Oil dealers set to gain from price caps

KenolKobil is slated to announce its full-year results at the end of this month with analysts forecasting strong performance despite the government regulating how much oil marketers can charge at the fuel pump.

They say worries of caps hitting oil marketers’ bottom lines have been reduced as the margins set by the Energy Regulatory Commission (ERC) still offer ample room for marketers to remain profitable. The ERC put a Sh6 margin per litre on the wholesale end of the chain and a Sh3 margin on the retail side. In the past margins were set at Sh4.50.

“We think that overall profitability for the sector will improve despite concerns about introduction of price controls in Kenya as the pricing formula (introduced 14 months ago) included margins which had historically been enjoyed by oil marketers anyway,” says a coverage report by Standard Investment Bank (SIB).

Kwame Owino, executive director of the Institute of Economic Affairs, said that all other factors remaining constant the ERC model assures oil marketers of making money. “The formula cuts out competition and assures marketers that they will make Sh6 to the litre,” said Mr Owino.

SIB analysts said that they expect the industry to see per unit contribution increase by 20 per cent all things remaining constant. KenolKobil has an upper hand over Total Kenya due to better branding despite having a slightly smaller marketshare in Kenya, says the coverage report. At 23.7 per cent Total Kenya has the largest marketshare, KenolKobil follows closely with 23.4 per cent, Shell 17.8 per cent and Libya Oil at 10 per cent with the balance shared amongst independent oil marketers. Eric Musau, a research analyst at Standard Investment Bank, said that cost of borrowing will put Total Kenya at a disadvantage. “Their costs will be high from a financing point of view. We saw that in 2011 interest rates were generally going up,” said Mr Musau. Interest rates begun scaling up towards second-half 2011 after the Central Bank Rate increased from 6 to the current 18 per cent.

Total Kenya financed the acquisition of the Chevron assets using a Sh7.5 billion commercial loan in 2009. Last October the French-majority owned firm issued a profit warning saying it will earn at least a quarter less than the Sh91l million in net profit it made in 2010.

A rights issue or selling some more assets to pay off the debt would be the most appropriate way out he added. This would nevertheless present a new problem of adding more shares in the market at a time its shares at NSE have been depressed for months.

KenolKobil, on the other hand, earned Sh1.77 billion in net profits, up from Sh1.29 billion in 2010. Discovery of oils and gas reserves in neighbouring countries will create both opportunities and risks for marketers according to the report. The present depots, stations and other infrastructure assure marketers that products still have to use the facilities.

Discovery of oil and gas reserves in neighbouring countries and concrete production plans by regional governments mean that oil marketers have to shift to oil infrastructure if they are to fully take advantage of opportunities. Mr Musau said the investment in upstream business is too expensive a venture for an oil marketer and is better suited to state entities.

jgachiri@ke.nationmedia.com