Equity Analysis /
Pakistan

Oil Marketing – Sector update: OMC margins increased; Cash earnings to elevate

  • OMC margins revised upward because of the space created by falling international oil prices.

  • HSD margins revised from PKR3.89/litre to PKR5.41/litre and MS margins revised from PKR3.68/litre to PKR4.00/Litre

  • Margin hike will give some respite to OMCs, as they have been suffering from a slowdown in demand.

Intermarket Securities
1 December 2022

OMC Margin Hike: The recent pull back in international oil prices has allowed the government to fulfill its promise of margin revision to the OMCs, albeit partially. MS margins have been revised upward to PKR4.00/litre from PKR3.68/litre, and HSD margins have been revised to PKR5.41/litre from PKR 3.89/litre. The earnings impact for both APL and PSO are mentioned in the table below.

This is a partial revision: The government initially promised OMCs to increase margins to PKR6.00/litre on both MS and HSD and the same was approved by the ECC (in the meeting held on 1st November 2022).

International prices will decide the fate of OMCs: According to our channel checks, the government has communicated to OMCs that the margins will only increase again once international oil prices fall, giving room for the government to increase Petroleum levy and OMC margins accordingly. This has been witnessed in the current oil prices notification.

Maintaining Overweight stance: The OMC sector is facing temporary headwinds this year (FY23) due to reduced demand amid a slowdown in overall economic activity and inventory losses as international oil prices continue to come off. However, demand uptick – FY24 onwards – combined with a meaningful hike in margins should translate into improved cash earnings and a healthy dividend yield for the sector.