Equity Analysis /
Pakistan

Pakistan OMCs: Sales volume update

  • Pakistan petroleum demand slumped abysmally (-26%MoM) as hydel energy flows spiked amid slow economy

  • However, declining furnace oil and diesel sales is broadly positive, paving way for low electricity tariff adjustments

  • We like PSO with a TP of PKR 309/share, with additional upside from likely OMC margin hike

Intermarket Securities
3 August 2022

Petroleum demand slumps highest since Feb’10; trends of FY22 unlikely to persist  

Latest petroleum product demand figures indicate a discouraging slump of 26% MoM to 1.44mnMT; highest decline since Feb’10. Product-wise data reveals a similar product demand trend with MS/HSD/FO dropping by 15/38/23% MoM. Triggered by a steep rise in POL product prices and better hydel energy availability in the backdrop of economic slowdown, heavy monsoon and Eid holidays, petroleum demand remained abysmally low. The declining sales of furnace oil and diesel for expensive power generation is broadly positive on the macro front, giving rise to relatively lesser Fuel Cost Adjustments (FCAs), going forward. However, we still favour PSO for a superior risk/reward profile, with an additional upside from the likely upward OMC margin revision.

  • Higher oil prices have translated into demand dampening for petrol and diesel. The nascent rise in diesel and FO demand during FY22 was also owing to lesser gas availability for power generation. Simultaneously, Jul'22 saw highest petrol and diesel prices which dampened demand, also underpinned by economic slowdown, monsoon impacted traveling, and Eid holidays. We believe, one element of slower petrol demand can be linked to car-pooling and work from home by masses in the metropolitan cities.

  • The petrol and diesel prices have not come off to a large extent. Hence, slower retail fuel demand prints can sustain, in our view. It is pertinent to note that recent petroleum product demand growth during FY22, was a function of higher car demand, strong economic momentum, subsidized retail fuel prices, and lower gas energy availability. Declining economic growth will be a major dampener for retail fuel demand.

  • Furnace oil sales demand may see another peak as the upcoming winter season may face shortage of expensive gas imports (RLNG) in the backdrop of peak gas demand in the country. We believe, the demand for furnace oil (FO) will also be supported by lower hydel energy availability in winters.

OMC margin hike be a key trigger

In the backdrop of substantial volumetric decline, a major upside trigger will be the upward revision of OMC margins following the recent ratification of Cabinet to increase dealer margins to PKR7/litre for petrol (previously: PKR 4.9/litre). Oil Companies Advisory Council (OCAC) has already pushed the Petroleum Division for increasing the OMC margin from PKR3.68/litre to PKR8.85/litre. Fresh news flows indicate that authorities will likely hike OMC margin to PKR6.0/litre. The decision can bear fruits for the entire OMC space, enabling them to overcome high financial costs while providing a level playing field, each for OMCs and dealers. In another beneficial event, the fortnightly pricing update now includes the average exchange rate, enabling reduction in exchange losses/gains borne by OMCs and Refineries and allowing a better transmission of international prices on consumers. We reiterate our BUY stance on PSO, underpinned by the gas tariff hike which awaits Cabinet’s ratification. PSO currently trades at FY23E PE of 3.0x and we currently have a BUY stance with a TP of PKR 309/sh.