Pakistan Petroleum profit likely to plunge by 40 percent

One of Pakistan’s pioneer exploration and production (E&P) Pakistan Petroleum Limited (PPL) is scheduled to announce its FY16 financial results on 17^th January 2017. During this period global crude oil price hovered at low levels. Therefore, the investors/shareholders await the result anxiously.

Pakistan’s leading brokerage house, AKD Securities has released its forecast hinting towards a decline in Earnings per Share (EPS) by 40 percent. The brokerage house attributes this potential decline to 44 percent decline in international oil prices. It has also hinted towards some other positives.

According to the brokerage house, PPL profit after tax for the period under revive is estimated to decline to Rs20.40 billion (EPS: Rs10.35) as compared to net profit of Rs34.25 billion (EPS: Rs17.37) for a year ago, a plunge of 40 percent.

Brokerage house has attributed this decline primarily to a 44 percent decline in average international crude oil price of USD41/barrel in FY16 as compared to USD73/barrel during FY15.

The report also suggests that PPL may also announce a final cash dividend of Rs2.75/share that would the full year payout to Rs5.00/share for FY16.

The story would begin with an expected fall in topline by 24 percent, to Rs79.13 billion in FY16 from Rs104.02 billion in FY15.  Other income is expected to decline by 30 percent to Rs5.32 billion owing to decline in short-term investments. Finance cost is expected to go up by 24 percent to Rs688 million owing to greater real discount rate set for the decommissioning obligations.

A decline in royalty expenses is likely to provide some relief. However, slide in crude oil price remains a key risk to declining revenues/earnings and consequently valuations.

Anti Iran stance of western media

In one of my previous blogs I had accused western media of being dishonest. Some of my readers termed it a ‘sweeping statement’. Since then, I have been reading news pertaining to Muslim countries more carefully and dispassionately and also avoiding giving any immediate response. However, today I read news released by Reuters captioned “Exclusive: Iran capitalizes on OPEC oil cut to sell millions of barrels” submitted by Jonathan Saul.

This report talks about Iran has selling more than 13 million barrels of oil that it had long held on tankers at sea, capitalizing on an OPEC output cut deal from which it is exempted to regain market share and court new buyers, according to industry sources and data.

In the past three months, Tehran has sold almost half the oil it had held in floating storage, which had tied up many of its tankers as it struggled to offload stocks in an oversupplied global market.

The amount of Iranian oil held at sea has dropped to 16.4 million barrels, from 29.6 million barrels at the beginning of October, according to Thomson Reuters Oil Flows data. Before that sharp drop, the level had barely changed in 2016; it was 29.7 million barrels at the start of last year, the data showed.

Unsold oil is now tying up about 12 to 14 Iranian tankers, out of its fleet of about 60 vessels, compared with around 30 in the summer, according to two tanker-tracking sources.

I would like to reiterate that this news pertains to 2016 and any details about 2017 are yet to come. During December 2016 both Saudi Arab and Russia have produced oil at record levels and more shale oil rigs have resumed production in the US. Therefore, it may be said that Iran was not alone in capitalizing on its crude inventories. It only followed the footprints of Saudi Arabia, Russia and the US.

Pakistan Stock Exchange inching closer to 50,000 mark

The benchmark index of Pakistan Stock Exchange (PSX) continued its upward journey towards 50,000 mark during the week ended 6^th January 2017. It posted a gain of 2.58%WoW, and closed the week at 49,038. Exercising of pricing power by cements, expectations of turnaround in margins for steels, expectations of the textile policy and the Supreme Court's move to re‐examine beneficial owners of holding companies, helped boost a broad based rally where average volumes for the week were up 42.3%WoW, 408 million shares. Key new flows included: 1) cement dispatches grew by 8.65%YoY to 19.81 million tons in 1HFY17, led by growing demand in the domestic market, while local cement sales increasing by 11.07%YoY during the period, 2) the GoP decided to keep petroleum prices unchanged for two weeks during the ongoing month, 3) domestic petroleum products sales during the 1HFY16 increased by more than 18% to 13 million tons. POL sales during December'16 rose to 2 million tons, reflecting a growth of 23% YoY/1.8%MoM and 4) news reports stated that KEL has shelved plans for converting its BQPS‐1, with 420MW capacity to low‐priced coal after the utility failed to secure cost‐effective tariffs from the regulator. Stocks outperforming over the week were: ASTL, FFC, NCL and PTC, while laggards were: MEBL, AGTL, EPCL and KEL. Volume leaders were: DSL, ASL, KEL and, BOP. News flows and preliminary data on output figures from OPEC nations is expected to greatly sway global oil prices. While the index is at all‐time highs, profit taking cannot be ruled out. In the run‐up to results season, dividend paying stocks are expected to remain in the limelight. 

Recent recovery in international urea price to US$240/ton (up 42% since July'16) presents a lucrative opportunity for local manufacturers to export excess urea inventory (November'16 urea inventory in the system stands reported at 1.45 million tons, down 15%MoM/ up 56%YoY). Weakening demand (poor farm dynamics) along with record level urea production has led to high inventory build‐up in the system which is likely to persist in the near‐term with urea inventory forecasted at 1.2 million to 1.8 million tons by the end of CY16/CY17 respectively. In this backdrop, the GoP is expected to allow export of 0.8 million tons of urea in line with a proposal of Ministry of Industries. In such a scenario, Engro fertilizer remains a key beneficiary on account of its low cost/bag and healthy market share, followed by FFC owing to market leadership in urea sales.  

Robust growth in demand for POL products, underpins December'16 total volumetric offtake of over 2 million tons, climbing 1.4%MoM/21.6%YoY. Furnace oil sales rose by 35.5% MoM/30.4%YoY, followed by HSD sales up 23.7%YoY but dipped 20%MoM, whereas MOGAS demand continued to rise (growing 16.7%YoY), yet remaining tepid sequentially (0.3%YoY increase). 1HFY17 volumes point to 18%YoY growth in total volumes, led by 20%/16%/20%YoY growth in FO/HSD/MOGAS offtake. The picking up of volumes at this pace is likely to slow. That said, 2HFY17 is likely to be slightly better (5-year average 2HFY sales make up 53% of annual offtake), led by strong growth in retail fuels from May’17 onwards. Premium fuels sales continue to soar, where 1HFY17 sales of 29,547 tons marks a 37%YoY increase, making FY16 full year sales of 41,067 tons pale in comparison. Renewed force to regain market share remains prominent in PSO's numbers, where the OMC is slated to benefit from its vast retail network.

According to an AKD Research report, cement prices in the North Region have likely been increased in the range of Rs10‐20/bag whereas the cement prices in the South Region remain unchanged and are not expected to be raised anytime soon. The brokerage house believes that the hike in cement prices (not incorporated in base estimates yet) should allow cement manufacturers to maintain margins whereas gross margin of AKD Cement Universe is likely to improve by 54 bps/100 bps to 38.76%/43.77% in FY17/FY18.

Pakistan Stock Exchange outperforms global equity markets

Inching towards another milestone of 48,000 level, benchmark of Index of Pakistan Stock Exchange (PSX) closed the week ended on 30^th December 2016 at an all‐time high of 47,807, up 2.52%WoW. Activity at the bourse tapered 15.06%WoW with average daily volume at 286 million shares. The volume leaders were DSL, BOP, KEL, DCL and TRG.

Key news flows during the week included: 1) Ogra recommended increase in POL prices, 2) CNG prices increased across Sindh, the first hike following the GoP’s decision to deregulate the country’s CNG market, 3) GoP rejected all the bids in PIB auction, 4) ECC of the cabinet approved export of 225,000 tons of sugar without any rebate and allocation of 26MMCFD gas to EFERT old plant and 5) Lahore High Court nullified the auction of DTH license carried out by PEMRA after striking down the rules and regulations which barred broadcasters from applying/participating in the bidding process.

Performance leaders during the week were: EFOODS, HCAR, FCCL, SHEL and SNGP; while laggards included: HMB, AICL, PSMC, POL and PTC. Foreign participation continued its negative trend with US$17.9 million outflows compared to US$45.5 million in the last week.

After a phenomenal end to the calendar year, PSX posted remarkable return of 45.7% in CY16, outperforming the world equity markets. The market is likely to continue its positive trend in the near term in the absence of any negative trigger. However, room for volatility in the next week remains where risk could emerge in the form of: 1) international oil price swings on potential concerns on the rising US inventories and 2) resumption of Panama leak case proceedings.  

Following its previous month performance, fertilizer offtake remained promising during November'16 as well on the arrival of Rabi season coupled with continued support from subsidy package announced in FY17 budget. After declining significantly during 5MCY16 (down 32%YoY), fertilizer offtake rose 28%YoY during June‐November 2016. According to latest figures released by NFDC for November'16, total fertilizer sales increased to 1.58 million tons against 1.32 million tons sold in November'15, up 20%YoY/68%MoM). Urea sales increased to 764,000 tons during November'16, up 23%YoY. On a cumulative basis, total fertilizer sales posted a growth of 3%YoY to 7.83 million tons during 11MCY16, whereas urea offtake was 4.59 million tons (down 4%YoY). On arrival of Rabi season, DAP sales continue to show great strength in November'16, registering an increase of 17%YoY/32%MoM to 631,000 tons, of which imported DAP sale was 421,000 tons (up 10%YoY/61%MoM). Near‐term factors affecting fertilizer industry are: 1) Rabi season to continue driving demand, 2) favorable ruling from SHC against GIDC imposition, 3) international pricing dynamics (urea prices rebounded to US$235/ton in December’16 and 4) decision on export of excess urea inventory.

Latest banking sector data for November'16 indicates that banks' balance sheet (BS) continues to grow at strong levels by 9%YoY to Rs12.3 trillion. With banks lowering their preference for risk‐ free GoP securities (investments down 9% since June'16, private sector credit growth picked up pace, posting an encouraging growth of 11.7%YoY during November’16. Consumer financing grew by a healthy 20.%YoY (10.3% of the private sector loans) as banks look to re‐focus on high margin auto finance and personal loans in the current lower inflationary environment. Expecting spreads to bottom out this year as interest rates rise next year, analysts retain their liking for banks due to: 1) the room to benefit from loan growth, 2) an adequate CAR buffer, 3) achieved economies of scale and 4) a strong non‐interest income franchise. Playing this theme, we like HBL and UBL however, post price‐bull run over the last 6 months.

According to provisional data, cement dispatches during December'16 declined by 0.8%YoY/8.9%MoM to 3.414 million tons. Weaker domestic demand growth during December'16 could be attributed to seasonal slowdown in construction activity and decline in PSDP expenditures in December'16. Exports also declined, likely due to the seasonality factor. While industry's dispatches growth remained dismal, CHCC dispatches were up to 119,000 tons in December'16, indicating the commencement of its 1.32 million tpa Brownfield expansion during the month. On a cumulative basis, industry's dispatches grew by 7.9%YoY in 6MFY17 as compared to 9.9% in 5MFY17 due to recent month's decline in dispatches. Seasonal slowdown in winters may keep dispatches growth rate lower, where we expect domestic demand growth to pick up ahead of summers as construction activity and PSDP releases increase.