How the Oil and Gas Sector is Thriving Despite FX Challenges in Nigeria

Nigeria’s oil and gas sector has shown remarkable resilience and growth in the first half of 2023, despite the impact of the exchange rate unification and the removal of fuel subsidy policies that were introduced in March.

These policies have affected the economy in various ways, such as increasing inflation, reducing consumer spending, and creating foreign exchange (FX) pressure.

However, the oil and gas sector has managed to overcome these challenges and deliver impressive performance in terms of revenue, earnings, and share price. In this blog, we will analyze the factors that have contributed to the success of the sector and the outlook for the future.

The Oil and Gas Index Outperforms Other NGX Indices

The Oil and Gas index, which comprises five companies listed on the Nigerian Exchange Group (NGX), namely Conoil, Eterna, MRS Oil, Seplat Energy, and Total Energies, has been the best performing index on the NGX in the first half of 2023.

The index recorded a gain of 67.76%, surpassing all other indices and the broader NGX All-Share Index (ASI), which gained 18.96% in the same period.

The index’s performance was driven by the strong share price appreciation of its constituents, especially MRS Oil, which achieved a staggering year-to-date (YtD) gain of 676% as of August 24, 2023.

This made MRS Oil the top performer on the NGX in terms of YtD return. The other four companies also posted impressive YtD gains, ranging from 54% to 231%, resulting in an average YtD gain of 246% for the index.

The share price rally of the oil and gas companies could be attributed to several factors, such as investors’ optimism about the sector’s prospects, improved revenue and earnings growth, and dividend payouts. The sector also benefited from the recovery in global oil prices, which increased from $51.8 per barrel in January to $74.5 per barrel in June 2023.

The Sector Overcomes FX Losses and Records Profit Growth

Despite the impressive share price performance, the oil and gas sector also faced some challenges due to the FX fluctuations caused by the exchange rate unification policy.

The policy aimed to eliminate the multiple exchange rate regime and create a single market-determined rate for the naira. However, this also resulted in a depreciation of the naira against the dollar, which affected the profitability of the oil and gas companies.

Except for Conoil, all other companies in the index reported net FX losses totaling N96.01 billion in the first half of 2023. These losses were mainly due to the revaluation of trade payables and receivables denominated in foreign currencies. The FX losses also increased the administrative and finance costs of the companies, which eroded their margins.

However, despite these challenges, the sector still recorded an average pre-tax profit growth of about 31% in the first half of 2023. This growth was supported by robust revenue growth, especially in Q2 2023, when most of the companies reported double-digit revenue growth compared to Q1 2023.

The revenue growth was driven by higher sales volumes and prices of petroleum products, such as white products (petrol, diesel, kerosene) and lubricants. The sector also benefited from increased demand for petroleum products due to easing lockdown restrictions and economic recovery.

Among the five companies in the index, MRS Oil was the star performer, reporting a pre-tax profit growth of 543% year-on-year (YoY) in H1 2023. This was mainly due to its impressive revenue growth of 132% YoY, which was largely driven by its petroleum product segment. The segment accounted for 97% of its total revenue and grew by 140% YoY.

Conoil also reported a remarkable pre-tax profit growth of 222% YoY in H1 2023. This was mainly due to its strong revenue growth of 55% YoY, which was also driven by its white product segment. The segment accounted for 97% of its total revenue and grew by 58% YoY.

Total Energies reported a modest pre-tax profit growth of 5.84% YoY in H1 2023. This was mainly due to its moderate revenue growth of 16% YoY, which was partly offset by higher costs of sales, finance costs, and FX losses.

Eterna Oil and Seplat Energy were the only two companies that reported pre-tax losses or declines in H1 2023. Eterna Oil reported a pre-tax loss of N5.54 billion in H1 2023, compared to a pre-tax profit of N2.29 billion in H1 2022. This was mainly due to its significant revenue decline of 41% YoY, which was caused by lower sales volumes and prices of petroleum products.

Seplat Energy reported a pre-tax profit decline of 50% YoY in H1 2023. This was mainly due to its lower revenue growth of 8% YoY, which was affected by lower production and sales volumes of crude oil and gas. The company also incurred higher costs of sales, finance costs, and FX losses.

The Sector’s Outlook and Opportunities

The oil and gas sector’s outlook for the second half of 2023 and beyond is positive, as the sector is expected to benefit from the continued recovery in global oil prices, increased demand for petroleum products, and improved operational efficiency. The sector also has some opportunities to explore, such as diversifying into renewable energy sources, expanding into new markets, and leveraging digital technologies.

However, the sector also faces some risks and challenges, such as regulatory uncertainty, security threats, environmental issues, and competition from other energy sources. The sector will also have to cope with the FX volatility and pressure that may arise from the exchange rate unification policy and the balance of payments deficit.

Therefore, the sector will have to adopt proactive strategies to mitigate these risks and challenges and capitalize on the opportunities. The sector will also have to align with the global trends and best practices in the oil and gas industry, such as reducing carbon emissions, enhancing corporate governance, and increasing social responsibility.

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