Equity Analysis /
Pakistan

Pakistan OMCs: Confluence of supply disruptions and weak demand

  • February 2020 OMC industry sales weaken considerably to 1.1mn tons, down 22% yoy and 17% mom

  • Impact of weak demand made worse by supply disruptions at ports and presence of smuggled products

  • PSO and HASCOL, being major importers, lost market share, while APL gained

Intermarket Securities
3 March 2020

Petroleum industry sales in February 2020 weakened considerably to 1.1mn tons, down 22% yoy and 17% mom. Even excluding Furnace oil (FO), industry sales were similarly depressed, down 23% yoy and 14% mom. Notably, petroleum prices were kept unchanged by the government for the month.

February is a slow-demand month because of winter season. Historically, many RFO based power plants planned their annual turnaround during this month. A number of supply factors also depressed sales during the month. These included (i) leakage of a fatal gas at the port, which led to shutdown of operations by OMCs for a few days, (ii) increased documentation requirements at the port, (iii) increase in availability of smuggled products from Iran, and (iv) pump dealers reduced offtake at the end of the month in anticipation of large price reductions for March. Finally, concerns on the global outbreak of coronavirus outside China also contributed to weaker demand.

Due to the factors mentioned above, HSD sales fell 36% yoy (down 20% mom) and Mogas sales declined 11% yoy and 10% mom. PSO and HASCOL, being major importers of retail fuels, lost about 3-5ppt market share in these products (compared to January 2020). APL, on the other hand, gained 2-3ppt market share in HSD and Mogas, due to concentration of pumps in Punjab, and its supplies predominantly come from local refineries (low reliance on imports through ports). Industry FO sales declined 16% yoy and 30% mom – with the sequential decline attributed to lower FO based power generation and slowdown in industrial activity.

In 8M FY 20, overall industry sales down 10% yoy to 11.2mn tons (down 6% yoy ex-FO). HSD sales fell 13% yoy due to a confluence of slowing economy and higher prices, exacerbated by the axle load implementation. Mogas sales are flat yoy despite steep decline of 47% yoy in passenger cars during 7MFY20 (indicating increase in demand from motorcycles). PSO’s overall market share has improved to 45% from 40% last year. Those of APL and SHEL are steady at 11% and 8% respectively. HASCOL’s share has halved from 12% to 6% in FY20 so far.

We expect OMC sales to improve in March 2020, partly due to dealers piling up stock following price reduction of PKR4-5/liter on Mogas and HSD. The closing of borders with Iran will temporarily reduce presence of smuggled products. Worsening of coronavirus outbreak is a key risk factor for demand.

Our preferred pick in the OMC space is APL (Buy, TP PKR440/sh), which is holding onto its market share in a declining market and is relatively less affected by the circular debt problem (better payouts).