Saudi Aramco acquires stake in Pakistani company

Reportedly, Saudi Aramco has acquired a 40% stake in Gas & Oil Pakistan (GO Petroleum). This is the second major development in Pakistan’s oil marketing space this year - both led by Saudi Arabia - with Wafi Energy earlier entering into a share purchase agreement to buy Shell Pakistan (SHEL PA).

Incorporated in 2015, GO Petroleum retails fuels and lubricants, backed by about 1,100 outlets and a storage capacity of 200,000 tons. It is the 2nd largest oil marketing company in Pakistan in terms of retail outlets. However, its market share has fluctuated between 6 to 8 percent in the last three years, making it smaller than SHEL and APL. The industry leader remains PSO (enjoying market share of 50%).  

Although, pricing details have not been divulged as yet, according to Pakistan’s leading brokerage house, Intermarket Securities the assessed intrinsic value of US$200 million for SHEL to tentatively price the GO deal.

Given GO’s smaller market share, including in the lubricants business and the lack of a brand value comparable to SHEL, the brokerage house takes the deal price between US$100 million to US$150 million.

A 40% stake at this valuation range translates to US$40 million to US$60 million.

The brokerage house estimates that Vitol Dubai has a 10% share in GO Petroleum but it is unclear at this point if this is part of the 40% stake being acquired by Aramco.

It is likely but not certain that Aramco will take over management rights.

The GO Petroleum deal will be Aramco’s first investment in Pakistan, and comes on the heels of its earlier moves to acquire Valvoline’s global operations and Chile’s Esmax Distribution SpA.

The GO Petroleum investment will likely be very small in comparison to these other overseas downstream ventures. This leads analysts to think it may well represent a testing of the waters, with Aramco reportedly also interested in setting up a mega refinery project in Pakistan.

If GO Petroleum expands rapidly it could eat into the existing market shares of competitors. At present, given its major presence on motorways and the North region, GO primarily competes with HASCOL and APL, while urban centers are dominated by PSO and SHEL.

A possible expansion into the South region will impact the latter two companies more.

 

Pakistan State Oil Co. warrants closer watch

Pakistan’s largest oil marketing company, Pakistan State Oil Company (PSO) is expected to suffer from increased circular debt build up during FY23 amidst volatile LNG prices due to current geopolitical scenario, alongside with rapid depreciation of Pak Rupee, in the near term. I am inclined to share with my readers the latest review by Pakistan’s largest brokerage house, AKD Securities.

The brokerage house after revisiting its investment case for Pakistan State Oil (PSO) has revised December 2023 share target price to PKR215, from PKR240, providing a total return of 66% from last close.

Its models incorporate risk-free rate of 17%, PKR/US$ of 240/270 and Arab Light of US$95/90 per barrel during FY23/FY24. More specifically, with the crop season likely to be impacted by the recent catastrophic floods (affecting HSD offtakes), reduced auto sales in the coming quarters and overall fallen retail sales due to lower affordability amidst higher prices.

Industry’s total POL demand is expected to cumulatively fall by 15% during FY23 (previous estimate 8%), due to an overall depressed economic outlook.

To note, PSO’s volumetric offtakes were down by 18%YoY as against industry’s overall decline of 20% during 5MFY23.

The much awaited revision in OMC margin provides significant impetus to the valuation. The brokerage house has incorporated uniform OMC margins of PKR6/liter for both MS and HSD from January 2023 onwards, up 61%/51% from current levels for MS/HSD, respectively.

The aforementioned increase is expected to result in gross margins for retail fuels to stand at 2.6%/2.5% (assuming current POL prices) from 1.6%/1.7% on MS/HSD, respectively.

Historically, OMC margin increases were done generally benchmarking with the core CPI (NFNE), increasing by 6% on an average, annually. Going forward, the brokerage house assumes an annualized growth in OMC margin by 8%, to be revised at the start of every fiscal year.

With regards to the company’s working capital issues, measures taken by the GoP in order to meet with conditions set out by the IMF may be a breath of fresh air for the company.

As the global lender pushes the GoP into fiscal consolidation by increasing power and natural gas tariffs, this is expected to reduce the financial burden on the cash-starved sector and consequently PSO.

The company may be the primary beneficiary of these hikes as repayments of its overdue receivables and LPS surcharges may begin flowing through from its two biggest defaulters SNGPL (overdue receivables: PKR305 billion) and power sector (overdue receivables: PKR92 billion) as per latest quarter, inducing increased collections from customers.

Ongoing winters may pose  risk because in the near term, the national petroleum company is expected to suffer from increased circular debt build up during FY23 amidst volatile LNG prices due to current geo-political scenario, along with rapid depreciation of PKR/US$.

This subsequently results in increased working capital needs for the company and finance costs (82% short term in foreign currency, rising rates globally pose a risk).

Overall, the brokerage house expects belligerent build up of LNG receivables from Sui companies (as seen in the past) to gradually slowdown/ halt on the back of shrinking tariff differential between indigenous and imported gas assuming biannual gas price increase is incorporated in timely manner going forward.

The brokerage house liking for Pakistan State Oil (PSO) is due to: 1) gas and power tariff adjustments may prove to be cash-positive, 2) Modernization plans in refinery subsidiary (PRL) to enhance productivity, and 3) Phasing out of RFO coupled with increasing share of retail fuels, resulting in stable margins to drive unhampered future cash flow.

PSO posts 57 percent increase in profit after tax

On Tuesday, Pakistan’s largest oil marketing company, Pakistan State Oil Company Limited (PSO) released its half yearly results and also announce approval of 50 percent dividend by the Board of Directors. The results were above market expectations.

PSO has posted profit after tax of Rs6.7 billion (EPS: Rs24.76) for the half year ended 31^st December 2015 as compared to profit of Rs4.2 billion (EPS: Rs15.76) for the corresponding period of 2014, an increase of 57 percent.

The major takeaways are: 1) reduction in financial cost to Rs3.6 billion from Rs5.9 billion, may be because of improved cash flow and declining interest rates, 2) increase in share of profit of associates rising to Rs388 million from Rs23 million and 3) other income also went down to Rs5.3 billion from Rs6.7 billion.

Net sales of the company declined by over 30 percent to Rs353.9 billion from Rs508.2 billion. This erosion can be attributed to the declining trend in international prices of crude oil, also affecting prices of POL products being dispensed by PSO.

Pakistan: PSO third quarter profit up by 18 percent

Pakistan's largest oil marketing company, Pakistan State Oil (PSO) has released its third quarter results. Though, there is 18 percent increase in quarterly income, it remained below market expectations. Visit shkazmipk.com and read details.