Time to revamp oil refineries in Pakistan

I can recall the day the combustion system of my car stopped working. I towed it to the nearest workshop and came to know that the fuel filter, fuel pump and carburetor have been chocked due to accumulation of wax. The mechanic also told me that this has happened because you don’t drive car daily and the excessive wax present in petrol choked the lines etc. He also advised me to use HOBC instead of regular petrol. When I shared by experience with my other friends, they also confirmed facing similar problem. One of the findings was common that often HOBC is not available at all the outlets, even those located in the most posh areas.

This prompted me to talk to the owners of petrol pumps being run by different oil marketing companies OMCs. All of them gave me a copybook reply, “We don’t get enough supply of HOBC from OMCs”. When I probed further the finding was most surprising that only one refinery in Pakistan, Pak Arab Refinery (PARCO) produces HOBC. I also discovered that with the induction of cars based on latest technology consumption of HOBC has increased manifold but there has not been corresponding increase in its production in the country.

I continued my search and met two more surprises: 1) the other refineries operating in Pakistan are incapable of producing HOBC and the government owned largest OMC, Pakistan State Oil Company is not keen in importing HOBC and 2) the second refinery of PARCO to be constructed at Khalifa Point, having a capacity to refine 250,000 barrel oil per day has been delayed. This should have commenced production by 2010. I also found out that even if the construction is done on ‘war footings’ at Khalifa Point refinery, it will not be possible to commence production by 2020.

The prevailing situation prompts following questions:

1. What were the factors that didn’t allow PARCO to expand its ‘Mid Country’ capacity?
2. Why the sponsors deferred construction of ‘Khalifa Point’ refinery?
3. Why other refineries continue to produce lower distillate?
4. Why refineries (other than PARCO) are operating below optimum capacity utilization?
5. Why huge quantities of POL products are being imported despite local refineries operating below optimum capacity utilization?

Finding replies of the above stated questions is the responsibility of the incumbent government.

However, prevailing situation offers golden opportunity to foreign investors to examine investment potential of constructing new refineries as well as expanding prevailing capacities in Pakistan.

Pakistan Stock Exchange closes above 40,000 level

Finally the benchmark of Pakistan Stock Exchange PSX-100 managed to close at 40,340 level, up 2.22%WoW. The rally was primarily driven by index heavy weights Banks on expectations of bottoming out of interest rates and Oil & Gas companies on higher international oil prices.

Average daily traded volumes jumped 23%WoW to 457 million shares, where second tier scrips remained the volume leaders that included: TRG, DCL, PACE, BOP and DSFL. Leaders during the outgoing week included: PTC, INDU, NML, MEBL and LOTCHEM, while laggards included: EFERT, MLCF, AGTL, PPL and ASTL.

 Key developments during the week included: 1) SBP’s official data suggested that the imposition of 0.6% withholding tax on bank transactions has caused gradual decline in deposits and high currency circulation, 2) the federal government has missed FY16 budgeted deficit recorded at 4.6% of GDP, 3) cement dispatches rose by 16.75%YoY to 3.585 million tons during the previous month, 4) Cotton Crop Assessment Committee (CCAC) slashed cotton production estimates by 20% to 11.27 million bales against the initial estimates of 14.1 million bales for FY17 and 5) Saudi Arabia and Russia have agreed to "act together" to try to stabilize oil prices but failed to make headway on a production freeze.

With result season nearing its end, there is no major trigger left in short term except for the following minor ones: 1) ceremonious meeting of OPEC to stabilize prices scheduled on 26^th of this month, 2) monetary policy in September end with expectation of status quo and 3) US FED rate decision likely to be announced on 21th of this month with the expectation of no change in interest rate. However, growing political noise poses significant downside risks as against potential positive surprises.

Making up the second IPO transaction of CY16, Loads limited is on the listing block with book building for 71.25% of offer size that commenced on 7^th September. The general public portion for 28.75% of the offer inclusive of 2.5 million shares reserved for employees is to be held on 28^th and 29 at a strike price of Rs20 per share. On offer are 50 million shares, making up 40% of post IPO outstanding shares of 125 million, by the country's premier radiator and exhaust systems manufacturer. Maintaining dominance in the exhaust systems and radiators market, the company plans on using proceeds from the listing for funding a significant expansion plan of Rs550 million with excess funds to be provisioned for working capital. Anticipating significant uptick in demand for automotive products, the management of Loads has plans to raise exhaust, radiator core and sheet metal production capacity by 83%, 119% and 109% respectively. Additionally, the growth from an expanded production facility and stable five-year (FY15‐20F) average auto sector sales growth of 9%, flows down to forward earnings CAGR of 19.8%.

Now that it is no longer a secret regarding sale of controlling shares by the current stakeholders of Pakistan’s only integrated electric utility K-Electric (KEL), AKD securities has set out a possible roadmap for the deal. As Shanghai Electric has publicly disclosed its intention to acquire the 66.4% of KEL (notice dated August 30th), essentially buying out KES Power, the Cayman Islands based SPV through which Abraaj acquired its interest in KEL. While a final deal price for the Share Purchase Agreement (SPA) between Abraaj (majority shareholder in KES Power) and Shanghai Electric is yet to be disclosed, the price may not be based on market prices alone and would most likely involve fair value analysis and thorough due diligence proceedings. However, using the stipulations of the Takeover Regulation 2008 as a proxy for a possible SPA between KES Power and Shanghai Electric, the brokerage house has calculated an indicative transaction price range and deal size (based on a sensitivity analysis). Additionally, a cursory analysis of top shareholders of ordinary shares in the utility shows the minor changes in shareholding, over FY08‐15, while foreign shareholders have acquired a minor stake following foreign debt conversion in FY10. Highlighting the robust operational credentials of Shanghai Electric Power Company, flashpoints remain in finalizing the deal (status of liabilities, negotiations with the GoP and authorities, MYT renewal application).

Remembering the day India attacked Pakistan

Pakistanis will celebrate 6^th September with great fervor, the day they repelled the attack by a military might, ten-times the size of their army. They just can’t forget 6^th September 1965, the day India attacked their homeland. Despite signing Tashkent agreement India continued its aggression against Pakistan that culminated at turning its eastern part into Bangladesh in1971. The war mania continues, the only difference is that there is no military assault but RAW agents are operating through nock and corner of Pakistan.

Many Pakistanis believe very strongly that all the RAW agents have not come from India. A question arises, if Pakistan is fully aware of the presence of RAW agents, why can’t these perpetrators be arrested?  The reply is simple; these agents are so skillfully embedded in the society that even their next-door neighbors can’t identify them. They live in thickly populated areas where inter-faith harmony exists at its best. These perpetrators normally enjoy high repute in the areas where they live in and also don’t indulge in any suspicious activity. But, they have their touts in other areas that are fully supported financially as well as supplied most lethal arms. Their touts have been completely brained washed and are blood-thirsty. The just can’t sleep without ‘enjoying the pleasure of killing a few innocents’.

Last year I had posted a blog on 6th September and its title was ‘Celebrating 50 years of 1965 war’. I have witnessed 1965 and 1971 wars besides uncountable border firing cases. I said that extremist Hindus have not accepted the partition of the subcontinent and are adamant at destroying Pakistan. Their repeated failures prove that these extremists have not been able to achieve their ultimate objective of eliminating Pakistan from the world map only because of patriotic citizens.

I am also of the view that over the years India has changed its strategy and abstain from entering into any major border conflict. Now it supports its embedded elements i.e. various militant groups busy in sabotage in the name of religious fanaticism, self-proclaimed discontent and targeted killing of religious scholars, academicians and social figures that raise voice against the terrorists and demand weeding out of these highly ruthless elements.

Being a student of geopolitics I also keep an eye on proxy wars being fought in general and in Pakistan’s neighborhood in particular. I can say without mincing my words that the super powers create issues, assemble rebel groups, and provide those funds, arms and training. They also prepare hawks that spread hatred among people belonging to different religions/sects and speaking different languages.

Pakistan has been fighting a proxy war in Afghanistan for more than four decades and has faced the worst fallout. Its social fabric has been destroyed, millions of militants are hibernating in Pakistan (they wear different caps) and use residents of areas as human shields. These culprits often enjoy the support of local political, sectarian and linguistic group as they also play the role of ‘militant groups’ of these outfits.

These perpetrators kill people for money and only for money. Their sanctuaries are located in Punjab, KP and Baluchistan provinces and they also keep coming to Sindh, the financial hub of Pakistan for the collection of booty. One wonders what the people posted at various check points are doing to check and contain the movement of these culprits.

I am also a staunch believer that since 9/11 millions of people have been killed in Iraq, Afghanistan, Libya, Yemen, Syria, Sudan and Pakistan. Most of these countries do not suffer from any serious internal conflicts but those inculcated and groomed by super powers.

If Pakistanis have to live and progress, everyone has to stand up, identify the culprits and weed them out. People have to keep a close watch at their surrounding and stop any suspected person seeking refuge in their neighborhood. As a first measure, they have to strengthen interfaith harmony so that no can exploit them in the name of religion, Islam does not teach killing. Remember, any one killing innocent people is not Muslim.

Pakistan market closes below 40,000 despite higher turnover

The week remained a cliffhanger for markets, coming off of the high-water mark of 40,000 as result announcements were met with a passive reaction from market participants. The index closed the week at 39,465 points, down 1.2%WoW. Expansion plans in the cement sector; strong order book for new model launches accompanied by rumors or planned capacity enhancements in autos and building materials kept select scrips in the limelight.

Healthy uptick of 60.2%WoW in volumes, average daily turnover for the week rose to 371.8 million shares as compared to 232 million shares a week ago. This was a reflection of heightened activity during earnings seasons. Volumes leaders remained retail favorites in the mid and small cap categories with solid average daily turnovers from: KEL, BYCO, DCL and DSFL. Gainers at the bourse were: SHEL, HCAR, ASTL and PSMC. Conversely laggards were: PIOC, MLCF, LUCK and CHCC.

In a trigger‐less backdrop, market participants may retain a downside bias to political developments, where bearish sentiment may trigger a spell of consolidation marking this September. Event risk in the form of macro developments including oil prices (OPEC ministers meeting in September and November), USFOMC's meeting (to possibly trigger another rate hike) and the SBP's rate decision (expected by end of the month) have the potential to spill over into markets.

The MSCI hype fizzled out with the market returning 0.02%MoM in August 2016 against an average 4%+ returns in the previous two months. Unable to sustain at 40,000 level during the month, the index retraced from its all‐time high of 40,057 points, to close at 39,810 levels. Foreign participation, took a back seat with net outflow of US$20.4 million versus inflow of US$23.2 million in July 2016. While volumes for PSX‐100 constituents remained flat, increased participation in small cap stocks bolstered overall volumes by 36.5%YoY with KEL, DCL and DSFL leading the volumes chart. Result season guided market sentiments predominantly with interest coming in sectors depicting above expected earnings announcements. In terms of performance amongst the main board, Automobiles, Textiles, Oil & Gas and Commercial Banks superseded the rest while Cements and Fertilizers lagged behind. Going into September 2016, analysts believe the market will continue hovering around the current level with political risks coming to the fore. Globally, key events to track are: 1) US FOMC meeting scheduled on 20-21 September potentially impacting the dollar and consequently regional equities and 2) an informal OPEC meeting on 28th September to discuss production freeze on oil.

Recently released NFDC numbers revealing higher fertilizer offtake during July 2016, where total fertilizer sales was 1.1 million tons against 618000 tons sold in July 2015 (up 78%YoY/58%MoM), a clear reflection of the subsidy package announced in budget FY17. In tandem, urea sales have also increased significantly by 66%YoY/32%MoM to 777,900 tons during the month under review. However, on a cumulative basis, fertilizer sales remained dismal during 7MCY16, as total fertilizer and urea offtake was 3.96 million tons (down 15%YoY) and 2.60 million tons (down 22%YoY) respectively. Similarly, DAP sales also remained strong during the month under review, registering an increase to 199,000 tons, of which imported DAP offtake amounted to 131,000. EFERT and FATIMA have come out as clear winners with urea sales for both recovering significantly.

Freezing oil output is a hoax call

Once again there is an uproar that oil producers want to talk about freezing output. It sound very funny that while the big producers are not willing to curtail their production, they want smaller producers to reduce their output.

It is on record that Saudi Arabia has persistently increased its output, but wants Iran to agree to freeze output without reaching its pre-sanction output level. It is on record that lately Saudi Arabia has been pumping one million barrels daily above its historical average.

On the face value it appears that the rift between two OPEC members, Iran and Saudi Arabia is not a complete fallacy. Saudi Arab is not willing to curtail its output because it is afraid of United States and Russia, which are adamant at causing damage to its desire to become a regional superpower, surpassing Iranian might.

Both United States and Russia are fighting a proxy war with Saudi Arabia in Syria and Yemen. Both the super powers know very well that the only way to cause dent to Saudi lust for wars is by reducing its petrodollar income.

In my humble opinion if Saudi Arabia cuts its production and price goes up by one dollar per barrel, it will not be a major loser. However, this may pave way for the US shale producers to increase their output. But a point must also be kept in mind that the US shale producers have not gone bankrupt and continue to pose a major threat to Saudi Arabia.  

Though, it may sound a little divergence from the topic, I just can’t resist from saying that the Zionists have completely brain washed Saudis who openly say that Iran is a bigger threat as compared to Israel. Having belief in this absurd idea, Saudi Arabia has emerged as the biggest buyer of arms.

I would also say that Saudis have enough petrodollars, if they stopped buying arms. Their animosity with Iran has been a cause of instability in the region but more importantly buying arms has not given it supremacy over its rival.

PSX-100 Index filtering at 40,000 level

Ignoring recent political flare up the benchmark of Pakistan Stock exchange, PSX-100 index resumed bullish momentum during the week ended 26^th August. After some recent profit-taking, the benchmark Index closed the week at 39,927 points. Average daily volumes for the week remained almost flat a little above 232 million shares with KEL, TRG, DFML, SNGP and AMTEX leading the board.

Key news flows during the week included: 1) GoP announced that claims for tax refunds for which payment orders were issued till 30^th April would be settled by 23^rd August this year, 2) SSGC in its plan submitted to the OGDC indicated spending Rs118.5 billion on its ongoing and new projects for improving and upgrading its transmission and distribution network, including RLNG transmission projects over the next 5 years, 3) meeting of the Drug Pricing Committee (DPC) summoned on 30^th of this month, where pharmaceutical companies have appealed to the government to increase the prices of various medicines, 4) ADB approved US$810 million in multi-tranche loans for Pakistan's transmission system, funding rehabilitation of NTDC's grid, 5) service deficit rose to US$290 billion, as against a surplus of US$51 million last year and 6) due diligence for MCB acquisition of NIB nearing completion.

Performance leaders during the week were: SNGP, ASTL, ICI and PSMC; while laggards included: HMB, SHEL, FATIMA and PPL. Foreign participation also eased out where net inflows during the week amounted to US$1.9 million as against considerably high net outflows of US$18.4 million a week ago.

Interest in the coming week is likely to be centered around the remainder of the corporate result for the season especially cement sector. Major companies scheduled to announce results include LUCK, DGKC, KOHC, KAPCO, GHNL, KML, ICI, AGIL and SMBL. At the tail‐end of earnings season, analysts expect the index to remain range-bound, in the absence of major triggers. Global developments surrounding oil prices and speculations over an output freeze by major oil producers may spur the index heavy Oil & Gas sector.

Reflecting lower remittances and delay in CSF installments, current account deficit for July 2016 widened to US$591 million. Remittances received during the month declined 20% YoY/36%MoM on account of 1) worsening labor dynamics in GCC region, 2) greater regulatory monitoring in US, and 3) seasonal impact from Ramadan. Trade deficit also continued to worsen; where monthly deficit widened 18%YoY with exports declining 6.6%YoY and imports rising 6.2%YoY in July 2016. Foreign investment flows remained a mixed bag; with portfolio investments staying in the positive zone (US$49.5 million inflows as compared to US$24.7 million outflows), FDI registered a decline of 14.6%YoY on reduced investments from China (decline of 75.8%YoY). Going forward, analysts expect current account to post a deficit of 1.7% of GDP during FY17 underpinned by weak trade outlook amid stagnant remittance inflows.

National Bank of Pakistan (NBP) has posted consolidated profit after tax of above Rs10 billion (EPS: Rs4.74) for 1HCY16 as compared to net profit of Rs7.8 billion (EPS: Rs3.70) for 1HCY15, up by hefty 28%YoY. This above expectations performance can be attributed to higher net interest income (NII) along with lower than expected provisioning expense. Sequentially, there was a substantial 51%QoQ uptick in earnings on the back of 31%QoQ higher NII and capital gains, despite higher tax incidence (tax rate of 45% in 2QCY16 as compared to 35.0% in 1QCY16). Key 1HCY16 result highlights included: 1) a 9%YoY/31%QoQ increase in NII, 2) provisions down 78% YoY/48%QoQ to Rs1.3 billion during the period under review, 3) non-interest income came down by 20%YoY due to 54%YoY lower capital gains. However, fee income posted a considerable rise of 20%YoY during 1HCY16 and 4) a 8%YoY increase in total expenses. Sequential uptick can be attributed to growth in NII that was up by a commendable 31%YoY. NBP’s 1HCY16 earnings performance is encouraging due to growth in NII along with improvement in asset quality.

Continuing with its disappointing trend, detailed data for external trade reflects a marked decline during July 2016, where exports were registered at US$1.48 billion, down 7.4%YoY/10.4%MoM. Exports registered a decline across all segments, with highest impact coming from the heavyweight Food and Textile sectors at US$185.5 million and US$982.6 million, posting decline of 15.4%YoY and 4.2% YoY respectively. Going forward, despite a buildup in pressures due to weakness in PkR/US$ parity. Analysts expect textile exports to remain under pressure on the basis of: 1) lower Chinese demand due to slow economic growth, 2) lack of currency competitiveness (as opposed to regional competitors) limiting GSP+ benefits, 3) concerns of an economic slowdown in the EU following Brexit and 4) shortage of cotton supply after tapering cotton production last year with arrivals down by 34%YoY.