“We retain a BUY recommendation for both KNOC (fair value KES 13.53; 23.5% upside) and TNKL (fair value KES 41.02; 135.7% upside).”

We think (Total Kenya) TNKL had challenges in profitability management, as evidenced by first half 2015 numbers. We have upgraded KenolKobil on sustained management comments for what we consider a surprisingly quick debt pay down (KES 8.5bn in June 2015 to KES 2.8bn in Feb 2016) at an estimated price of KES 1.6bn.

In 2016, we feel remarkably comfortable about margin sustenance and a likely uptick in volumes (despite some domestic tax increases). Volume demand growth will also be boosted by GDP rise with regulatory stability sustaining overall industry attractiveness, especially in Kenya and most regional subsidiaries.

Key Sector/ Company Developments are:-
  1. Global crude oil prices have declined dramatically. We view sub USD 50 barrel price in the next couple of years as sustainable, even with the recent recovery to around USD 40. The emergence of swing producers in the USA and tepid demand is likely to weigh in negatively on price – as well as expected new capacity increase from Libya and Iran. The impact on exploration & development is likely to be negative, making it less profitable or unavailable for certain projects, especially offshore developments.
  2. Discovered Reserves (2C gross contingent) for Kenya were raised to over 600m barrels in 2015 from 250m in 2013, with ongoing appraisal suggesting the presence of roughly 1bn barrels.
  3. Kenya Petroleum Refinery Limited was closed after being converted from toll to merchant mode operation. It will now likely to be used as a first line processing facility for Kenya’s crude oil due for early production exports from late 2017.
  4. Plans to relocate and expand Kipevu oil terminal commenced. The process will improve Mombasa port efficiency and more than quadruple capacity. When completed in 2018, it will allow four large tankers of up to 150,000 tonnes to berth at the same time. Kenya currently has two oil terminals – Kipevu situated on the mainland Port Reitz which can only accommodate a single vessel of up to 100,000 tonnes at a time and the Shimanzi that can take in a 30,000-tonne vessel at a time.
  5. Uncertainty developed on the proposed Kenya and Uganda pipeline for crude oil export to the international markets from Hoima in Uganda after Uganda signed a similar agreement with Tanzania.
  6. Fallout from Triton Scandal continued. Kenya Pipeline won a dispute against Glencore Energy, commodities trader, which had claimed KES 3.6bn against the pipeline company – with the Court of Appeal ruling that Glencore had entered Kenya without an operating license. In FY13, Total Kenya took a one-off charge of USD 7.9m relating to guarantees made to Glencore on deliveries to the collapsed Triton Petroleum. KenolKobil was awarded KES 5.2bn in arbitration related to unfair allocation of ullage by Kenya Pipeline of storage capacity to Triton – a lower settlement or in lieu of service may be achieved.