The Nigerian oil and gas sector has experienced a strong bullish trend, driven by impressive performances from individual stocks.
In 2023, the sector achieved an average year-to-date (YtD) share price gain of 225%, with MRS Oil Plc leading the way, posting a 645% YtD increase.
By the end of Q1 2024, the total market capitalization of the sector grew by 37.41%, reaching N2.4 trillion.
This growth further accelerated by September 2024, as market capitalization surged to N3.9 trillion, largely fueled by Oando Plc’s 658% YtD gain, resulting in an average YtD gain of 147% for the sector.
The sector’s positive trajectory is reflected in its index, which recorded a 91% YtD growth as of September 30, 2024; the second best-performing indices on the Nigerian Stock Exchange behind the NGX Alternative Securities Market (ASEM) index, led by Juli Plc, which posted a 148% YtD return.
Both indices outperformed the broader market, as the NGX All-Share Index (NGXASI) saw a modest growth of 32% YtD during the same period.
This share price rally signals strong investor sentiment toward the industry, indicating that market participants anticipate continued earnings growth and value creation within the sector.
However, such rapid gains could lead to higher valuations, raising concerns about the sustainability of current prices in the long term.
Investors must consider both the fundamentals, and the risks associated with potential volatility as they evaluate their investment decisions.
A closer look at the individual companies’ strengths provides further insight.
Oando Plc
As of September 30, 2024, Oando Plc recorded the highest YtD share price gain of 714%, reflecting strong investor confidence.
However, the key question remains: can this momentum be sustained?
Although Oando has yet to release its first half of 2024 results, its latest financials for the 2023 fiscal year show a 71% year-on-year revenue increase, reaching N3.4 trillion.
However, the high cost of sales impacted the gross profit margin, which declined by 43% to a low of 2.26%.
A notable highlight is Oando’s N377 billion foreign exchange gain, which enabled the company to report a pre-tax profit of N104 billion, a significant improvement from the N62 billion pre-tax loss recorded in 2022.
Despite this positive development, the negative shareholders’ equity position has worsened, increasing by 19% to N236 billion, indicating a risk to watch out for.
Oando’s valuation metrics present a mixed picture. Its price-to-earnings (P/E) ratio stands at 12.2, significantly higher than the peer average of 8.39, suggesting that investors are paying a premium for Oando’s earnings.
This reflects confidence in the company’s growth potential, but it also implies that market expectations are high and may be difficult to meet.
Oando’s interest coverage ratio has improved to 1.69, up from 0.21 in 2022. While this indicates better earnings relative to interest expenses, a ratio below 2.0 raises concerns about the company’s ability to comfortably cover its interest obligations, which is another risk element.
In a strategic move, Oando recently acquired Agip. This acquisition expected to enhance Oando’s revenue streams and profitability could be a key driving factor contributing to investor confidence and supporting the share price rally.
Seplat Energy Plc
Seplat Energy Plc has also seen strong performance, with a YtD share price gain of 108% as of September 30, 2024.
Seplat’s fundamentals show robust growth, with revenue increasing by 107% in the first half of 2024 to N575 billion, driven by higher production levels and improved oil pricing. Profit before tax grew by 462% YoY to N244 billion, with an improved pre-tax profit margin.
However, Seplat’s current P/E ratio of 20.58 is significantly above the sector average of 8.39, indicating a possible overvaluation.
Analysts project that the P/E ratio could reach 22.85 by the end of 2024, suggesting high investor expectations.
Seplat offers a 4.23% dividend yield and a 5-year dividend growth rate of 40.29%, making it attractive to income-focused investors.
While Seplat’s share price gain is supported by strong revenue growth and improved profitability, the elevated P/E ratio suggests some risk of overvaluation, requiring close monitoring of its performance and market conditions.
Conoil Plc
As of September 30, 2024, Conoil Plc posted a YtD share price gain of 100.24%, reflecting robust market sentiment and significant returns for investors.
On the positive side, Conoil’s fundamentals are strong, with revenue surging 107% in the first half of 2024 to N180.57 billion.
Additionally, the company’s asset turnover rose by 120% to 1.97, and its debt-to-equity ratio declined by 84% to 15.67%, providing substantial support for the impressive share price performance.
Conoil’s P/E ratio of 8.39x suggests that the stock is reasonably valued compared to its peers, offering growth potential without excessive risk.
However, concerns arise from a declining interest coverage ratio, which dropped by 53% to 5.60x, indicating that the company’s ability to cover interest expenses has weakened. This can worsen with the recent hike in the MPR.
Additionally, rising costs have led to a decline in the gross profit margin to 9.71% and the operating profit margin to 7%, which raises questions about the long-term sustainability of the current share price levels.
For investors, it will be crucial to monitor Conoil’s operational efficiency, cost management strategies, and broader market dynamics to assess whether the current momentum can be sustained.
Total Energies Marketing Nigeria Plc
Total Energies Marketing Nigeria Plc achieved a YtD share price gain of 75% as of September 30, 2024.
Fundamentally, Total has demonstrated strong growth, with revenue increasing by 93% YoY in the first half of 2024 to N529 billion.
However, the cost of sales grew even faster, by 94%, contributing to a 5% decline in gross profit margin.
Despite rising costs, pre-tax profit grew by 126% YoY to N30.57 billion, improving the profit margin to 5.77%, up by 17.6%.
Total’s interest coverage ratio stands at 4.5x. The equity multiplier increased to 7.4x, highlighting a rise in financial leverage, while the current ratio remains slightly above 1 at 1.05, suggesting stable short-term liquidity.
The valuation metrics present a mixed picture. Total’s P/E ratio of 9.27 is above the sector average of 8.39, implying a slight overvaluation.
Its price-to-book (P/B) ratio of 3.36 also exceeds the average of 2.8, indicating higher market expectations.
However, Total offers a 3.7% dividend yield and a 5-year dividend growth rate of 8.02%, providing an incentive for income-focused investors.
Overall, while Total’s share price rally is supported by strong revenue and profit growth, rising cost pressures and elevated valuation metrics may limit future upside potential.
Investors should weigh the company’s growth prospects against potential risks from increasing leverage and valuation.
Overall the oil and gas sector has enjoyed a strong rally, reflecting investor confidence in its growth prospects. However, elevated valuations, rising costs, and leverage are key risks that could impact sustainability. Investors should closely monitor these dynamics when making investment decisions in this sector.
