Nigeria’s downstream sector still attractive despite challenges

Despite a myriad of challenges bedevilling Nigeria’s downstream sector and few investors cashing out, some new investors and shareholders are still expecting a bumper performance in the sector in the coming years.

Some investors have exited the downstream sector due to persisting environmental, operational and regulatory challenges, including regulation of the sector, low operating margin for operators leading to low Return On Equity (ROE), huge debts/receivables on account of unpaid accumulated subsidy and unpaid interest, and foreign exchange differentials on product importation.

Nigerian billionaire businessman Femi Otedola in June completed the sale of his stake in Forte Oil plc to focus on his investment in the power sector, according to him.

But another set of new investors are pumping in million-dollar investments into the sector. Majority of the new investors believe the chal

lenges faced by firms in the sector are temporary. Some stakeholders also believe there would soon be an increase in the pump price of petroleum products as it is becoming obvious state-owned Nigerian National Petroleum Corporation (NNPC) cannot sustain the huge burden of subsidy.

“Irrespective of the challenges, Nigeria’s downstream sector is always going to be attractive because of Nigeria’s population size and huge demands from over 200 million people,” Adeoluwa Eweje, an international energy solution consultant, said.

Eweje said the market anticipates the removal of fuel subsidy which is making some long-time investors position themselves for profit and market dominance.

“The new investors that took over from Exxonmobil were Indians who are trying to penetrate Nigeria downstream sector because of 11 plc’s dominance in natural gas, while the new investors at Forte Oil were attracted by its technological dominance in the sector,” Eweje told Businessday.

Before now, the sector was the darling of all, but recent activities have raised concerns about the sustainability of Nigeria’s downstream sector.

According to a report by Major Oil Marketers Association of Nigeria (MOMAN) titled ‘Making the Downstream Sector Work – An Investor’s Perspective’, Conoil’s share price recorded -70 percent, MRS’ share price recorded -83 percent, while 11 plc (formerly Mobil Oil Nigeria plc), OVH Energy and Forte Oil recorded -44 percent, -94 percent and -90 percent, respectively.

Analysis of activity for the 12-month period ending December 31, 2018 showed the oil and gas industry underperformed in the NSE All Share Index ( ASI) by 27.2 percent, while year to date also recorded -26.2 percent as at close of market on August 8, 2019.

Ademola Henry, team leader at the Facility for Oil Sector Transformation (FOSTER), said there’s still a lot of money to be made in the downstream sector. He said the new investors have recognised this and are pumping in a lot of money despite the current challenges.

In June, Abdulwasiu Sowami, through his investment portfolio, Ignite Investments and Commodities Limited, acquired a 74.02 percent equity stake in Forte Oil plc’s downstream operations, while NIPCO plc successfully acquired 60 percent equity stake in Exxonmobil (a major player in the downstream sector) leading to a change of name to Double One (11) plc.

Charles Akinbobola, an energy analyst at Sofidam Capital, believes these deals signal a good omen for the downstream sector, noting that it may even propel other major oil producers into their own alignments to take advantage of Nigeria’s bourgeoning downstream sector.

“It shows that there is a positive outlook for the sector and we may yet see more of such deals,” Akinbobola said. Leading global consulting firm Pricewaterhousecoopers (PWC) believes Nigeria has the largest market in Africa and offers unique opportunities for investment in the petroleum downstream sub-sector.

Apart from new investment coming into the sector, other downstream firms are also increasing their investments and pumping in more money into operations.

Current alignments and deals in the sector seem to validate this decision. For example, Heyden Petroleum Limited announced the acquisition of 40 new petrol stations at the cost N10 billion, increasing the company’s retail outlets to 50.

Also, Eterna plc, a major operator in the downstream sector, has said it aims to increase the number of its petrol stations across the country to 200 and acquire upstream oil and gas assets in the next five years while also insisting on making significant investment in its lubricants business, despite having a thriving chemicals business.

“We hope to have 200 petrol stations in the next five years. Year-on-year, you are going to start seeing us doubling our capacity,” Mahmud Tukur, Eterna’s managing director/ceo, said at an event early this year.

Abdulwasiu Sowami, the new investor at Forte Oil, said the next phase of the company’s growth would focus on increasing volumes, diversifying business operations, widening distribution networks and extracting potential synergies with partners.

“We look forward to working as part of the Forte Oil family to achieve this growth,” Sowami said.

Also, Oando Marketing Limited, in a bid restrategise and maintain relevance, changed its name to OVH Energy Marketing Limited (OVH) and increased its capacity to distribute 2 billion litres of petroleum products yearly.

“However, the government needs to create the necessary business environment through price liberalisation and strong independent regulation,” PWC said in a report titled ‘Nigeria: looking beyond oil’.

“In addition, challenges around pipeline infrastructure, technology, supply consistency and capital need to be addressed,” it said.