Company Update

Forte Oil Plc

Equity Research
04 March 2016
Analyst:
Damilola Lawal*
Damilola.Lawal@cardinalstone.com

On Wednesday, 24th February, 2016, we visited Forte Oils Geregu Power Plant in Ajaokuta,
Kogi State. Based on feedback from the visit and the release of the companys trading and
st
operational update for the year ended 31 December, 2015, we raise TP to N297.69
(Previous: N183.61) and upgrade the counter to a HOLD. Kindly see our update on the
company below;

We expec t earnings to improve in FY16E A combination of factors

should help improve the companys bottomline in FY16E. First, we highlight the
petroleum motor spirit (PMS) margin increase for retailers from N4.60 per litre to
N5.00 per litre and the rise in the retail price for kerosene from N50.00 per litre to
N83.00 per litre. Secondly, the fall in crude oil prices has led to a corresponding fall
in base oil prices which should be supportive of revenue from lubricants. Also, we
think an improvement in the subsidy management scheme which saw zero subsidy
paid in January should help working capital management. According to the Minister
of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu, the novel price
modulation mechanism currently in place will ensure that the Federal Government
records zero expenses on fuel subsidy in 2016.

Following from a tough 2015 as supply disruptions dampen ed

sales: 2015 was a markedly tough environment for downstream operators who
battled with FX challenges and delayed subsidy payments by the government. FO
reported a 27% YoY revenue decline in FY15 as PMS supply disruption weighed on
sales. With lower PMS volume coming into the revenue mix, FOs margins were
boosted significantly by contribution of the higher margin lubricants and power
segments. FY15 gross margin came in at a historic high of 14.7% (FY14: 10.9%).
Despite the reduction in sales throughput, OPEX continues to rise up by 17% YoY.
PAT was up by 30% YoY to N5.7 billion as the benefit from a 189% YoY rise in
exceptional income fed through.

HOLD

TP: N297.69

Stock Data
Bloomberg Ticker:

FO:NL

Market Price (N)

293.23

Shares Outs (Mn)

1,302

Market cap (NBn)

382

Price
Performance

FO

NSE

12-month (%)

32.4

-14.0

3-month (%)

17.9

-6.3

-11.1

-9.9

2015A

2016E

2017F

63.8

39.1

26.3

8.0

7.1

6.0

1.0%

1.2%

1.5%

YTD (%)

Valuation
P/E (x)
P/BV (x)
Div. Yield (%)

YTD Price Performance (rebased)

ASI

FO

1.5
1

0.5

Catalys t and Risks: The deregulation of the downstream sector in 2016 would
have a material impact on the companys earnings. A major risk to FO is the
devaluation of the Naira as gas prices are quoted in dollars whilst the company
receives payments for generated electricity in naira.. Naira devaluation will see
operating expenses rise for the power business.

Jan-16

Nov-15

Sep-15

Jul-15

May-15

price (TP) on Forte Oil Plc (FO) to N297.69 (from N183.61) after adjusting for
expected higher earnings from Geregu and improved operating environment in the
downstream sector, and therefore place an HOLD recommendation on the counter.
The stock is trading at 63x earnings compared to comparables (TOTAL and MOBIL)
average P/E of 14x. Our target price implies a 2% upside from current price.

Mar-15

We rev ise our recommenda tion to a HOLD: We have raised our target

Dec-14

Contact Information

research@cardinalstone.com
+234 809 0415 178

sales@cardinalstone.com
+234 809 945 3062

Page | 1

Company Update
Forte Oil Plc
Equity Research
FY15 Review Tough opera ting env ir onment deals blow to
revenue, bu t earnings d e ligh t
FO reported a 27% YoY revenue decline to N124.6 billion in FY15. The decrease in
revenue reflects lower revenue from the companys fuel and lubricants business
(down by 32% YoY) due to product distribution challenges which affected volumes
and a N10 price cut in the retail price of PMS. The other divisions, the production
chemicals, lubricants and power generation segments reported strong growth
numbers up by 44% YoY, 9% YoY and 13% YoY to N3.9 billion, N6.2 billion and
N10.3 billion respectively. We saw considerable shift in focus towards the
production chemicals and lubricants segments given that they are margin accretive.
The uptick in the power generation segment was due to an increase in capacity
utilization to 33% from 30%.

Table 1: FY15 Segment Breakdown (Nbillion)

FY15

FY14

% Growth

Power

10.3

9.1

13.3%

Fuels

104.3

152.7

-31.7%

Production Chemicals

3.9

2.7

44.2%

Lubricants

6.2

5.7

9.1%

Source: CardinalStone Research, Company Financials

FO reported FY15 EPS growth of 87% to N4.11, boosted by an exceptional rise in

other income up by 190% to N4.1 billion. Other income increased by 190% due to
income from investment in securities held to maturity, freight income from the 100
trucks acquired the previous financial year and sale of investment property. FOs
Board of Directors proposed a DPS of N3.45 (FY14: N2.50), representing a payout
ratio of 84%.

Price performance: Is th ere any gas left?

Relative to the All Share Index (-14.01%), and Nigerias Oil & Gas index (-6.81%), FO
(+32.41%) has outperformed over the last 12 months. The market has reacted
positively to news about FO; - 1) the award of a crude oil lifting contract by the
NNPC; 2) planned upgrade to the installed capacity of the Geregu Power Plant; and
3) release of FY15 results. Other news such as the increase in downstream
marketers margin to N5.00 per litre and the introduction of price modulation
template was justifiably acknowledged by the market. We believe FOs market
valuation is stretched at current level. However, illiquidity and trading sentiments
may continue to support FOs share price.

Page | 2

Company Update
Forte Oil Plc
Equity Research
Figure 1: Event Tracker
FO

400
350
300
250
200

1.
2.
3.
4.
5.

150

FO announces FY14 dividend of N2.50 (February 03)

FO signs $83 million contract with Siemens (June 30)
FO sells 17% stake to Mercuria (September 27)
FO wins NNPC lifting contract (December 18)
FY15 earnings release accompanied by DPS of N3.45 (Jan 29)

100
Jan-15

Feb-15 Mar-15

Apr-15 May-15

Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15 Dec-15

Jan-16

Feb-16

Source: CardinalStone Research, Bloomberg

2016 th emes - Higher fu el margins, increase in Ger egus

installed capacity, oil lif ting con tracts, a plus for 2016 earnings
Along with the review of the PMS pricing template, the margin for retailers has been
increased from N4.60 per litre to N5.00 per litre after a long period of fixed margins
technically an 8.7% increase in margin per litre. We also expect that supply
disruptions that plagued much of last year will ease as the de-risking of the subsidy
burden should help improve volumes. Secondly, the fall in crude oil prices has led
to a corresponding fall in base oil prices which should be supportive of lubricants
segment margin; we recall that this category accounted for 5% of sales last year. We
see contribution from that business segment rising to 6% in 2016. Other areas that
could help improve FOs earnings is the ongoing upgrade to the Geregu Power Plant
which will lift installed capacity to 435 megawatts and the award of the crude oil
lifting contract. At 55% capacity utilisation (CSPs 2016 estimate), that business
segment will account for 11% of revenues. This could rise much further if capacity
utilisation reaches managements target of between 70 - 85%. FO was awarded a
one-year contract by the NNPC to lift crude oil (c.45,000 barrels per day) from the
various crude and condensate production arrangements. In our view, its partnership
with Mercuria helped the company qualify for the contract which brings in higher
margins than petroleum marketing. Details are sketchy as the contract is yet to
commence but we are optimistic that this will boost revenues and earnings further
as crude oil trading brings in higher margins than petroleum marketing. This entails
the swapping of crude oil in the international market for refined petrol, which is
then imported into the country. This could also help reduce the strain of sourcing FX
to import refined fuel.
Page | 3

Company Update
Forte Oil Plc
Equity Research
Nonetheless, devalua tion concerns rise to the fore
In our view, FX volatility provides the biggest challenge to operations this year and
could likely offset or limit most of the positives highlighted earlier. Devaluation
would prove to be a double whammy on the companys operation. Firstly,
devaluation of the naira will increase the landing cost of petroleum products.
Accordingly, this will increase the subsidy the government will have to pay on
regulated products such as petrol if subsidies are retained. For these products,
devaluation will have no impact on the marketers as the government bears the
exchange rate risk. However, for bills of laden executed before the devaluation, the
subsidy repayment will be based on the pre-devaluation exchange rate and only bills
executed after the devaluation will be refunded using the devalued exchange rate.
As such, the company will be forced to bear the loss of devaluation. Asides that, for
non-regulated products such as diesel and kerosene, the company may have to bear
or transfer the total cost implication to the consumers or split the cost between
themselves and consumers. Either of these alternatives would pull margin
downwards. Secondly, the company pays for gas priced in dollars and receives
payments for generated electricity in naira. Hence, cost of sales will rise if
devaluation occurs. A devaluation would increase Fortes operating expenses in the
power segment. Though, MYTO allows for an upward adjustment in electricity tariffs
in the event of devaluation, the difficulty in implementing tariff increases lately will
be a hindrance.

Valuation
We value FO using a five-year discounted cashflow model. We increase our TP for
FO to N297.69 (Previous: N183.61) after adjusting for higher margins in the
downstream sector and improved outlook for earnings from the power division.
This implies a 2% upside potential from current share price levels and therefore
revise our recommendation to a HOLD. However, given the sketchy details around
the crude oil lifting contract, we have excluded its impact from our valuation.

Page | 4

Company Update
Forte Oil Plc
Equity Research

Operational report of Geregus plant visit

A Brief History
Amperion Power Distribution Co Ltd, a power generation company and a subsidiary
of Forte Oil Plc, acquired the Geregu Power Plant located in Ajaokuta, Kogi State,
under the government-led privatization program in the power sector, for a purchase
consideration of $132 million in 2013. The total installed capacity of the gas-fired
power plant is 414 MW. The transaction implies a deal value of $0.32 million per
MW. While it may seem expensive relative to other acquisitions in the sector
(average of $0.25 million per megawatt), we highlight the fact that the Geregu
Power Station is the newest of the power stations that were either sold or
concessioned. The gas-fired power plant was commissioned in 2007 with three
Siemens V94.2 open cycle gas turbine power generation units totaling 414MW of
installed capacity. The three operational units namely GT11, GT12, and GT13 have
an installed capacity of 138 MW each.

Good ramp up expec ted

Forte Oil signed an $83 million contract with Siemens AG to upgrade the capacity of
the power plant to 435 MW. The company has made a down payment of $62.25
million for the work and construction work should be completed by H116.
According to the Siemens representatives, repair and replacement works have
commenced and work is progressing according to schedule. GT11 and GT12 have
been shut-down for the necessary repairs whilst work will commence on GT13 when
repairs have been completed on GT11 and GT12. Following the completion of repair
works, the plant should be able to function at close to c.100% capacity but due to
transmission losses, management expects capacity utilisation to vary between 70% 85% but still well above the 33% capacity utilisation recorded in 2015.

The energy ris k is contained

The Geregu Plant is gas-fired with feedstock currently supplied by Seplat Petroleum
Development Corporation through a 24-inch natural gas pipeline which feeds from
Seplat Oben gas processing plant in Edo State. Seplat currently supplies about
80mmscf/d though negotiations are ongoing to increase supply by an additional
10mmscf/d. We understand that gas supply is relatively stable except when there
are incidences of pipeline vandalisation which then reduces gas pressure. Efforts are
underway to mitigate this as discussions are ongoing with the Nigerian Gas
Company to supply additional gas as back-up. Power has a considerable impact on
the companys valuation contributing 40% to EBITDA in 2015; however margins
could come under pressure in the event of devaluation of the Naira. The company
pays for gas in dollars at the interbank rate and from our analysis, a 50% devaluation
of the official rate could see gross margins for the power division drop by 25%.

Page | 5

Company Update
Forte Oil Plc
Equity Research

Photo Gallery of Geregu Power Plant, Ajaokuta, Kogi State

Welcome to Geregu

GT11, GT12, and GT13

Pipe-link from Oben Gas Plant

Step-Up Transformer

Generators

Stripped-Out Gas Turbine

Page | 6

Company Update
Forte Oil Plc
Equity Research

Sector Analysis in 2016

Overall, we exp ect a much smooth er op erating environment in
the do wnstream sector
The downstream sector was fraught with negative events last year. For lengthy
periods of time, persistent queues rocked fuel stations across Nigeria. A
combination of factors precipitated this event. 1) There were continued delays in
the reimbursement of oil subsidies by the federal government; 2) poor product
evacuation infrastructure at the Apapa Ports, including road networks; and 3) higher
risk aversion by banks to the sector which limited credit to petroleum marketers. In
addition to these, FX volatility was not supportive. In 2016, we expect smoother
operations given that delays in subsidy reimbursements are likely to be less of an
issue. Crude oil price outlook remains bearish and as such, the expected market
price for premium motor spirit (PMS) is set to hover around the FGs set N87.00 per
litre pump price, possibly below, for an extended length of time. Secondly, the road
network in Apapa is expected to improve given concerted efforts by the Federal and
State Government to ease bottlenecks. Recently, Dangote Construction Limited
announced plans to reconstruct the Apapa Road as part of its corporate social
responsibility. With the de-risking of the subsidy burden, we think that lenders will
be more comfortable lending to petroleum marketers.

Power - Can gas supp ly catch up with estimated elec tric ity
demand?
NERCs electricity generation projections for 2015-2024 under the Multi Year Tariff
Order (MYTO 2) estimates a 15% Compounded Annual Growth Rate (CAGR) in load
projection with gas-fired (thermal) power plants generating an average 88% over
the period. Thermal power generation is expected to rise from 4,853 MW in 2016 to
13,170 MW by 2024. From our calculations, the industry would require a significant
boost in gas supply to achieve this feat. We calculate that a doubling of gas-topower supply from the 722.0 mmscf/d recorded in December 2015 to 1,444
mmscf/d is required in order to meet 2016 load projection of 4,853 MW. By 2024,
4,181 mmscf/d of gas will be required to meet load projection of 13,170 MW. Whilst
current and forecast gas production can bridge this gap, gas producers will need to
significantly reduce gas flaring which at an average 743 mmscf/d is higher than the
average supply of 696.7 mmscf/d supplied to the power industry in the whole of
2015. Commercializing flared gas would require huge investments which gas
producers are cautious of making in view of huge debts owed by the power industry.

Page | 7

Company Update
Forte Oil Plc
Equity Research

Financial Statements and Key Ratios Forte Oil Plc

Income Statement
Revenue
Cost of Sales
Gross Profit
Distri. And Admin Expenses
EBITDA
Other Income
EBIT/Operating profit
Interest Expense/Income
Pre-tax earnings
Taxation
Profit after tax

Statement of Financial Position

2014A
170,128
(151,663)
18,465
(11,726)
6,739
1,398
8,137
(2,130)
6,006
(1,550)
4,457

2015A
(N'Mn)
124,617
(106,256)
18,361
(13,724)
4,637
4,051
8,688
(1,676)
7,012
(1,218)
5,794

2016E

2017F

2014A

181,946
(147,163)
34,783
(21,834)
12,950
1,398
14,348
(2,898)
11,449
(1,989)
9,460

197,405
(156,825)
40,579
(23,689)
16,891
1,426
18,317
(1,201)
17,116
(3,081)
14,035

1,030
(918)
112
(71)
41
8
49
(13)
36
(9)
27

2015A
(US$'Mn)
626
(533)
92
(69)
23
20
44
(8)
35
(6)
29

2016E

2017F

910
(736)
174
(109)
65
7
72
(14)
57
(10)
47

940
(747)
193
(113)
80
7
87
(6)
82
(15)
67

2014A

2015A

2016E

2017F

2014A

2015A

2016E

2017F

54,253
1,935
476
121
16
12,202
573
53,600
16,062

62,420
1,832
286
131
42
10,060
390
34,897
11,701

66,370
1,832
286
131
42
13,933
540
24,924
18,938

68,722
1,832
286
131
42
14,848
575
27,042
18,202

329
12
3
1
0
74
3
325
97

315
9
1
1
0
51
2
176
59

332
9
1
1
0
70
3
125
95

327
9
1
1
0
71
3
129
87

139,238

121,758

126,995

131,679

845

614

635

627

Loans and Borrowings

Bank Overdraft
Current Income Tax Liabilities
Deferred Fair Value Gain on Loan
Trade and Other Payables
Deferred Taxation
Loans & Borrowings
Non- Curr. Deferred Fair Val Gain on Loan
Non-Current Trade and Other Payables

12,289
16,496
846
52,515
82
12,254
422

13,758
10,268
968
441
34,183
74
13,952
1,433
400

12,094
8,268
1,406
441
47,344
74
3,522
1,433
400

6,815
6,268
2,083
441
50,452
74
1,985
1,433
400

75
100
5
319
0
74
3

69
52
5
2
172
0
70
7
2

60
41
7
2
237
0
18
7
2

32
30
10
2
240
0
9
7
2

Total Liabilities
Capital and Reserves

94,904

75,477

74,982

69,952

576

380

375

333

Share Capital
Share Premium
Foreign Exchange Reserve
Revenue Reserve
Treasury Stock
Non Controlling Interest
Shareholders' funds
Total liabilities and equity

546
8,181
(248)
3,959
31,897
44,335
139,238

546
8,181
(258)
6,002
(1,389)
33,198
46,281
121,758

546
8,181
(258)
10,789
(1,389)
34,144
52,014
126,995

546
8,181
(258)
19,099
(1,389)
35,548
61,728
131,679

3
50
(2)
24
194
269
845

3
41
(1)
30
(7)
167
233
614

3
41
(1)
54
(7)
171
260
635

3
39
(1)
91
(7)
169
294
627

Key Ratios

2014A

2015A

2016E

2017F

2014A

2015A

2016E

2017F

10.3%
4.0%
4.8%
3.5%
2.6%

12.8%
3.7%
7.0%
5.6%
4.6%

19.2%
7.1%
7.9%
6.3%
5.2%

24.7%
8.6%
9.3%
8.7%
7.1%

10.3%
4.0%
4.8%
3.5%
2.6%

8.2%
3.7%
7.0%
5.6%
4.6%

5.6%
7.1%
7.9%
6.3%
5.2%

6.6%
8.6%
9.3%
8.7%
7.1%

82.9
8.3
0.7%

63.8
8.0
1.0%

39.1
7.1
1.2%

26.3
6.0
1.5%

82.9
8.3
0.7%

63.8
8.0
1.0%

39.1
7.1
1.2%

26.3
6.0
1.5%

Assets
Property, Plant and Equipment
Investment Property
Intangible Assets
Deferred Tax Assets
Long-Term Employee Benefits
Inventories
Other Assets
Trade and Other Receivables
Cash and Bank Equivalents

Total Assets
Liabilities

Profitability
Return on Average Equity
EBITDA Margin
EBIT Margin
Pretax Profit Margin
Net Profit Margin

Valuation Multiples
P/E (x)
P/B (x)
Dividend Yield (%)

Page | 8

Company Update
Forte Oil Plc
Equity Research

Disclosure
Analyst Certification
The research analyst(s) denoted by an * on the cover of this report certifies (or, where multiple research analysts are primarily responsible for
this report, the research analysts denoted by an * on the cover or within the document individually certifies, with respect to each security or
issuer that the research analyst(s) cover in this research) that: (1) all of the views expressed in this report accurately articulate the research
analyst(s) independent views/opinions, based on public information regarding the companies, securities, industries or markets discussed in this
report. (2) The research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific
recommendations, estimates or opinions expressed in this report.
Analysts Compensation: The research analyst(s) responsible for the preparation of this report receive compensation based upon various factors,
including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from,
among other business units, Investment Banking and Asset Management.
Investment Ratings
CardinalStone employs a 3-step rating system for equities under coverage: Buy, Hold, and Sell.
Buy +15.00% expected share price performance
Hold +0.00% to +14.99% expected share price performance
Sell < 0.00% expected share price performance
A BUY rating is given to equities with strong fundamentals, which have the potential to rise by at least +15.00% between the current price and the
analysts target price
An HOLD rating is given to equities with good fundamentals, which have upside potential within a range of +0.00% and +14.99%,
A SELL rating is given to equities that are highly overvalued or with weak fundamentals, where potential returns of less than 0.00% is expected,
between the current price and analysts target price.
A NEGATIVE WATCH is given to equities whose fundamentals may deteriorate significantly over the next six (6) months, in our view.
CardinalStone Research distribution of ratings/Investment banking relationships as of December 31, 2015

Rating

Buy

% of total recommendations

57%

Sell
17%

Hold
23%

% with investment banking

relationships

33%

0%

50%

Negative Watch
3%
17%

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any
security recommended herein. You can contact the analyst named on the front of this note for further details.
Frequency of Next Update: An update of our view on the company (ies) would be provided when next there are substantial
developments/financial news on the company.
Conflict of Interest: It is the policy of CardinalStone Partners Limited and its subsidiaries and affiliates (individually and collectively referred to as
CardinalStone) that research analysts may not be involved in activities that suggest that they are representing the interests of Cardinal Stone in
a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts reporting lines are
structured to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in
CardinalStones Investment Banking or Sales and Trading departments.

Page | 9

Company Update
Forte Oil Plc
Equity Research
However, such sales and trading departments may trade, as principal, based on the research analysts published research. Therefore, the
proprietary interests of those Sales and Trading departments may conflict with your interests.
Company Disclosure:
CardinalStone may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally,
affect the objectivity of this report. Material interests, which CardinalStone has with companies or in securities discussed in this report, are
disclosed hereunder:
Company

Disclosure

Forte Oil Plc

a.
The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of the company
b.
The analyst responsible for this report as indicated on the front page is a board member, officer or director of the Company
c.
CardinalStone is a market maker in the publicly traded equities of the Company
d.
CardinalStone has been lead arranger or co-lead arranger over the past 12 months of any publicly disclosed offer of securities of
the Company
e.
CardinalStone beneficially own 1% or more of the equity securities of the Company
f.
CardinalStone holds a major interest in the debt of the Company
g.
CardinalStone has received compensation for investment banking activities from the Company within the last 12 months
h.
CardinalStone intends to seek, or anticipates to receive compensation for investment banking services from the Company in the
next 3 months
i.
The content of this research report has been communicated with the Company, following which this research report has been
materially amended before its distribution
j.
The Company is a client of CardinalStone
k.
The Company owns more than 5% of the issued share capital of CardinalStone
l.
CardinalStone has other financial or other material interest in the Company
Important Regional Disclosures
The analyst(s) involved in the preparation of this report may not have visited the material operations of the subject Company (ies) within the past
12 months. To the extent this is a report authored in whole or in part by a Non-U.S. analyst and is made available in the U.S., the following are
important disclosures regarding any Non-U.S. analyst contributors: The Non-U.S. research analysts (denoted by an * in the report) are not
registered/qualified as research analysts with FINRA; and therefore, may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on
communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by
an *) is a Non-U.S. Analyst and is currently employed by Cardinal Stone.
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Legal entity disclosures: CardinalStone Partners is authorized and regulated by the Securities and Exchange Commission (SEC) to conduct
investment business in Nigeria.

Page | 10