Undervalued Nigerian producers set to benefit as oil-price outlook strengthens

By David Whitehouse
Posted on Tuesday, 25 January 2022 09:24

Photo supplied by Seplat.

Nigeria is set to be Africa’s biggest winner as the outlook for stronger oil prices this year and next improves, Renaissance Capital analysts led by Charles Robertson write in new research.

Rencap has increased its oil forecast from $65 per barrel in 2022 and $60 for 2023, to $80 for both years to take account of higher average predictions in the market, it said in a note on January 20. “The main positive surprise from the revision to oil is what this does for an unloved market like Nigeria,” the piece says.

Based on Rencap’s real effective exchange rate (REER) model developed by Yvonne Mhango, oil at $80 implies the naira at 465 against the dollar, close to its average rate of 473 since 2004, the research says.

This would trigger a current-account surplus and more than offset the shortage of domestic savings caused by demographic factors, the research argues.

Others are more cautious. While the $80 level is “very realistic,” Nigeria may not be able to take full advantage due to inability to raise output, says Joshua Odebisi, equity analyst at Vetiva Capital Management in Lagos. He points out that Nigeria’s crude production in December was only 1.19m barrels per day, far from the highs of over 2m barrels the last time crude prices were this high.

  • Output is being limited by force majeure at the Trans Forcados terminal, as well as oil leaks in the Niger Delta region.
  • These factors “outweigh the strong oil prices” and are likely to keep the current account negative, Odebisi says.


At the corporate level, Seplat, Ardova and TotalEnergies are Nigeria’s top energy sector picks for 2022, according to research from Khalil Woli and Philip Anegbe at Cardinal Stone in Lagos on January 14.

The firm rates all three stocks as buy. Seplat “has survived two oil price crises in 10 years, navigated through communal unrests in Niger Delta, implemented strong corporate governance and now appears ready to grow,” the research says. The company’s gas and oil production is forecast to increase by 15% and 10% respectively this year. The higher gas output is based on the impact of the new Anoh plant. First gas from the plant should be flowing to customers before the end of the first half, Cardinal Stone says.

Optimism on Seplat’s oil production is based on the likely absence of operational shocks such as the delays in siting a new storage vessel at OML 40 which disrupted production in the first half of 2021. Cardinal Stone also points to plans to expand drilling activities after Seplat completed six wells in the first nine months of 2021.

  • A further plus for Seplat is the expected commissioning of the Amukpe-Escravos export pipeline (AEP).
  • The new pipeline is mostly underground and has better security than the Trans Forcados pipeline, the analysts write.

Ardova, TotalEnergies

Ardova is undervalued as its turnaround gathers pace, according to Cardinal Stone. The stock trades on  an enterprise value (EV) to EBITDA (earnings before interest, taxes depreciation and amortisation) ratio of 4.2 times, compared with a  five-year average of 7.3 times. Cardinal Stone’s forecast 2022 return on equity of 9.8% is higher than the five-year average of 9.6%.

  • Ardova finally completed its purchase of Enyo Retail and Supply in November. That will increase the company’s retail client base by 17.5%, Cardinal Stone says.
  • The company’s lubricants revenues are projected to expand by 15% in 2022 as better truck supply drives faster product distribution.

Meanwhile, TotalEnergies Marketing is “perfectly poised” to benefit from the gradual improvement in air travel this year, Cardinal Stone says. The company has a 55% market share in lubricants and a strong retail network of 556 stations. Cardinal Stone sees increased lubricant demand in 2022, and an overall revenue increase of 16% this year.

  • The firm raises its rating on TotalEnergies Marketing to buy from hold, noting that its EV/EBITDA ratio of 1.7 times compares with a peer average of 5.4 times.

Bottom Line

Undervalued Nigerian energy stocks may be the best way to play prospects for higher oil prices.

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