Equity Analysis /

Pakistan OMCs: Demand weakens sequentially; PSO gaining market share

    Intermarket Securities
    6 February 2020

    Petroleum industry sales in January 2020 have clocked in at 1.3mn tons, down 15% yoy and 3% mom. Excluding Furnace oil (FO), however, industry sales were lower by 7% yoy. Petrol and HSD prices during the month were increased moderately by about PKR2.0/liter.

    Note that January is a low demand period given the winter season, where overall power generation declines and industrial output is lower partly due to gas curtailment. Mogas sales held up yoy (down 5% mom) in January, while HSD sales declined 13% yoy (down 15% mom). Notably, the decline in HSD sales is sharper in contrast to the previous three months (down 3% yoy on average). FO sales (though down 43% yoy) rose 78% mom in January, where we attribute potentially higher FO-based power generation amid more LNG being diverted to domestic consumers, while very low prices have triggered greater demand from the industries. FO has become a cheaper fuel for captive power compared to natural gas and LNG. If FO sales continue at a pace of 0.2-0.3mn tons per month, local refineries will likely overcome the FO inventory issue, in our view.

    PSO’s sales have performed well in the retail fuels market, where sales of HSD and Mogas have risen compared to a decline for the industry. Its market shares in both fuels have thus improved 5-6ppt yoy. However, its FO sales (down 65% yoy) have underperformed the industry, which corroborates rising demand from the industries and that FO based power generation occurred on more efficient IPPs (those based on 2002 Power policy), in our view. Market shares of APL and SHEL have remained around 10% and 8%, respectively, in January 2020, even though their retail fuel sales declined slightly more than the industry. Notably, HASCOL posted better mom sales growth than its peers and improved its overall market share by 1.5ppt to 8.7%. On a yoy basis, HASCOL’s sales are still very weak (down 47% yoy).

    In 7MFY20, overall sales are down 9% yoy (down 4% yoy ex-FO). HSD sales fell 10% yoy due to a confluence of slowing economy and higher prices, exacerbated by the axel load implementation. Mogas sales were up 2% yoy. PSO’s overall market share has improved to 45% from 41% 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.

    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 to the circular debt problem (better payouts).