Being an Analyst Note Issued by Proshare Research on August 26^th, 2022

Analysts Note that Emergency Interventions Needed in the Oil and Gas Industry

Regulators, operators, and energy correspondents at a conference organized by the Association of Energy Correspondents of Nigeria (NEAC) have raised concerns about the rising scale of crude oil theft and high operating expenses. The low production volume and the high operating cost are twin problems affecting oil producers in terms of cost overrun and thin profit margin, as well as the country's ability to take advantage of the rising crude oil prices. While Nigeria is losing as high as 400,000 b/d to crude oil theft and vandalism, the cost of oil production in the country is also one of the highest among oil-producing nations at between US$15-17 per barrel. Comparatively, Saudi Arabia has its cost of production at between US$4-5 per barrel. Proshare analysts believe Nigeria's oil and gas industry is bleeding from all sides and urgently need intervention. The industry requires emergency regulatory and supervisory interventions and full compliance with the provisions of the PIA.  

N2trn Energy Sector Debt: Analysts See DisCos Reducing Demand from GenCos

At a recently concluded conference, the Association of Power Generation Companies refuted the claims by the Nigerian Bulk Electricity Trading Company (NBET) that the Discos owed N500bn to the Gencos. According to the Association's Executive secretary, Discos owed N2trn to Gencos, causing them to owe a sum of N1trn to their suppliers. Electricity Distribution Companies have been bedevilled with low tariff collection and illiquidity, threatening the entire value chain. Proshare Analysts note that while the Gencos' under-generation of power has typically been attributed to the relatively low transmission capacity of the national grid, distribution companies may have begun to pull back demand to limit their indebtedness.  

Analysts Explain the Importance of Water Security to Food Stability

Food security has been prioritized worldwide as countries try to ensure that the domestic market supplies food products. Many countries have food strategies showing that food production is valued by the country and seen as a priority but do not publish a water security strategy. Water security is essential since it helps the Agricultural and other sectors. The first step for countries achieving this security is to understand how much water is needed by industries and farms, then determine how much water is available for use. Countries experienced high temperatures this year, affecting food production and planting. Countries experienced drought this year, a situation caused by the high temperatures experienced this year, and evidence of how weather conditions cannot be determined or influenced. If water security is prioritized, infrastructures could be put in place to protect countries from the possibility of low food production, thereby preventing food scarcity. 

Equity Market Begins to Look Up, Say, Analysts

Analysts observed buying interest in the market as the Nigeria Exchange Limited (NGX) increased by 2.03% to close at 49,661.27 basis points against a 0.25% gain recorded to close at 48,675.24 basis points at the end of the previous trading session. In Naira terms, the NGX Market CAP recorded an increase of N532.16bn. Anaalysts believe investors are taking advantage of the bearish trend, entering the market on the low, and looking forward to the positive Q3 performance to improve their investments. At the close of previous trade sessions, Analysts observed colossal buying interest in Multiverse with a +505.21% increase in volume traded, which caused a +9.5% increase in share price to move from N2.1 to N2.3. In comparison, Chams Holdco, with a +40.15% increase in traded volume, caused a +8% increase in share price to move from N0.25 to N0.27. 

Investors' interest in index heavyweights like Airtel, with share index moving from N1905.4 to N2040, which is a +7.1% with BUA Food, Nestle also contributed to the broader index's strong performance (see chart 1 below). 

Chart 1: Share price movement of Chams and Multiverse

Analysts Review Investor Interest in Alagbaka Power Limited  

Alagbaka Power Limited issued a senior secured N4.2billion 7-year Fixed rate Bond due in 2029 with a 19% coupon rate. The Ondo state government secures the bond as the company has a 25-year Power Purchase Agreement (PPA) to construct a 4.5 megawatts Independent Power Plant to supply electricity to the state secretariat and other offices in Alagbaka. Given that, the state has pledged an irrevocable Standard Payment Order (ISPO) from its FAAC receivables with United Bank of Africa Plc to cover the payments for the 2.5MW electricity supplied during the duration of the PPA. The offer is ongoing and will close on August 30, 2022, with a "Bbb-" rating from Agusto & co. Investors can subscribe with a minimum of N10m and multiples of N1,000 afterward. Analysts expect the high coupon and lower risk to attract investors, as the coupon is close to the current headline inflation at 19.64%, with other secured bond issuances having lower coupons. 

Analysts Interrogate Nigeria's Demand for Power Generators 

According to a study done by the World Bank, no less than 70% of Nigerian firms rely on generators for their electricity. The data reflects statistics from Nigeria's Rural Electrification Agency (REA) that Nigerians spend an estimated $14 billion annually on small-scale diesel generators without reliable power from the national grid. Nigeria's power supply challenge has worsened, with the average diesel price rising steadily in the past eight months.  'All On,' a subsidiary of Shell, in a recent report, advised the Nigerian government to implement policies that would discourage the importation of fossil-fuel-based generators, citing its harmful environmental impact as a result of the emission of harmful pollutants and increase in the risk of premature death. 

Analysts believe the suggestion is narrow-minded, given that unless the government can improve its grid supply or provide renewable alternatives, demand for generators would not falter regardless of taxes imposed. Emphasis should instead be on how to transition to sustainable power supply, which could serve Nigerians and their businesses, before seeking to eliminate the use of generators. 

CBN Announces USSD Code for e-Naira Transactions, Analysts Review Matters Arising

The CBN has disclosed a new short USSD code *997# for subscribers of its digital currency, e-Naira, to make financial transactions on the platform. The aim is to enhance its acceptability, focusing on deepening the payment system. Analysts believe the e-Naira, especially the USSD channel, would enhance financial inclusion, support poverty reduction, and enable direct welfare disbursement to citizens. The platform would also improve the availability and usability of digital money, reduce the cost of processing cash transactions, and improve cross-border payment efficiency, among others. 

Analysts Dissect SCBX Termination of $500m Crypto Exchange Acquisition

Due to regulatory concerns about crypto exchanges in Thailand, SCBX, the parent company of Siam Commercial Bank, terminated a $500 million deal to purchase a 51% share in Bitkub, a crypto exchange. While SCBX intends to grow its business with a regional fintech, it performed due diligence on the firm and found no abnormalities. Analysts believed that crypto exchanges saw Thailand as a controlled environment with tax benefits for dealers. However, large Exchanges have already encountered challenges with regulatory guidelines in the past.

In comparison to previous performance, the global crypto market trended slowly. Bitcoin lost -1.27% with a -5.37% fall in trading volume. Over the past week, the coin has dropped by -0.54%, with a year-to-date decline of -55.03%. Cardano witnessed an uptick among the top cryptocurrencies by market cap, with a 24hr rise of +2.78%. However, the value remains below its initial price of US$1 with a year-to-date decline of -65.37% (see chart 2 below).

Chart 2: Bitcoin Price Movement