Oil Barrons of Jordan
Fuel to go
After tobacco, oil (& its derivatives) is another commodity on which the government depends on. Tax revenue from oil products in 2020 was JODs 708 million compared to cigarette’s 950 million. Of course, pre-pandemic, it was the other way around with tax revenue on oil being higher than cigarettes and the cause established here.
At the end of each month, the public anxiously awaits the government’s calculated decision on whether to increase or decrease fuel prices before filling up their cars on the day or wait a little bit more.
In Jordan there are three main “marketing companies for oil derivatives” with possibly more coming on the way1, and one having the advantage of refining locally:
JoPetrol with 372 service stations and 3298 employees. Market cap: 346 million. Revenue: 957 million JODs (2020).
Manaseer with 77 service stations (+ 85 Express) and 2300 employees. Market cap: 155.1 million. Revenue: 617 million JODs (2020)2
Total with 180 service stations (93 employees).
In this newsletter, we will briefly go over the performance and financials of the first two as they are publicly traded on the Amman Stock Exchange.
Jordan Petroleum Refinery Company : Smokey downstream classic
JoPetrol (JOPT:ASE) is one of the most vital companies and a landmark in Jordan’s industrial scene for the past 65 years. It has been a darling to institutional, value and sleepy3 investors for a long time. It owns its own refinery in Zarqa and distributes oil derivatives to service stations (fully or partially owned) all across the Kingdom.
Share price performance however hasn’t been something to brag about and it seemed to be decoupled from the movement of oil prices in the past 10 years.
10 Year: -15% (Oct/2011-Oct/2021)
1 Year: +34% (Nov/2021)
The government and the social security own 22% :
The Refinery has two main issues that it needs to resolve. The first being the high sulphur content of their diesel fuel4. Everyone in Jordan complains about the pollution of black smoke coming out of the exhaust of lorry and heavy goods trucks (diesel in Jordan is not allowed to be sold and used to small SUVs); everyone who owns a diesel boiler for heating in the winter also complains from the soot deposits. Thankfully the refinery is working on a 4th expansion5 and in 2017 the government allowed for the other gas stations to import EURO 5 diesel6. The second issue facing the refinery is the government itself. Not in terms of the special taxes imposed on fuel as shown below (419 million JODs in 9 months! JoPetrol is the biggest contributor to treasury’s coffers).
It is in terms of the government being the refinery’s biggest client as well as debtor. JOPT is owed 457 million.
And what did the government decide to do?
Source: JOPT Annual Report 2020
Manaseer Oil: too big to fail?
Officially trading as Afaq for Energy (AFAQ:ASE), the Manaseer company has really changed the landscape in Jordan in the past 15 years. As a private sector business, it managed to enter a tightly knit, government controlled market and break JoPetrol’s monopoly. It managed to compete by setting high standards for quality and service. JoPetrol is only catching up with Manaseer by rebranding its image and improving its stations.
Similar to JoPetrol, its share price performance has been lacklustre despite having a star founder
10 Year: +19%
1 Year: +27%
It is owned primarily by the Manaseer group and Jordan Kuwait Bank:
Having a financial institution as a major shareholder could be beneficial when it comes to getting loans and overdraft from said shareholder. This brings us to the main issue of the company : its balance sheet.
On its liabilities side, it owes a bit to some banks here and there but the loans seem manageable and serviceable in the short and medium term.
From the asset side, what would worry an investor are the related party transactions, or credit to sister companies. Similar to JoPetrol’s relationship with the government, Manaseer Oil is expecting a lot of dues from sister companies, mainly Manaseer Cement. One or two of the smaller companies on the list have already closed down.
Instead of only taking provisions for bad debts, their auditors at Ernst & Young could suggest instead a debt for equity swap. This could be a quick fix until the company and market restructures.
With Government setting prices on oil derivatives, there is little these companies can do to compete except on a small number of services (branding, loyalty points, all in one service station for the automobile, allow solar charging for electric vehicles etc.).
There are many challenges ahead for this sector but the recent fuel shortage in the UK has shown that combustion engines will not disappear overnight. There needs to be a clear path forward and strategy set by the main distributors, the Ministry of Energy and the Ministry of Finance. They cannot haphazardly and blindly walk in the next decade thinking things will fix themselves.
The Government is heavily dependent on fuel tax (we didn’t cover the import side) but at the same time needs to lower its dependency on imported energy (that number being 93%). Just as with tobacco, it is stuck in a catch 22 when it comes to fuel consumption: should it increase customs for hybrid and electric vehicles which are more fuel efficient? Will customs compensate for the long term loss from fuel tax? Should the government provide for better public transportation, give incentives to private companies to carpool? Also what happened to the automobile factory in Aqaba7?
Sleepy investor definition: when your granddad bought shares of a company and forgot about it. Only after his death does the family find out about the investment and are scrambling to get their inheritance of the shares and dividends.