Equity Analysis /
Pakistan

Pakistan OMCs: Q4 FY 20 preview – Expect large losses on sharp price cuts

  • Expect big losses (again) from Pakistan OMCs in Q4 FY 20 results courtesy large inventory and exchange losses

  • Some mitigating factors – sharp price revision by end-June, lower finance costs and potential tax loss credits

  • We advocate being Underweight on OMCs, but the passing of new petroleum policy by the govt. will make us more positive

Intermarket Securities
7 August 2020

Our OMC Universe will continue to post large losses in 4QFY20. The quarter was mired by significant price reductions and another slip in the exchange rate. Sales could have been much lower qoq due to lockdown in April-May, but a big jump in June made up for the earlier weakness.

Petroleum prices were reduced more than 25% early in the quarter, but the entire cut was reversed at the end of June (likely containing the extent of the losses). Lower finance costs and potential tax credits will also trim losses, in our view. PSO and APL will likely skip payouts.

We have an Underweight stance on the sector, but will turn more positive if the government expeditiously approves the new Petroleum policy for the downstream oil sector, which promises to moderate competition and reduce earnings volatility in future, in our view.

Brace for big losses

We expect our OMC Universe (PSO, APL and SHEL) to post combined losses of PKR9.0bn for 4QFY20 compared to total losses of PKR8.5bn in the previous quarter and PKR4.5bn profits last year. This quarter was unprecedented because of the coronavirus pandemic, which led to sharp price reductions and wild swings in overall petroleum consumption. We believe OMCs will book big inventory losses, worse than in the previous quarter, along with large exchange losses. These, however, will be partially offset by lower finance costs amid sharp reduction in interest rates of 625bps since the outset of the pandemic, a big price increase of over 25% at the end of June (NRV adjustment will reduce inventory losses), and tax credits. Interestingly, despite pump prices plummeting to below PKR80/liter, sales declined in April-May due to lockdown conditions; but the easing of lockdown by mid-May saw stupendous jump in sales in June.  

PSO gained market share at the cost of large inventory losses

Because of the sharp jump in petroleum consumption in June 2020, OMC sales during 4QFY20 (exc. furnace oil), were flat yoy (up 31% qoq) despite nearly two months of lockdown. A sharp rebound in industrial activity post-lockdown led to steep jump in HSD sales. In this environment, PSO gained market share by 6ppt qoq (from 38% to 44%), as other OMCs restricted supplies to contain inventory losses amid more than 25% reduction in prices. PSO will therefore book larger inventory losses than peers (we estimate c.PKR9.0bn or PKR14.0/sh). APL, on the other hand, lost market share by 2ppt qoq due to underutilization of its group refineries during the lockdown. Even so, we expect both APL and SHEL to book inventory losses of PKR1.2bn (PKR8-9/sh for both).

More exchange losses but offset by lower finance costs

Exacerbating the dim scenario, the PKR fell further 3% against the greenback (4% during 3QFY20). While this will affect most OMCs (besides APL which imports very little), PSO will likely be more exposed as it had largely retired FE-25 loans on government’s directions (the borrowings allowed passing-on of any exchange losses to the government). In the past, FX losses were partly contained by passing it on in furnace oil prices, which change bi-weekly, but FO consumption has dwindled in recent past. Operating losses will be trimmed by lower finance costs (benefits PSO and SHEL more) amid lower interest rates, and likely booking of tax credits as both of these will have losses before tax for the period (FY20 and 1HCY20 respectively). We maintain our Underweight stance on the sector, but we will turn more positive if the government approves the new Petroleum policy in an expeditious manner.