfolio, and building its long term financing capacity to place it in a position to better execute its upstream growth aspirations. There was no mention of the downstream activity or business. Total Plc went the other way, opting for a divestment route with a sell-off of its 20% stake in Nigerian offshore bloc to China's Sinopec at $2.5billion - the cash transaction is expected to improve the Total Plc's cash flow and dispel some industry doubts about the company's ability to finance an ambitious investment program of $20billion. Deriving from these developments, the outlook points to a fresh trend of weak cashflow(s) in the sector as the business model for the sector seems to be experiencing a make-over, which cannot be isolated from the unintended consequences arising from the busted subsidy racket and different probes in the sector. All these creates a dark cloud over the sector and investors reaction so far in the year towards the sector cannot be misconstrued as otherwise.

Investors Sentiments: Oil & Gas Stocks... under the siege of negative sentiments Lets make an attempt to shed more light on the investors sentiments toward the sector stocks in the 2012 year for a better appreciation of the issues. Total Plc recorded huge sell tendency persistently and sustained negative sentiments in the year, plunging by -35.31% to slide into the range of a 4-yr low at N118.75kobo while the overview so far in the year revealed an overwhelming sell tendency amid weak or no bargain tendency towards the stock. Also, the price moving average revealed the stock to be in a bearish mode in both short and mid-long term period. Though, we observed improved bargain trend recently as indicated by MACD with corresponding improved money flow posture, the continued low volume trend buttressed the unenthusiastic posture of investors towards the stock as accumulation pattern remained very low and weak.

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MRS experienced a similar trend with continued negative sentiments so far in the year with a -57.61% loss, recording the highest loss within the sector to hit a 4-yr low. The stock closed bearish in both short and mid-long term period as revealed by its price moving average while the MACD revealed an intense sell tendency towards the stock. Also, the stock closed depressed in an oversold region as revealed by RSI.

Oando Plc is in a bearish mode in both short and mid-long term period, as indicated by its price moving average. The stock recorded -45.00% loss so far in the year, hitting a 4-yr low on October 31st 2012 at N10.94kobo. However, the stock recently experienced continued moderate rally in the last 4weeks to record +10.00% gains and settle at N12.10kobo - still within the range of its 4-yr low.

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Conoil plunged by -36.35% so far in the year to hit a 4-yr low at N16.69kobo on November 16th 2012 and remained bearish both in short and mid-long term period. However, the stock recently experienced a trend reversal in the last 3weeks to record +18.22% - the depressed posture of the stock impacted the reversal trend which appears thinning-out.

Mobil recorded the lowest loss of -18.42% so far in the year, trading at N109.25kobo below its 3-yr low of N110.00 recorded on August 12th 2009. The stock remained bearish in both short and mid-long term period, indicating strong negative sentiments. Nevertheless, the stock may experience short term trend reversal anytime soon as incoming sentiments appeared mixed while sell pressure waned.

Forte Oil closed among the top losers in the sector, plunging by -31.21% to trade at N7.98kobo below its 4-yr low. The stock closed bearish in both short and mid-long

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term period as revealed by its price moving average, indicating strong negative sentiments towards the stock. Though, the stock experience waning sell pressure to remain flat in the last four sessions while incoming sentiments remained negative.

About the Authors:

Taiwo OLOGBON-ORI is an analyst in Proshare and Reshu BAGGA is a Director for The Analyst & COO, Technical Services. The authors wish to acknowledge the contribution of Olufemi AWOYEMI, FCA to the development of this article.

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Tags: Mobil, Oando, Forte Oil, Conoil, Total, MRS, Sinopec, NNPC, PPMC, petroleum Ministry, Fuel Subsidy, PIB, Reforms, Oil & Gas, Sectoral Analysis, Subsidy Scandal, Frauds and Scandals, Corruption, Importation, Business Model, technical Analysis, 4-year low, ASI, Fundamental Analysis, investors, Sentiments Analysis

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