Focus of the Week: FY’24 Nigeria Oil & Gas Outlook – A mired journey ahead

FY’24 Nigeria Oil & Gas Outlook – A mired journey ahead

The global demand for oil is holding strong, especially in key markets like China and the U.S. This sets the stage for positive outcomes in the upstream part of the sector, where we could see more revenue and better profits. However, challenges such as weak infrastructure suggest that Nigeria may not be able to fully take advantage of opportunities in the market.

In the downstream segment, there remains a certain level of uncertainty, as the government has yet to assertively pursue the necessary reforms. That said, profitability for the segment may remain subdued at least for the first half of 2024. Nonetheless, the oil and gas sector still possesses growth opportunities; however, strong performance will be hinged on the government’s steadfastness in overhauling the sector.

SEPLAT ENERGY PLC: Production growth to drive performance in 2024

Despite weaker oil prices, Seplat’s performance has been fair. The company was able to grow revenue by 31% y/y (inclusive of overlifts) in 9M’23, on the back of improved production. Revenue grew to $810 million, and we believe the company is on track to deliver $1.0 billion for FY’23.

In 2024, we still expect increased production to drive topline performance. For specifics, with oil prices expected to stay stable y/y on our base case scenario, and with an expectation of a 15% y/y growth in oil volumes (FY23E: 10.8mmbls, FY’24E: 12.5mmbls), we see oil revenue printing at $1 billion (FY’23E: $899million). Similarly, gas revenue is expected to print at $127 million (FY’23E: $125million) on the back of higher production. This will bring total revenue for FY’24 to $1.1 billion, up 13% y/y.

TOTALENERGIES MARKETING NIGERIA PLC: Margins to remain stable

Going into 2024, we see revenue printing at ₦634 billion (FY’23E: ₦572 billion), driven by growth in economic output. Meanwhile, for profitability, we do not expect a deviation from current trend (i.e., stable margins), given that price controls are less stringent. We believe this is a better position for the company, given where they are coming from (falling margins). That said, we expect gross margin to print at 14% (FY’23E: 14%). This will bring gross profit to ₦85 billion (FY’23E: ₦77 billion). However, there may be an upside if deregulation is fully implemented. In this case, we may see margins improve beyond our current expectations.

What shaped the past week?

Equities: It was a positive week for Nigerian stocks as the benchmark ASI gained 0.17% w/w. The Banking sector (+6.08%) closed out the week as the top performer thanks to capital appreciation in ETI. Meanwhile, it was also a green close in the Consumer Goods space (+0.21%) as well, due to broad-based interest in the sector’s counters. On the other hand, the other sectors closed in the red led by Industrial Goods.  Industrial Goods (-3.03%) closed in the red due to broad-based losses in the sector.

Fixed Income: Activities in the fixed income market were directed by liquidity levels and PMAs. Both the NTBs and Bonds market traded in a mixed manner this week. However, the overall weekly trend was bearish for the NTBs market and bullish for the bonds market. Notably, the yield on the 91-Day, 182-Day and 364-Day papers rose 207bps, 236bps and 324bps to close at 7.07%, 10.93%, and 15.21% respectively. For the bonds market, the most significant changes were seen on the FGN 2-Year and 7-year bonds where yields eased by 10bps each to settle at 12.92% and 14.30% respectively.

Currency: At the NAFEM, the Naira closed the week at an all-time low, losing ₦171.70 w/w to close at ₦1099.05 per dollar.

Domestic Economy: While awaiting Moody’s decision on Nigeria’s credit rating, Nigeria could be up for a favourable credit rating action. Since Moody’s downgrade in January, Nigeria has implemented key policies to address issues raised earlier. So far in 2023, while oil revenues have underperformed, non-oil revenue has compensated for the shortfall in oil revenue, thanks to better-than-expected tax collections. As a result, higher retained revenue complemented by lower-than-planned spending has resulted in a narrowing of the fiscal deficit. We believe the ratings agency will like efforts to raise non-oil revenue, following the inauguration of a fiscal steering committee. We also expect the agency to recognize fuel subsidy removal as a key reform that will stabilize Nigeria’s finances. The agency was concerned about the constitutionality of Ways and Means securitization, however, the parliament approved this in May 2023.

Finally, we expect the ratings agency to look favourably upon the minor recoveries in oil production, refining projects, and reforms in the foreign exchange market. However, the ratings agency could frown at low levels of net reserve, the ability of the Central Bank to contain pressures given the revelations from its financials, and impact of devaluation on debt. Overall, while we expect these factors to uphold a retention in of its stable outlook, an upgrade may be too good to be true, but it is not out of place. 

Global: The U.S. dollar strengthened on Friday as new data revealed accelerated job growth and a decline in the unemployment rate for November, signaling robustness in the labor market. The U.S. dollar index rose by 0.4% to 103.99, on track for a moderate weekly gain. Also, U.S. stocks closed higher, with the S&P 500 and Nasdaq reaching their highest levels since early 2022, boosted by a strong U.S. jobs report that fueled optimism about a soft landing for the economy. Labor Department reported a higher-than-expected increase of 199,000 jobs in November, bringing the unemployment rate down to 3.7%. Average earnings also exceeded forecasts, rising by 0.4% on a monthly basis. The S&P 500 closed at 4,604.37 points, and the Nasdaq closed at 14,403.97 points.

Asia-Pacific markets exhibited mixed performance as Japan’s third-quarter GDP unexpectedly revised downward to a 0.7% q-o-q decline, surpassing the earlier estimate of a 0.5% fall. Contrary to expectations, India’s central bank maintained its benchmark lending rate at 6.5%. Australia’s S&P/ASX 200 reversed early losses, rising by 0.3% to close at 7,194.9. In response to the GDP data, Japan’s Nikkei 225 tumbled by 1.68% to its lowest level in a month. China’s CSI 300 rebounded by 0.24% from a four-year low to close at 3,399.46 even as China’s consumer prices experienced the steepest decline in three years in November, dropping 0.5% y-o-y, signaling growing deflationary pressures amid weakened domestic demand, raising doubts about the economic recovery.

On Friday, Europe’s STOXX 600 index climbed to its highest point since early 2022, reaching 472.75 and registering a 0.8% increase. The positive momentum was driven by an optimistic assessment of the U.S. labor market, boosting investor risk appetite. Since October 27, the index has surged by over 10%, with traders speculating that major central banks have concluded their interest rate hikes and will implement cuts in early 2024..

What will shape markets in the coming week?

Equity market: We saw a split in sectoral performance this week, with only the banking and consumer goods sectors closing in the green. We expect similar mixed sessions next week.

Fixed Income: In the next trading day, we expect the liquidity levels to determine investors’ sentiments in the NTB market. Meanwhile, we expect a quiet session in the bond market as investors await Monday’s bond auctions.