Oil Industry Review H1: Despite Jump In Revenue, Oil & Gas Majors All Trade On Low Margins

The Oil and Gas industry has had its fair share of troubles over the last six months. From the removal and partial reinstatement of the fuel subsidy and the strikes that ensued to the probes and sting operations that have drawn the attention of all and sundry. Ordinarily one would expect a dismal H1 results from the Oil majors listed on the NSE with revenues leading the line as sales expectedly will be affected. Well, the opposite is exactly what has happened going by the combined revenues of the 6 companies under review.

In total they posted a combined revenue of about N685b, 30% increase from the N526b posted in the same period last year. Oando had N350b of the revenues for 2012 as it had N267 of that of 2011 as well.  Contrast this impressive revenue growth to the N17b.3b in Profit before Tax they all posted (Oando had N10b of that too). A meagre 2.5% of Turnover for the first half of the year. Whist interest may have a say in this, most is as a result of the huge cost of sales and high operating cost that is common in this industry. Operating Profit Margin for example was just 3.9% for the companies combined.

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There exist a silver lining as companies like Eterna Oil, Mobil and Total lead the way in Returns on Equity despite the ubiquity of the paltry margins industry wide. Afterall Oil and Gas industries are known for their poor margins. Its no wonder Net Asset Turnover ratio is always high within the industry. It could thus seem that the higher the ratio the higher the returns on equity. For example, Total Oil with a Net Asset Turnover of almost 11x posted a 29.15% on Equity. Eterna Oil with about 10.6x posted 19.7%. Obviously, these companies rely heavily on leverage to fund their operations just as they rely on Trade Creditors. The fact that very little of their capital is required to generate so much turnover, thin margins are expected but not without a strong returns on equity. That has got to be the bottom line.

For Investors seeking to own shares in this companies nevertheless, liquidity may pose a stumbling block as the volume of shares traded for most are low. Whilst the banks combined trade in values of over N1b daily they average just over N30m. The disparity in their pricing will also give an investor headache as the likes of Eterna Oil trade at just over N2 whilst the Mobil’s and Total’s of this world trade at over N114. For an Industry with a combined market cap of about 7% of that of the Banking Industry, shallow is depth of their equities can offer and thin is the margins they will continue to post.