Pakistan-Saudi Arabia to create a refinery

Four Pakistani state-owned petroleum companies (SoEs) have signed on Thursday a memorandum of understanding (MoU) to facilitate US$10 billion Saudi investment in a new oil refinery at Gwadar, Baluchistan with a refining capacity of 300,000 barrels per day – the first in more than a decade and the largest in the country.

The government is reportedly in the advanced stages of negotiations with Saudi giant Aramco to execute the Greenfield refinery project at the strategic Gwadar Port and wanted to complete the initial paperwork before its tenure ends in two weeks.

Oil and Gas Development Company (OGDCL), Pakistan State Oil Company (PSO), Pakistan Petroleum (PPL), and Government Holdings (GHPL) signed the MoU to join hands and provide comfort to the Saudi firm to enter Pakistan with a major investment. The four SoEs would join the project through equity participation.

The project envisions setting up an integrated refinery petrochemical complex with a crude oil processing capacity of a minimum 300,000 bpd along with a petrochemical facility. The integrated complex shall comprise various components such as marine infrastructure, petrochemical complex, storages for crude oil and refined products, pipeline connectivity etc.

According to the Petroleum Division, despite being integral to the growth of the economy, no new refinery project has materialized in Pakistan for more than a decade and only two refineries have been added in the last 40 years. Compared to the 20 million tons of refining capacity, the actual capacity utilization is at around 11 million tons.

This is mainly due to the decreasing furnace oil demand in the country as a result of a change in the energy mix in the power sector and the fixed production slate of refineries that cannot produce just petrol and high-speed diesel and all products are produced simultaneously. Thus, as furnace oil demand declines, refineries have to lower their overall production and struggle to maintain their throughput at optimal levels.

This is despite the fact that independent consultants forecast Pakistan’s demand for petrol and diesel to grow beyond 33 million tons per annum by 2023.

To facilitate the Saudi investment in refining, the government has recently passed a new policy under which a new deep conversion oil refinery of a minimum 300,000 bpd achieving financial close of the project within five years shall be eligible for a customs duty of 7.5% for 25 years on petrol and diesel of all grades produced effective from the date of commissioning of the refinery.

The said refinery shall also enjoy a 20-year tax holiday and would also be entitled to exemption from levy of customs duties, surcharges, withholding tax, general sales tax, any other ad valorem tax or any other levies and duties on import of any equipment to be installed, or material to be used in the refinery projects without any precondition for obtaining certification by the Engineering Development Board.

These fiscal incentives and other facilitation would be recorded and protected under the project agreements between the project company, the key sponsors, investors and the concerned government and would be protected through a grant to Special Economic Zones Act.

Minister for State Musadiq Malik, who witnessed the MoU signing ceremony, said the Saudi oil firm showed a willingness to inject the entire equity into the multibillion-dollar refinery project, leading the Pakistani government to decide on a joint venture with key SoEs.

 

 

Pakistani OMCs face doom and gloom

Sales of oil marketing companies in March 2023 dipped to 1.1 million tons, a fall of 9%MoM and 39%YoY basis. The decline was led by high speed diesel (HSD) and furnace oil (FO). This is the lowest monthly offtake number since April 2020 (1.068 million tons), when Government of Pakistan (GoP) resorted to lockdowns in a bid to contain the spread of COVID-19.

The decline can be mainly attributed to significant price hikes in motor spirit (MS) and HSD over the previous two months, taking prices during March to PkR272 and PKR293 per liter respectively.

The said fall to 35 month low can also be attributed to demand destruction, as POL sales volumes are correlated with an overall economic slowdown, depicted by falling industrial activity, falling power generation, shock in the auto sector and the unprecedented wave of inflation that has gripped the economy.

Overall, total POL sales remained down by 21%YoY during 9MFY23, to 12.8 million tons as compared to 16.2 million tons during the same period a year ago.

Product wise, HSD sales were down 43%YoY and FO offtake was down 70%YoY), as muted industrial activity and power generation. FO based generation declined 51%YoY during 8MFY23.

Analysts expect increased HSD offtakes in the upcoming Kharif season (April-June), although, with fuel prices on the rise, it is expected to be an expensive affair for farmers, and may even be riddled with fuel shortages like last year where diesel shortage hit sowing/harvesting farmers in Punjab as they queued up at filling stations, being wary in anticipation of monsoon season in May/June. The ongoing wave of inflationary pressures has also gripped the economy and has resulted in consumers choosing to avoid leisurely travel amidst reduced purchasing power.

It is worth mentioning that the prices of both MS and HSD have risen to PKR272 and PKR293 per liter, respectively.

These prices represent an increase, in line with the current government's plan to pass on the full cost of supply and levies to consumers.

Company wise, major players in the sector, PSO/APL/SHEL/GOPL, delivered throughput levels of 535,000/113,000/89,000/58,000 tons, taking total market share to 48.4%/10.2%/8.2%/5.3% for March 20223, respectively.

To note, PSO’s offtakes remained worse off, down 44%YoY, mainly due to dampened FO demand, down 92%YoY as compared to an industry-wide decline of 70%YoY.

More specifically, country’s largest OMC saw its retail volume fall by 12%MoM/36%YoY. Furthermore, HASCOL emerged the most resilient amidst the industry decline as total volumes for the month were reported at 43,000 tons, up by 60%MoM. This comes on the back of HASCOL’s approach to remobilize most of its retail depots by CY22 end, as most closed up due to company’s fallout back in CY20.

On the retail front, PSO and APL ended the 2QFY23 period with market share standing at 49.1%/8.5% as compared to 47.0%/8.3% during SPLY.

With only a quarter left during the year – the demand for petroleum products hasn't looked this bad in years since the Covid’19 pandemic struck. Overall, the broad based economic slowdown continues to haunt the sustainability of the sector as risen prices and dampened industrial/commercial activity have kept offtakes under pressure.

On a forward looking basis, rampant inflationary pressures in the coming quarters alongside a depressed GDP outlook during the year period compels us to assume negative volumetric growth for the industry, by approximately 20-21% for FY23 (previous 15%).

 

National Refinery stops supplying fuel to Pakistan State Oil Company

According to media reports, National Refinery (NRL) has decided to halt supplies to Pakistan State Oil Company (PSO) after the state-owned oil marketing company stopped the payments to the refinery.

PSO has been suffering from a severe financial crisis due to lack of payments from various sectors on account of supply of petroleum products. Currently, the PSO owes National Refinery PKR 3.469 billion.

PSO stopped the payments of refineries a couple of days back. These refineries are the suppliers of diesel, petrol, aviation fuel, furnace oil etc. to the state-owned company, having the largest share in the sales of petroleum products in the country.

“NRL has decided to halt the supply to PSO after the stoppage of payment and intimated the OMC in written,” said sources familiar to the development. They added, NRL was the first and other refineries might follow suit.

PSO has been entangled in financial woes for the last many years, but in recent months the situation has aggravated immensely as its inter-corporate debt has increased to PKR1,024 billion with receivables at PKR762.653 billion and payables at PKR261.155 billion.

The breakup of the PSO payments to the local refineries showed that it has to pay PKR25 billion to Pak-Arab Refinery Company (PARCO), PKR10 billion to Pakistan Refinery (PRL), PKR3.469 billion to National Refinery, PKR9.049 billion to Attock Refinery (ARL), and PKR4.108 billion to Cnergyico.

Details of the company’s receivables show that the Sui Northern Gas Pipelines (SNGPL) has so far emerged as the biggest defaulter of Pakistan State Oil.

The SNGPL owes PSO PKR492.102 billion as of March 08, 2023.

The power sector continues to haunt the state-owned oil marketing company as it is required to PKR Rs178 billion followed by Pakistan International Airlines (PIA) and the government of Pakistan, which owe PSO PKR92.5 billion.

The most crucial payment of PKR124.666 billion in the head of LPS (late payment surcharge) is also part of the total receivables that have soared to PKR762.653 billion.

 

PSO earning to plunge due to inventory losses

Pakistan’s largest oil marketing company, operating in the public sector, Pakistan State Oil (PSO) is expected to announce its 2QFY23 financial result. The Company is expected to post profit after tax of PKR2.4 billion (EPS: PKR5.1). The said increase can be attributed to increase in HSD offtakes (up 53%QoQ), owed to the sowing demand in the rabi season during October and November 2022.

Recovery in offtakes was imminent as compared to the severely dampened fuel demand (floods/price hikes) during 1QFY23, resulting in total offtakes rising by 26%QoQ during 2QFY23.

The company’s revenue is expected to rise to PKR880.6 billion, changing by 2.1%QoQ/69%YoY, mainly on the back of the rise in fuel prices as compared to the last year (2QFY22: PKR140/124 per liter for MS/HSD).

The company is anticipated to record inventory losses of PKR12.2 billion (PKR26/share) for 2QFY23, as ex-refinery prices for MS/HSD fell by 18%/11% during the period as compared to the previous quarter.

Subsequently resulting in gross margins for the quarter to end at 0.7% as compared to 0.2% 1QFY23.

The effective tax is expected to rise to 56% for the period (vs 1QFY23: 70% ET), as minimum turnover tax (0.5% on gross POL sales) hampers the already beat-down bottom-line.

At a normalized tax rate of 33%, the earnings per share would have clocked in at PKR7.76/share.

Finally, analysts expect the topline from LNG segment to clock in at PKR232 billion, majorly on the back of rising LNG prices globally (energy crunch in Europe/ Asia) coupled with increased volumes (new LNG deal with Qatar @ 10.2% slope, signed last year).

To note, PSO’s average DES price for the quarter stood at US$11.39/mmbtu as against US$13.43/mmbtu in the previous quarter.

The liking for PSO is due to: 1) gas & 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.

For this reason, our December 2023 price of PKR215/share provides a total return of 53%, with forward dividend yields of 7% for FY23 and /10%for FY24.

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.

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.