Equity Analysis /
Pakistan

Pakistan OMCs - Sep’22 sees flat petroleum sales; PDL seem like a tall order

  • Weak demand for POL product means government will not be able to collect targeted levy amount for the first quarter.

  • Upcoming gas shortages due to constricted international supply means that FO demand is likely to rebound during winter.

  • The proposed OMC deregulation policy seems promising for the sector as it is experiencing higher costs & static margins.

Intermarket Securities
4 October 2022

POL product demand remained sequentially stable at 1.53mnMT in Sep’22. However, compared to Sep’21, demand declined by 22%. The cumulative reduction for 1QFY23 is 23% YoY which shows demand moderation in the face of elevated petroleum prices. Key POL products, MS/HSD witnessed a YoY decline of 22%/26% in demand primarily owing high oil prices amid an increased levy. FO experienced weakening of demand in 1QFY23 (-23% YoY) as well, due to heavier reliance on hydel energy. Weak FO demand is unlikely to persist owing to low gas and hydel energy availability during the upcoming winters.

  • Market shares for the OMC sector remained stable on a MoM basis. Both SHEL and PSO were able to increase their market share by 0.7% to 6.8% and 40%, respectively. APL’s market share declined slightly on a MoM basis by 0.6% but on a YoY basis the decline was more significant to 3.2%. APL’s MS and HSD sales performed better on a YoY basis than the overall industry as they declined by 16%/18% compared to the overall industry decline of 21%/30%. This means that APL’s falling market share can be attributed to the -40% YoY change in FO sales. The infrastructure damage caused by floods continues to dent demand for HSD and MS products. Supply chain issues continue to persist due to damaged road networks between cities and this is likely to continue moderating intercity travel in the short term. Demand may pick up in the medium term, when most of the repair work has been completed.

  • FO demand took a significant hit in 1QFY23 due to heavy rainfall as power generation shifted from FO plants to hydel energy during the quarter. Decline in hydel generation during winters and shortage of gas supply internationally will likely make it challenging for Pakistan this year. Pakistan requires 12 cargoes a month during winter in order to cater to rising demand. Gas shortage will be a major issue this winter due to Pakistan having access to only 7-8 cargoes from Qatar and Eni, leading to greater reliance on FO-based power generation.

 PDL seems like a tall order; Deregulation is in the offing

For FY23, the government has targeted collection of PKR 855bn under Petroleum Development Levy (PDL), translating into 1QFY23’s target of PKR213.75bn. We believe that the government is unlikely to meet its target due to lowering of the PDL rate and dampened demand in FY23. Slower demand  is a function of high oil prices, which have translated into unaffordable intra-city travel, leading to increased carpooling.  

Clarity has emerged on the upcoming OMC deregulation policy, a key catalyst for higher earnings outlook and valuation upside for the Oil marketing sector. The proposed de-regulation 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 01 Nov’22. The second phase would deregulate IFEM. The timeline for this phase has not been announced. We reiterate our BUY stance on PSO, underpinned by OMC margin hike going forward and the pending deregulation policy. PSO currently trades at a forward PE of 3.0x and we currently have a BUY stance with a TP of PKR 309/share.