Oil stocks fare badly in 2009 despite projections

Investors who thought that putting money in any firm that was involved in oil or the media was like buying the proverbial cash cow were proven wrong at the end of 2009.
Oil marketers have traditionally posted positive returns even when the economy was dipping due to the ever increasing demand for fuel, but last year bucked this trend when the two listed oil firms on the Nairobi Stock Exchange (NSE) reported negative returns.

KenolKobil and Total Kenya who have a combined market share of 44 per cent posted negative end of year returns of 24.24 per cent and 7.03 per cent respectively, defying earlier projections that had stated that stocks from the two firms would continue their resilient growth.

A report from Dyer and Blair Investment Bank had warned in March last year that rising transportation and distribution costs were the main risk factors to the sector’s profitability by being a drag on earnings and cash flows.

The fears were confirmed in August when KenolKobil released its half year results showing a Sh431 million loss with analysts shocked more by the extent of the loss rather than the outcome.

“We did not expect this type of loss,” says Leah Nyambura, Dyer and Blair’s senior research analyst. The report projected that the costs would decline this year, helping KenolKobil’s future earnings per share outlook. But KenolKobil says it could be a while before the supply bottlenecks at the refinery are sorted out, depressing the sector’s outlook in the meantime.

Kenya has only one main refinery, the Kenya Petroleum Refineries which is unable to process heavier crude which is cheaper and it is consumers who bear the brunt as they are unable to get cheaper oil. Competitor Total Kenya experienced similar problems with the refinery and it suffered from falling oil prices which had a year earlier catapulted revenues.

Total Kenya posted half-year operating profit of Sh227 million, less than a quarter of the Sh1.04 billion reported over the previous period.

Johnson Nderi of Suntra Investment Bank says getting a pulse on the petroleum energy sector is becoming difficult because of the government’s unclear policy stance. “The energy industry is tricky due to government’s interference and the results are wild swings in the price of petroleum as well as that of shares of oil marketers quoted at the Nairobi Stock Exchange,” says Mr Nderi.

The Triton saga which nearly left Kenya Pipeline Company bankrupt, the continued exit of oil marketers and the government acting as both a regulator and player, through the National Oil Corporation of Kenya, are symptoms of the crossroads the sector is at.

But the industry faces a brighter future as result of oil prices likely rising as the global economy slowly recovers from the economic crises, analysts say.

“The world oil market should gradually tighten in 2010 and 2011, provided the global economic recovery continues as projected,” the Energy Information Administration said in a statement earlier in the week.

The agencies predictions are that global prices will rise to at least $80 per barrel from 2009’s average price of $68 per barrel.

The weather will also play a critical role in setting prices as warmer temperatures hit cold regions such as North America and China thereby reducing demand for the commodity which should bring down prices.

On the other hand prices may remain high if the current cold season in Europe continues fuelling demand for oil ahich is used for heating.
The movement of the Kenyan Shilling will also play a key role in determining revenues generated by the two firms.

In Kenya oil accounts for 22 per cent of all imports which means any move in the shilling is immediately felt by the two firms that are biggest importers of the commodity.