Executive Summary 
Prior to 2022, the global oil market witnessed volatile conditions due to the outbreak of the Covid-19 pandemic. Most countries introduced movement restrictions, border closures, and temporarily shut down businesses to curb the virus spread. Thus, the demand for crude oil declined by 9.1% to 91.0 million barrels per day (mbpd) in 2020 (2019:100.1mbpd), following the sharp contraction in economic activities. However, in 2021 global oil demand improved by 6.2% y/y to 96.6mbpd, albeit below the pre-pandemic levels, amid a gradual recovery in economic activities and an improvement in transportation fuel consumption.
 
 On the supply side, global oil output increased by 1.4mbpd to average 95.0mbpd in 2021 (2020: 93.7mbpd), leaving a shortfall of 1.6mbpd in contrast to excess supply observed in 2020 (2.7mbpd). We observed that the OPEC+ supply to the market was subdued, partly due to technical and operational challenges encountered by members and allies. Consequently, the build-up in global oil demand following the loosening of pandemic-related restrictions and an up-ward sticky oil supply led to a 64.2% rise in the Brent crude oil price to an average of $70.94/bbl. in 2021, while WTI rose by 73.0% to average $68.07/bbl. This trend sharply contrasted with the oil price crash in early 2020 that prompted the OPEC+ and G20 countries to implement production cuts in three phases.
 
Our oil supply outlook for 2022 favours higher global output, up 4.0mbpd to 99.0mbpd, on the back of additions from strategic inventory drawdowns and ramp-ups by non-OPEC producers. Similarly, global oil demand is projected to rebound to pre-Covid levels, up by 4.2mbpd to 100.8mbpd based on the OPEC forecast. The positive outlook for oil demand is mainly hinged on further recovery and the normalisation of economic activities in 2022 despite brewing downside risks such as spiralling global inflation and the crises in Eastern Europe.
 
 

On the domestic front, the oil & gas sector (upstream segment) has broadly underperformed the general economy over the past decade. Specifically, the oil sector GDP has contracted by a CAGR of 4.3% since 2012 whereas the overall domestic output expanded by 1.9% CAGR in the same period. The oil sector GDP trend is consistent with the collapse in oil production from a daily average of 2.35mbpd in 2012 to 1.60mbpd (including condensates) in 2021, which is 19.1% lower than the 10-year production average of 1.98mbpd.  We attribute the negative trend to social unrest around the coastal region, aging oil wells & pipelines, and poor maintenance of oil facilities. More recently, the failure of oil output to return to pre-pandemic levels after the 2020 shutdowns has worsened the prospect for the industry.

In addition, the delay in implementing key reforms in the sector has resulted in divestments in the upstream amid a global shift to cleaner energy. Based on data from the Department of Petroleum Resources (DPR), the average crude oil and condensate production as of April 2022 stood at 1.54mbpd, lower than 2.13mbpd and 1.73mbpd in the corresponding period of 2020 and 2021 respectively. For gas, Nigeria's resources remain largely untapped due to low investments in the absence of a strong policy framework, security, and market reflective pricing. As such gas production is estimated to have declined by 3.5% y/y to 2.6 trillion cubic feet (tcf) in 2021, a further decline from 2.7tcf (-4.7% y/y) in 2020.

For 2022, our outlook for gas is gloomy given that technical and operational challenges are still prevalent at production facilities. Also, we project that crude oil production would peg at an average of 1.51mbpd compared to 1.60mbpd in 2021. Based on the Q1:2022 GDP report, the oil sector extended its contraction for the eighth quarter in a row after a 26.0% y/y dip. We expect the oil sector underperformance to linger in the subsequent quarters, albeit mildly. Thus, in a base case, we project an 8.1% y/y contraction of the sector in 2022, barring worsening insecurity and oil theft.
 
 

Meanwhile, in the downstream segment, the daily petroleum product consumption increased 5.0% y/y to 77.9 million litres in 2020 compared to 74.1 million litres in 2019. Based on the consumption data analysis, Premium Motor Spirit (PMS) accounted for a 77.1% (60.0 million litres) share of the petroleum products, while kerosene and diesel accounted for 22.0% (17.1 million litres) and 1.0% (0.7 million litres) respectively. We estimate daily petroleum products consumption to have increased by 5.1% in 2021 (to 81.1m litres) due to the complete lifting of pandemic restrictions and sustained epileptic power supply to businesses and households.

Also, the ongoing rehabilitation of the refineries is expected to enhance capacity utilization. Based on the latest data, the refineries were redundant in 2020 and 2021 with zero output of LPG, PMS, HHK, and AGO. As a result, 100.0% of total petroleum products were met through importation in 2021. Given the near completion of rehabilitation work on state-owned refineries and the expected coming on stream of the 650,000 bpd Dangote refinery in Q4:2022, we anticipate resumption of local supplies of refined product by year-end.
 
Beyond these, a tight regulatory environment due to lack of clarity on policy direction (for instance, the postponement of the implementation of PIA), price controls, and vandalism further weighs on outlook. These constraints have informed investors’ poor pricing of the Nigerian downstream oil companies (c.3.1% of total NGX equities capitalisation as of 30/06/2022) given a P/E of 3.5x compared to an average of 14.1x for selected market peers (downstream).
 
In the upstream sector, SEPLAT is the only publicly listed company. Over the years, Seplat has recorded impressive revenue growth with a 5-year CAGR of 20.2% which reflects its strong presence in the exploration and production segment. We forecast a 22.6% rise in revenue to $898.6m for 2022, and a CAGR of 1.5% over the next 5 years on the back of accretion from onboarding MPNU (Mobil Petroleum Nigeria Unlimited) assets, which is expected to improve production volume and sales. Also, the completion of strategic projects like the Sibiri exploration well at OML 40 slated for 2022 and Amukpe-Escravos pipeline commissioning would contribute to an uptick in revenue numbers. While these factors are positive for the company, we think there are some headwinds in the form of production stoppages at Oben, outages on the Trans Forcados Pipeline, and operational costs. As such, we arrived at a one-year target price of ₦1,564.10 representing a 9.3% upside potential from its closing price of ₦1,430.50 on 26-07-2022. Consequently, we issued a “HOLD” rating.

For the downstream sector, we project a 13.1% y/y rise in industry revenue to ₦756.1bn in 2022. Our outlook is premised on the fact that the demand for white products (AGO, ATK, PMS, DPK) and lubricants & greases remain unabated despite the increase in prices as substitutes are scarce. We issued a “BUY” rating on TOTAL and CONOIL, while ARDOVA’s valuation informed a “HOLD” recommendation given their closing prices as of 26-07-2022. For TOTAL, we expect its strong presence in the Aviation Turbine & Kerosene (ATK) and Lubricant markets alongside a solid cost structure to deliver quality earnings growth. Also, we expect CONOIL’s effective implementation of cost control to buoy impressive top and bottom-line. For ARDOVA, its strong focus on product distribution capacity expansion and cost-optimization is expected to solidify its position within the industry which is positive for both short- and long-term outlooks.

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