The past year has been a very good time to own Ghana Oil (GOIL) shares.
The stock has roared 260% higher over the past twelve months, propelled by high-octane earnings growth and a cheery outlook for the Ghanaian economy.
Today, the shares change hands at a price of GHS4.05 per stub, which gives the stock a price-t0-earnings ratio of 24.3. That’s a lofty level, and as I will argue below, I think it’s an indication that shareholders should begin looking for an exit ramp.
But first a bit of background.
Majority-owned by the Ghanaian government, GOIL is Ghana’s leading marketer of gasoline and oil products. It operates 330 filling stations across the country and also distributes aviation fuel, bunker fuel for ships, lubricants, and LPG. All told, the company controls 18% of the nation’s oil products market – up from 13% five years ago.
GOIL’s earnings per share have more than tripled over the past four years. This impressive growth was fueled in part by the cost of a barrel of crude dropping from triple digits to its current level of $61.98.
Low oil prices make it easier for oil marketers to purchase, store, and sell their inventory, which translates into increased revenue and profitability. GOIL has grown its gross profit at a 36% rate since the end of 2012. And while just 22% of gross profit trickled down to the company’s bottom line five years ago, today GOIL pockets 32%.
The company has also benefited from the intensifying hunt for oil off Ghana’s shores. Exploration companies need a reliable source of fuel for their ships and helicopters and GOIL successfully scored several plum supply contracts.
In mid-2016, the company came back to the market to via a GHS155.0 million rights issue and used the proceeds to pay down debt, fund expansion and renovation of its fillings stations, and to invest in new facilities like a just completed fueling terminal for ocean-going ships and a bitumen plant intended to supply road construction contractors.
GOIL reported strong 22% earnings growth for 2017 on the back of a 16% increase in gross profit. It also eliminated its long-term debt load. The news has been well-received by investors, who have sent the share price 6% higher since the results were announced two weeks ago.
Free cash flow remained in negative territory for the fourth consecutive year. This stands to reason given GOIL’s heavy capital expenditure over the past few years. But it raises the question whether the new assets will be able to sustain earnings growth at a sufficiently rapid rate to avoid a selloff in the stock. And the dwindling cash balance raises the specter of another dilutive rights offer.