Equity Analysis /

Pakistan Energy: Attock Group – Corporate briefing notes

  • Attock group posted its highest earnings. All three segments performed exceptionally well despite super tax.

  • Performance is mainly driven by three factors: elevated POL product prices, inventory gains and PKR depreciation.

  • For every vertical the Attock Group will enhance its product portfolio and introduce efficiencies within its processes.

Intermarket Securities
22 September 2022

POL announced highest ever annual profit of PKR25.9bn (EPS: PKR 91.37) in FY22, gaining from high oil prices and PKR devaluation. Earnings were highest in 4Q at PKR 8.44bn (EPS: PKR 29.73), where most part of PKR devaluation helped in terms of Fx gains despite super tax, also aiding with a healthy final payout of PKR 50/share. POL conducted a corporate briefing session today to discuss various contours of its FY22 performance and provide outlook.

FY22 was a year of lower oil (-11% YoY) and gas (-10% YoY), mainly on account of decline in output from its key assets (Tal block and Jhandial). POL’s management is currently appraising Tal block where Mamikhel South will likely increase the overall output. However, the resolution of pricing conundrum on windfall levy, related to revised concession under Policy of 2012, remains key in giving a green light for tie-in of additional flows. On the other hand, Jhandial field from Ikhlas block continues to suffer from unsuccessful appraisal efforts, however, the company continues to make development efforts; pointing towards a low likelihood of reserve downgrade.

POL’s balance sheet strength is depicted by its healthy cash position of PKR239/share, enabling it to continuously participate in the upcoming bidding process starting in Oct’22. The recent reserve numbers indicate a reserve life of c.16 years for POL, however, such increase in RLI can be inextricably linked to lower production from key fields. We have a BUY stance on POL based on its high dividend yield of 18% and our TP offering potential upside of 43%.

Attock Refinery (ATRL)

  • ATRL has announced stellar profitability of PKR 13.0bn (EPS: PKR 121.49) during FY22, most of which came from refining operations (i.e. EPS: PKR 85.63) as high crack spreads helped the company to post stellar growth in earnings in 4Q. The result was accompanied by a DPS of PKR10/share. It is pertinent to note that most of the earnings is attributable to inventory gains of PKR8.0bn during the year.

  • The management has guided that better refining margins were a function of international geopolitical situation that helped the company make early debt retirements. The refining throughput stayed supportive with 79% utilization and 1.87mn tons of production, higher than 77% in FY21 and 69% in FY20.

  • The company seeks to meet Euro 5 product specifications and also reduce FO output. In this regard, various projects are being undertaken. The Continuous Catalyst Regeneration (CCR) and Diesel Hydro Desulphurization (DHDS) will be setup under a total outlay of USD500mn to improve the product specifications of gasoline and gasoil. Similarly, concerted efforts towards two more projects under a JV are considered i) Bottom-of-Barrel to produce value added products and ii) deep conversion green-field refinery, if sustainable supply is available. The latter two depend heavily on deregulation and new refining policy.

  • It is not difficult for ATRL, currently in North, to source crude from South as they have also done in the past. Moreover, the recent impact of floods continue to partially weigh on diesel demand while petrol sales have not declined relatively. 

Attock Petroleum (APL)

APL announced all-time high earnings of PKR18.5bn (EPS: PKR 186.23). It is pertinent to mention that according to management over 50% of earnings this year can be attributed to inventory gains. For the 4QFY22 the company made a dividend announcement of PKR30/share cash accompanied with a 25% bonus. The total cash payout for FY22 is PKR45/share.

Expansion Plans

The management stated that they had established storage infrastructure in the south and the company was going to expand aggressively in the region. Out of the 50-60 new outlets to be opened in FY23, 20-25 will be located in Karachi and 50% of the company’s FY23 development expenditure will take place in the southern region.  To further fortify its position in the north, APL plans on opening 2 new storage terminals in DI Khan and Taru Jaba with a combined storage capacity of 50,000MT.

The company also mentioned its plans to upgrade selected Lahore, Rawalpindi, Karachi and motorway retail outlets by installing EV chargers in them over the next 2-3 months.

OMC Deregulation Policy

The APL team provided useful clarity on the upcoming deregulation policy. Deregulation will happen in two phases. In the first phase OMC margins and Ex-Refinery price would be deregulated. This phase is expected to happen on 1st November 2022.  The second phase would deregulate IFEM, the timeline for this phase has not been announced.  Management also mentioned that the government conveyed its intention to increase OMC margin in light of higher cost of doing business but, so far the government has not fulfilled its promise.