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Analysts’ Discuss Issues Beyond the Seplat Acquisition and Impact Assessment of Concessionary Lending

Aug 09, 2022   •   by TheAnalyst, Proshare Research   •   Source: Proshare   •   eye-icon 126 views

Being an Analys Note issued by Proshare Research on August 9th  , 2022

 

 

Analysts Look Beyond the Seplat-Mobil Acquisition Deadlock

The provision of the PIA 2021 requires that the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) shall have the power to renew and suspend licenses and leases with the approval of the petroleum minister. Analysts are of the view that the opposition to the Seplat-ExxonMobil shallow offshore deal by the NUPRC raises concerns as to the (clarity) intent and the endgame of the PIA.

 

Beyond the in-fighting on the Seplat acquisition of the entire stake of Mobil Producing Nigeria Unlimited (valued at US$1.3bn plus $300m contingent consideration), Proshare analysts are concerned about a few deeper issues/questions that demand urgent resolution: (I) the divestment of IOCs from the Nigerian oil market at a time the country needs FDI; (II) has the issue of abandonment and decommissioning of the assets by ExxonMobil been resolved before the approval; (III) what are the implications of unclear governance framework on future investment flow to the industry; (IV) who is seeking to exercise the Right of First Refusal on the Seplat-ExxonMobil deal again when the legacy NNPC is no longer a public corporation that is holding stakes in trust for Nigerians (since not all assets and liabilities of the NNPC is automatically transferred to the New NNPC Limited); and (V) how best can the country resolve the 400,000 b/d oil production shortfalls/theft as claimed by the Minister of State for Petroleum Resources.

 

Analysts Call for Impact Assessment of Concessionary Lending 

Data from the Bank of Industry (BOI) shows that it extended a total of N315bn loan to MSMEs over the period 2015 and 2021.  Analysts note that while MSMEs account for 45% of employment in Nigeria and 33% of the country’s GDP, the impact of the two recessions in 2016 and 2020, the legacy FX scarcity, multiple taxations, infrastructural deficit, and other several other challenges have forced the closure of many small businesses. Proshare analysts have therefore called for an impact assessment of the concessionary lending by the Bank of Industry (BoI) to determine the size of the bang the country gets from every buck loaned.

 

Higher Food Prices Pricks Analysts’ Interest as Global Supply Chain Disruptions Ease

Food prices have hit record levels this year as economic activities increased, causing an increased demand for food from rice to wheat and other commodities. As supply chain disruptions came to the fore, it became notable that supply could not meet up with demand, becoming a major driver for food price rise globally. While this was a global problem, Nigeria had other problems contributing to the food price rise. 

 

The Minister of Agriculture and Rural Development, Mahmood Abubakar, claimed the country still suffered from the after-effects of the COVID-19 pandemic which had arrested production, but Proshare Analysts note the role of insecurity as a significant disruptor and an escalator of risk pricing of farmgate produce.  

 

Farmers have been driven from farmlands and have had to choose between living and farming. The existential concerns of smallholder farmers are many times more severe than large holder farmers who are better favoured to protect their farms. With the relatively low food production in Nigeria before the COVID-19 pandemic in 2020, the country remains import-dependent. The high import levies on grain commodities like wheat, explains the high domestic cost of imported grain-based food staples like bread.

 

Analysts Observe Bullish Run of Flour Mills and Honeywell after Acquisition

Since the announcement of the acquisition of Honeywell Flour Plc by the Flour Mills of Nigeria, Analysts have observed an improvement in the share prices of both companies and attributed the improvement to investors taking advantage of the prospective scale advantage and cost containment made possible by the combination. While Honeywell recorded a loss of N2.4bn in the Q1 2023 financial statement, Flour Mill recorded a profit of N5.5bn. Analysts believe Honeywell will benefit from the good faith of investors in Flour Mills of Nigeria (see chart 1 below).

 

Chart 1: Movement in Share Prices of Flourmill and Honeywell

 

Rising IDA Debt Stock Raises Analysts’ Concern as Revenue Dips 

The World Bank Fiscal year 2022 audited financial statement shows that Nigeria has moved up to the fourth position of the World Bank’s top ten international development borrowers as the country’s IDA debt stock rose to US$13bn which is the highest for any African country. As of June 2021, Nigeria ranked fifth on the list with US$11.7bn IDA debt stock, indicating the country had accumulated about US$1.3bn IDA debt stock in H1 2022. Recently, rising debt stock has been a bone of contention although analysts believe the major concern should be the revenue constraint, not the mounting debt stock as debt-to-GDP is relatively modest and sustainable. Proshare analysts believe the ranking could weigh on the decision of other countries in giving out loans to the country as the 118% debt-to-revenue ratio poses a default risk, however, the federal government will most likely pivot to the domestic market through the issuance of FGN bonds.  

 

Meanwhile Coleman Technical Limited issued a N10bn series 5 & 6 Commercial Paper under the N20bn programme, which is scheduled to close on Friday, 12 August 2022. The yield for the 182-days and 270-days is 14.0% and 15.5% while the discount rate is at 13.09% and 13.91% respectively. Analysts believe the GCR short-term rating of BBB- indicating a good credit rating with an attractive yield, including the company’s 92% year-on-year growth in revenue and a 250% increase in PBT in 2021 financials should drive investors to the issuance.

 

High Energy Prices Could Be a Long-Term Catalyst for Renewable Energy

There is a severe and negative impact of the escalating cost of energy on the productive capacity and competitiveness of the Nigerian industrial sector, especially the small and medium scaled industries. In July, the price of diesel was N720 per litre and is projected to rise further, making fossil energy out of reach for many developing countries.

 

Global analysts believe that renewable energy could ultimately be cheaper within the next six years than continuing with the current energy systems. Meanwhile, empirical studies across developed nations found that while jobs would be lost in the mining and fossil fuels segments, 28 million more jobs would be created than lost overall. However, Russia, Canada, and parts of Africa may experience net job losses as these countries depend heavily on fossil fuels. Proshare analysts remain optimistic about job retention amidst the energy transition in Nigeria as the majority of the professionals in the fossil-fuel sector should be able to pivot easily to the renewable energy sector.

 

Analysts Review US Treasury Sanctions on Notorious Virtual Currency Mixer

The US treasury office of foreign assets control sanctioned Tornado cash- a virtual currency mixer- for allegedly aiding a gang of hackers, The Lazarus Group, funded by the Democratic People's Republic of Korea, in laundering over US$600mn. Tornado cash has reportedly been used to launder billions of dollars in virtual money since its inception in 2019. Notably, the regulator stated that US$96mn in cyber monies were obtained as a result of its operation from the Harmony Bridge Heist on June 23, 2022, and US$7.8mn from the Nomad Heist on August 2, 2022. Analysts feel that sanctions will continue to be of little success for regulators till there is a broad regulation of virtual currencies and a cap on crypto firms.

 

The cryptocurrency markets showed a short-lived rally this morning after bitcoin moved near the US$24506.07-resistance level. Over the past 24hr trading session, Bitcoin peaked at a 24hr high of US$24,203.69 with a 24hr low of US$23,701.38. This morning, Bitcoin fell by -1.72% to trade at US$23,723.59. Other altcoins mirrored the same direction, with Ethereum falling -0.81% and BNB down by -2.94% (see chart 2 below).


Chart 2: Bitcoin Price Movement

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