Russia’s war against Ukraine has thrown global markets for petroleum and natural gas into turmoil. One option for Europe is to invest more in Africa’s energy sector and thereby lessen its dependence on Russia. We look at which African stocks could benefit from such a move.
Capital News Africa: From the Trading Floor – Week 9-2022
Russia’s war against Ukraine has upset the world’s oil markets. While only 11% of the world’s oil supply is sourced from Siberia, this was enough to shake the markets’ foundations.
But there is also a bit of good news amid this terrible war. According to the US Energy Information Administration, Africa is home to five of the top 39 oil-producing countries in the world: Nigeria, Angola, Algeria, Libya and Egypt. Taken together, these countries produce around 10% of the world’s oil supply and as such could be used to stabilise oil markets.
The tensions on the markets for natural gas are also running high, as western Europe, particularly Germany, are very dependent on gas supplies from Russia. In 2015, moreover, many German gas depots were sold to Russian gas giant Gazprom.
Having supplied 639 billion cubic metres of natural gas in 2020, Russia was the world’s second-biggest supplier after the USA, which delivered 915 billion cubic metres.
With respect to Africa, Algeria was the world’s tenth biggest supplier with 81.5 billion cubic metres, followed by Egypt (14th with 59 billion cubic metres) and Nigeria (16th with 49 billion cubic metres).
Of the total gas it produces annually, Russia delivers around 168 billion cubic metres to Europe (Turkey and the UK included). Of that 56 billion goes to Germany. As with oil, the African nations of Algeria, Egypt and Nigeria could close any supply gap left by ending dependence on Russian natural gas.
Due to the war in Ukraine, Europe now finds itself regretting its lack of support for a proposed Trans-Saharan gas pipeline. The pipeline was to begin in Warri on the Nigerian coast, move through Niger and Algeria and then terminate at the Algerian port of Arzew. From there, the gas would have been transported to Europe via pipelines underneath the Mediterranean Sea.
Under the original plans from the Nigerian National Petroleum Company (NNPC) and the state-owned Algerian energy firm Sonatrach, the pipeline would have had a length of 4100 kilometres. But as NNPC and Sonatrach have most of the pipeline installed, only 1000 kilometres extra would have been needed. Unfortunately, the Trans-Saharan pipeline is dead, politically speaking, and would be very difficult to revive.
As a result, Europe has one less alternative to reduce its dependence on Russian oil and gas. As the Trans-Saharan gas pipeline will likely never be realised, Europe will have to source liquified natural gas (LNG) for which the relevant terminals must be built.
Europe’s renewed interest in African fossil fuels will, in the first instance, benefit many companies that are not listed on any exchange. Not only Sonatrach, but also NNPC and several other energy players in Africa are state-owned.
Nonetheless, we have identified some listed companies that would benefit from greater European reliance on African oil and gas. One of them is Tullow Oil (ISIN: GB0001500809), which is listed on the London Stock Exchange (LSE) and specialises in oil and gas exploration in Africa and South America. Tullow is particularly active in Ghana (69% of sales). Other areas of operation are: Gabon (20% of sales), Equatorial Guinea (8%) and the Ivory Coast (3%).
Tullow’s African business did not perform well in the recent past. World prices on oil were at historic lows, making the development of new oil fields not very viable. Consequently, Tullow’s share shed 76% of its value in the last three years. But following Russia’s war with Ukraine, investors are taking a new look at Tullow. Its share gained 5.8% in February.
South African oil and chemical company Sasol (ISIN: ZAE000006896) is another stock that we believe will be on investors’ radar screens. Sasol supplies not only hydrocarbons and basic chemicals, but explores and produces oil and gas in South Africa, Mozambique, Gabon, Australia and Canada. Since the beginning of January, its share has put on a whopping 36%.
With no less than 14 oil and gas companies, Lagos’ bourse is heavily represented in the fossil fuels industry. But we tend to be careful with these stocks, including, for example, Oanda (ISIN: NGOANDO00002). As we reported, Oanda must still resolve its troubles with regulators (Link Newsletter vom 28.2.).
Seplat Energy (ISIN: NGSEPLAT0008), another African firm listed on the LSE, has also lost momentum recently (Link Newsletter vom 14.2.). Although it’s true that Seplat’s share has gained somewhat since the outbreak of war, we still see an investment in it as highly speculative. We’d prefer to wait and see if Seplat’s share continues to rise.
We also like shares in Total Energies Marketing Nigeria (ISIN: NGTOTAL000019), which is more widely known as Total Nigeria. This distributor of oil products should benefit directly from higher energy prices. Investors should, however, be aware that the share is not traded often on the Nigerian stock exchange. Such absence of liquidity could prove problematic when an investor in the company’s shares wants to sell them.
The renewed interest in African energy supplies could also benefit the continent’s construction sector. Investors will likely hunt for companies capable of realising complex industrial projects. One prime example is the Egyptian construction conglomerate Orascom (ISIN: AEDFXA14NUL7). Listed on the Nasdaq Dubai, Orascom specialises in industrial plants. For the month of February, its share was up 4% to USD 5.00 (EUR 4.44).