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NNPC JV stake sale to boost NSE by N13trn

The possibility of Nigerian National Petroleum Corporation (NNPC) listing its stake in the nine International Oil Companies (IOCs) it currently has Joint Venture arrangements with, could boost total equities market capitalization of the Nigerian stock exchange (NSE) by N13 trillion.

According to the 2016 NNPC oil and gas report, the government has Joint Venture arrangements with IOCs that produced 46 percent of total crude oil in the upstream oil and gas sector. They together produced 301 million barrels of crude and at $60 per barrel; total production value for the period amounted to $18.06 billion (N6.5 trillion)
If the price to sales (P/S) ratio of equities currently listed on the Nigerian bourse which is 2x is applied to 6.5 trillion naira, we get an additional N13 trillion to total market capitalization which as at the 31st of May this year stood at N13.81 trillion.

To elucidate further on the weight and value possible listings could bring to the market, BusinessDay did valuation for four of the nine NNPC JVs with IOCs, a result of which put their cumulative Enterprise Value (EV) at N27 trillion.

This was arrived at by multiplying the EV/production multiple of Seplat (30.14x), a listed company operating in the oil and gas upstream to the barrel of oil equivalent per day (BOEPD) of Shell Petroleum Development Company of Nigeria Limited (SPDC), Chevron Nigeria Limited (CNL), Mobil Producing Nigeria Unlimited (MPNU), and for Nigerian Agip Oil Company Limited (NAOC) which was 631,000, 600,000, 207,000 and 109,000 respectively in 2017.

It should be noted that the NNPC currently has a 55 percent stake in SPDC, 60 percent in CNL, 60 percent in MPNU, and 60 percent in NAOC. EV/Production Multiple (EV/boepd) is the most commonly used valuation multiple in the oil and gas industry which measures the value of a company as a function of the total number of barrels of oil equivalent, or mcf equivalent, produced per day.

In view of how successive governments have shielded the operations of the NNPC from the public for fear of scrutiny, letting go of its majority stake with IOCs might prove to be an uphill task, but for the sake of diversifying the market and ensuring an equities market with depth, analysts have suggested listing between 5 to 8 percent of its stake.

Should the Government decide to list at least 5 percent of its total stake estimated at N27 trillion in just four of the nine IOCs, the market will be significantly boosted with the sale of about N1.35 trillion ($3.78billion) worth of shares.

“Before we can even think of listing the JVs, the petroleum industry bill (PIB) needs to come into effect because it is when the bill is signed into law that the NNPC can finally be dissolved and asset management structures will come up,” Moses Ojo, the head of research Pan African Capital, said.

“But that is just one side of the discussion. Yes, listing these stocks on the Nigerian bourse if legally possible, will raise market capitalization significantly but we might end up having another Dangote Cement, or Seplat, a situation where 3 or 4 stocks will be controlling a very high proportion of the market.

“The problem of depth will only be adequately addressed if we have more listed equities controlling a larger share of total market capitalization,” Ojo concluded.

The FG announced plans last year to fund the 2018 budget from restructuring the nation’s shareholdings in joint venture (JV) companies and sale of non-oil assets.

A top source in government disclosed to BusinessDay that in the JV restructuring plan, the Federal Government is looking to replicate the successful NLNG model where government’s stake is capped below 50 percent across the oil producing joint ventures.

By this arrangement, the joint ventures will run as commercial operations with the ability to raise their own funding, borrow and finance projects without recourse to the country’s budget.

On his part, Robert Omotunde, head of research Afrinvest, said “we currently have only one security that is a fully fledged oil and gas upstream operator listed on the floor (Seplat), and it accounts for less than 0.35 percent of the total oil production capacity in the country.

“If there are policies that ensure listings of JVs are done, what we will likely see is more depth and breadth in the market in terms of the amount securities that are listed. Also, there will be increased opportunities for investors to come and play in the Nigerian market,” Omotunde concluded.

While deepening the equities market is not a direct function of the government, its operations and policies which translate to relative stability or instability in the economy affects the equities market largely.

The role of the Federal government in ensuring an equities market with depth and capacity to play its capital formation role in the economy has been passive in the last three years as the government has relied more on the debt side of the market.

According to data from the DMO, the federal government’s public debt stock as at March 31, 2018 stood at N12.58 trillion and this has attracted criticism from around the country.

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