Are markets mispricing Oando as its journey to become a beefy upstream energy major in Africa's biggest oil producer gathers pace? On Wednesday, the company released its IFRS results for the end-December 2010 fiscal year, posting a 56 per cent jump in profit before tax at $144m compared with $93m in the 2009 fiscal year.

The results were in line with expectations since it has already disclosed its earnings according to Nigerian accounting standards.

According to the company, its revenue and profit before tax has grown at a CAGR of 50 per cent and 58 per cent, respectively, between 2003 and 2009, as it diversified away from the low margin business of marketing petroleum products to the more profitable oil and gas production business (though, it has no refining capability.)

And strong earnings growth is on the cards in the coming years, as it grabs oil and gas market share. For example, in March, the government announced it had awarded a multi-billion dollar contract to Oando and Eni subsidiary Agip to develop a natural gas plant.

The project forms part of the government's Gas Revolution Plan, which eyes $25bn of investment to facilitate natural gas exports and meet domestic energy demand, given the country's chronic power shortages.

Dragan Trajkov, London-based oil and gas analyst at Renaissance Capital, the emerging markets investment bank, who has a buy target on the stock, thinks there is about a 30 per cent upside to the share price. It traded at 50.9 naira, as of pixel time, compared with his N66 target.

Bull run

Trajokov cites the following reasons for his bullish outlook: strong commodity demand, the prospective passage of the Petroleum Industry Bill that will bestow favourable treatment toward local energy majors, and margin growth as projects come onstream in the second half of 2011 and 2012.

Profit after tax is set to grow 30 per cent and 50 per cent, respectively, in the 2011 and 2012 fiscal year, before softening to between 7 per cent and 15 per cent in the subsequent years, the RenCap analyst said. He also forecast profit margin growth of 3.9 per cent and 5 per cent in 2011 and 2012, respectively, from 3.1 per cent in 2010, driven by higher oil and gas production.

On the sidelines of the African Development Bank annual meeting in Lisbon last week, Wale Tinubu, CEO of Oando, told FT Tilt that he was "confident" that the new administration will pass the long-awaited oil and power reform bills, a development that should help production volumes, he said.

Taking stock

Even if profits disappoint if high-margin projects are delayed, there is a powerful driver for the share price: as FT Tilt has reported, there are a woeful lack of energy majors listed on the Nigerian Stock Exchange. Oando's only real comparable benchmark is Afren, which is only listed in London, while NSE-listed Total Nigeria, for example, is principally involved in the marketing of petroleum and gas products rather than upstream activity.

The CEO, in comments to FT Tilt last week, also stressed that recent suggestions that it planned to issue 25 per cent of its share capital through a private placement to finance growth or acquisitions should be taken with a pinch of salt. The company is still fleshing out its capital-raising plans and no private placement is imminent, he said.

The RenCap analyst said the company might consider spinning off its marketing or upstream business in to raise capital and boost its valuation, given the tendency of investors to underprice stocks of conglomerate businesses.

See also:
Coverage of gas - FT Tilt
Oando gets a boost as Nigeria steps on the gas - FT Tilt