May 19 (Lagos) - Last week, the Minster of Petroleum Resources announced that any Nigerian entity is now free to import PMS sourcing forex from secondary sources. The development led the Product Pricing Regulatory Agency (PPPRA) to adjust the retail price of PMS in its template to a band of N138-N145/litre (+56-68%).
The new price regime which effectively abolishes the PMS import quota system is primarily to capture autonomous foreign exchange rate which the minister put at N285/$ vs. N197/$ at the official window.
Analysts at Asset & Resource Management Ltd in Ikoyi think the abolition of import quota system and ultimately extension of the flexible pricing regime (price modulation) is broadly positive for the downstream oil and gas sector, thumping our earlier cautious view which was largely hinged on halt in implementation of the price modulation.
Specifically, the hike in prices should translate to jump in sector receipts as we expect the drag on petrol demand which is assumed to be inelastic in Nigeria here in addition to car travel it is a major source of fuel for powering small generators to be minimal.
Perhaps, what is more important is that we expect the topline growth to filter to earnings, unlike 2012 where sector earnings fell (-10% YoY), despite double digit revenue growth (+14% YoY) that trailed the hike in PMS price (+49%). We see the removal of subsidy as the key differentiating factor, even as the adoption of pricing range (vs. fixed price) and higher retailer’s margin buoy margin.
Consequently analysts at Asset & Resource Management Ltd in Ikoyi have upgraded our rating on Total Nigeria Plc ( TOTAL
)(BUY, FVE: N232.37) and Mrs Oil Plc ( MRS
) (BUY, FVE: N49.58) from respective prior ratings of NEUTRAL (N174.67) and SELL (N28.05) while we retain our SELL rating on Mobil Oil ( MOBIL
) FVE: N175.49 vs. N146.47 previously) and Conoil (FVE: N13.32 vs. N22.72 previously).