Pakistan Stock Market Remains Lackluster

Trading at Pakistan Stock Exchange remained lackluster evident from benchmark index sliding by 1.7%WoW and closing the week at 48,156 points. The average daily trading volume also declined by 3.5%WoW to 248.7 million shares.The lack of investors’ interest can be attributed to political volatility and absence of market triggers. News flows for the week included: 1) SECP in its press release dated 29th March apprised that its constituted committee (for reviewing in‐house financing) had submitted a report which focused on introducing reforms in Margin Financing (MFS) to improve banks' funding to investors through brokers, 2) GoP released total Rs505 billion (63% of total Rs800 billion allocated) inclusive of Rs122 billion from foreign aid, 3) GoP allowed PTA to auction a next generation mobile services (NGMS) license with a base price of US$295 million from the frequency spectrums left unsold in the previous two auctions, 4) NML announced selling of 40% stake of its auto assembling business to the Japanese giant Sojitz Corporation and 5) OGRA proposed an increase of POL products for April. Stocks leading the bourse include: SHEL, MTL, ASTL and MEBL, whereas laggards were: HASCOL, AKBL, KEL, NML. Volume leaders were: BOP, ANL, KEL and ASL. Headline inflation is expected to guide expectations for monetary policy and may trigger a rally in banks. Additionally, the much awaited outcome of Panama case hearings could alleviate political pressures.

Circular debt and overdue receivables remain a usual element in cash strapped liquidity dynamics for the power sector. Taking a comprehensive approach, AKD Securities map the timeline of developments and quantum of circular debt build up since the one‐time clearance of Rs480 billion in June 2013. Its analysis show that in a large number of cases the GoP has been asked by independent arbitrators (foreign and domestic) and high courts to clear the pile‐up. This perception gains further strength based on increasing reliance on IPPs in power generation mix particularly in the backdrop of 10,663MW of gross capacity additions coming online by CY20. Also, with its political agenda hinging on resolving the prevailing power deficit of over 5,000MW, it is believed that a limited clearance of overdue payables to them is more likely. The Rs48 billion being claimed by 13 IPPs currently is a minor hiccup whereas IPPs with planned CAPEX outlays have increased pressure to free up liquidity tied in GoP receivables (case in point being HUBC where the room for leverage falls from Rs71.7 billion in FY16 to Rs27.8 billion in 1QFY17 and Rs1.8bn in 2QFY17).

Inconsistent with previous month's improved performance, Pakistan’s exports remained lackluster in February 2017, declining by 8.0%MoM/8.6%YoY to US$1.64 billion. Total exports registered a decline across all segments, with highest impact coming from the heavyweight Food and Textile sectors amounting to US$318.9 million and US$995.3 million, sliding 12.7% MoM/24.6%YoY and 6.5%MoM/2.7%YoY respectively. On a cumulative basis, 8MFY17 textile exports were 1.6%YoY lower at US$8.23 billion, largely contributed by 9.2%YoY decline in the low value segment diluting the impact of 1.6%YoY growth in the value added segment. Contrary to expectations, inclusion in zero rated regime and recently announced export incentive package worth Rs180 billion (textile sector's share estimated at close to 90%) has so far failed in generating positive momentum in export trend, giving way to fresh concerns regarding the export‐oriented industry's competitiveness over regional players. Going forward, analysts expect textile exports to remain under pressure due to: 1) weak Chinese demand outlook and concerns of economic slowdown in the European Union following Brexit and 2) lack of currency competitiveness. Moreover, continuous rise in international and local cotton prices has also aggravated concerns about textile industry.

ASTL has recently raised its re‐bars prices per ton by Rs2,000 (up 2.5%) to Rs79,000 likely due to: 1) increase in scrap steel prices and 2) rise in Chinese re‐bar prices due to higher domestic demand as a result of improvement in Chinese property sector and continuous decline in steel production. The recent price increase is likely to improve the bottom line. That said, current re‐bar prices still remain below FY16 average of Rs83,000/ton resulting in reduced gross margin/earnings for FY17F. While the upcoming expansion is to aid earnings growth, analysts believe the current price level is already reflects that.

West getting ready again to create rift between Saudi Arab and Iran

Major oil producers are scheduled to meet in Kuwait to deliberate on the outcome of their collective cut in production. It is expected that they won’t make any decisions until May, but are likely discuss the slow pace of market adjustment.

A survey of 13 oil market analysts by Bloomberg concludes that OPEC has little choice but to continue their production cuts. “They’ll probably think they need to grin and bear it longer. The glue that bound them together to begin with, which was higher prices, is the glue that will continue to bind them together.”

A point to be dealt with by all is ‘Saudi Arabia might demand Iran cutback if OPEC is to extend deal’. Speculation about whether or not OPEC will extend its production cut deal for another six months will be one of the most significant variables affecting oil prices in the short run. Western media has once again started spreading disinformation, “Saudi Arabia might only agree to an extension if Iran agrees to cut its production, something that it did not have to do as part of the initial deal”.

 The western media is prompting, “Iran agreed to a cap on production slightly higher than its October baseline for the January to June period, but Saudi Arabia is growing tired of taking on the bulk of the sacrifice for the market adjustment and might stipulate that other countries make a larger sacrifice if the deal is to be extended through the end of the year”.  

The western pinch can be understood by a Reuters report quoting a Saudi energy ministry official that crude exports to the United States in March would fall by around 300,000 barrels per day (bpd) from February and hold at those levels for the next few months.

The official said the expected drop, in line with OPEC's agreement, could help draw down inventories in the United States that stood at a record 533 million barrels last week. It is also believed that Saudi exports to other regions, notably Asia, will not face any cut, rather these may increase. Therefore, the western media is once again making hue and cry that unless OPEC extends the curbs beyond June or makes bigger cuts, oil prices are not likely to improve.

The question remains whether OPEC, whose committee monitoring the cuts will meet over the weekend in Kuwait, will extend the deal? In Russia, private oil producers are ditching their skepticism and lining up behind an extension of output cuts after previous oil price increases compensated for lost income.

In the United States, shale drilling has pushed up oil production by more than 8 percent since mid-2016 to just above 9.1 million bpd, though producers have left a record number of wells unfinished in Permian, the largest oilfield in the country, a sign that output may not rise as swiftly as drilling activity would indicate.

While, I am not an expert to suggest any thing to OPEC, I have no option to tell them that if no cap is put on oil output in the United States, they (OPEC) have no obligation to cut output.  On the contrary they should start dumping their oil in the United States, rather than giving it a chance to increase indigenous production. OPEC must once again let the price go down below US$25 per barrel.  This will render the producers from the United States uneconomical. OPEC should also stop considering Iran its enemy as it (Iran) can’t increase output in near term.

Pakistan Stock Market Witnesses Return of Foreign Investors

The benchmark index of Pakistan Stock Exchange closed the week ended 24^th March 2017 at 48,971, up paltry 1.16%WoW. Investors remained cautious and activity remained lackluster with average daily traded volume at 257.8 million shares. KEL led volume charts with 140.9 million shares) as NEPRA determined the company’s multi‐year tariff  (MYT) reducing its base tariff from PkR15.57/kWh to PkR12.07/kWh which was followed by news reports of PM Sharif forming a committee to review the tariff after a meeting with Chairman of SPIC (Shanghai Electric’s parent company). Other key developments for the week included: 1) current account deficit for February 2017 was reported at US$744 million, taking cumulative 8MFY17 deficit to US$5.47 billion, up 120%YoY, 2) PIB yields remained flat at the latest auction with GoP raising PkR28.5 billion, 3) February 2017 fertilizer off‐take declined by 19%MoM/2%YoY to 491,000 tons, 4) HBL announced plan to sell its Kenyan branches in exchange for 4.18% holding (13.28 million shares) in Diamond Trust Bank Kenya and 5) PSMC considering shelving its planned US$450 million investment in spare parts plant and capacity expansion. Stocks leading the bourse were: SNGP, AGTL, MEBL and EFERT and laggards were: KEL, ICI, UBL and APL. Foreign interest was positive during the week with inflows of US$3.47 million compared to US$11.07 million net outflow a week earlier. Little surprise is expected at the Monetary Policy announcement scheduled on 25^th March as marker expects rates to remain unchanged. On the global front, representatives of the five monitoring OPEC/Non‐OPEC countries will meet to review compliance with the members’ deal to curb supply by 1.8 million bpd. Market is likely to remain volatile till clarity about the upcoming FY18 federal budget.

Current account continues to steadily deteriorate with 8MFY17 cumulative deficit to 1.7% of GDP or US$5.47 billion. This reflects rising imports (+11.2%YoY) this fiscal year on the back of higher oil prices (8MFY17 oil imports up 15.4%YoY) along with greater machinery (12%YoY) and auto (36%YoY) imports. This has been exacerbated with weak exports (down 2%YoY in 8MFY17) and tepid remittance flows (down 2.5%YoY). In February 2017 deficit was registered at US$744 million, lower than US$1.2 billion recorded in January 2017 helped by lower imports for the month ( down 6.2%MoM) and US$350 million CSF inflows under service exports received earlier. Going forward, unfavorable trade dynamics will prompt further weakness in the deficit, with additional CSF inflows of US$200 million received in March 2017 and expected recovery on the remittance in 4QFY17 based on seasonal trends.

NEPRA has released KEL's MYT for the years FY17‐23 with numerous details still to be sorted. Salient features of the tariff include: 1) seven year period covered under the determination as opposed to the request for ten years, 2) raising of T&D benchmark, 3) allowance for passing through of increased O&M expense with inclusion for WPPF and WWF, 4) allowance of write-offs up to 1.78% of Electricity sales revenue in any given year, and 5) planned CAPEX of PKR237.6 billion allowed for in the tariff and adjusted in the base tariff. Contrary to increased allowances and benchmarks, the base tariff for the utility has been decreased to PkR12.00/ KwH (after adjusting for T&D and fuel), a reduction of PkR0.94/KwH over FY16's tariff, raising concerns of a tapered bottom‐line. Analyst from ADK Securities believes that  KEL may approach NEPRA for a Review, with specific aspects being highlighted.

Another Pakistan Resolution Needed

Every year on 23rd March Pakistanis celebrates the day Muslims of South Asia passed a resolution in 1940 for the formation of an independent country. They worked hard under the charismatic leadership of Quaid-e-Azam Mohammad Ali Jinnah. The first ever state based on ‘ideology’ rather than geographical proximity or common language appeared on the map of the world in 1947. Since independence opponents of Pakistan connived and tried to prove that ‘two nations’ theory was wrong and finally succeeded by carving Bangladesh out of East Pakistan. One still hears slogans like ‘we don’t want Pakistan’ (Pakistan Na Khappay), Sindhudesh, Greater Pashtunistan and Greater Balochistan. All these ideologies are being sponsored by those adamant at fragmenting Pakistan. All these pursuits are fully sponsored and funded by the regional and global super powers in the name of ‘new world order’. The politicians in power or in oppositions have been saying for decades ‘Pakistan is standing on crossroads’, ‘it is the most critical time for Pakistan’, ‘challenges are enormous’ and ‘third hand is busy in destabilizing Pakistan’. However, even a Pakistani of average wit strongly believes that since independence conspiracies have been going on to erase Pakistan’s name from the world map. Many of the external forces have embedded their agents in Pakistan. These agents not only have access to power corridors but often succeed in occupying key positions. They have attained the capacity to influence decision making. Ironically, politicians seeking key positions often become ‘most obedient servants’ of super powers. They make many decisions which are not in the interest of Pakistan but help them build personal wealth. Believers of conspiracy theories say that soon after independence reins went into the control of external forces. The first ever notable incident is said to be the assassination of Liaquat Ali Khan. However, some insist that Quaid-e-Azam was also assassinated because no one pulled him out from the ambulance which remained stranded for hours. Then came hanging of deposed Prime Minister Zulfikar Ali Bhutto and assassination of first ever lady prime minister of Muslim Ummah, Benazir Bhutto. If it could not be found out who sent an ambulance without spare wheal to carry seriously ill Quaid-e-Azam and killers of Liaquat Ali Khan and Benazir Bhutto have also remained at large. The same elements have also refused to make public details of Hamood-ur-Rehman Commission on the fall of Dacca. From the cold war era the United States has its bases in Pakistan. If in the past these bases were used for spying USSR the most recent endeavor has been attacks by CIA-operated drones, flying from a Pakistan Air Force base at Jacobabad. Some outfits are also involved in cross border terrorism in Iran, the most notorious being Jundullah. Its chief was caught while flying over Iranian airspace in a chartered flight. The latest hearing at a Congress Committee demanding Pakistan to give right of self determination to Balochs is also part of the grand agenda. It may not be wrong to say that not only ruling junta of Pakistan remains subservient to super powers but the situation is even worst in other Muslim countries. Saddam Hussain of Iraq was kept in power to kill his fellow citizens, encouraged to invade Iran and fight a war for almost a decades. He was also encouraged to attack Kuwait but once he became redundant, he was hanged. Many other rulers have also faced similar fate be it Anwar Sadat or Hosni Mubarak of Egypt. Assassinations of Quaid-e-Azam, Liaquat Ali Khan, Benazir Bhutto, Pakistan fighting US proxy war in Aghanistan US bases in Pakistan,

The Editorial Published in The Financial daily on 23rd March 2012.

Pakistan Stock Market remains laclkuster

Due to political uncertainty and regulatory pressures the benchmark of Pakistan Stock Exchange index remained unexciting. The week ending 17^th March 2017 closed at 48,409 points, down 1.6% WoW. Soft global oil prices, SECP’s action to curtail in-house badla financing and political uncertainty kept the market under pressure. Key news flows during the week were: 1) SBP raised Rs284 billion through short‐ term government papers, 2) in line with expectations, the US Fed raised interest rates, 3) in addition to independent power producers’ claims of over Rs414 billion, non‐payments to oil companies were reported at more than Rs300 billion, 4) Ministry of Finance approved payment of Rs6 billion on Thursday for the state owned PSO to avoid an international default, and 5) HUBC and FFC announced in separate notices the offer and receipt of an equity divestment plan relating to Thar Energy Limited. (TEL), a 330MW mine mouth coal fired project in Thar Block II. Stocks leading the bourse were: MEBL, ASTL, FATIMA, and ICI. On the other hand, laggards were: HMB, PPL, and FFBL. Volume leaders were: KEL, BOP, TRG and ASL. Subdued global oil prices, strengthening US$ and global trade related developments over the upcoming G‐ 20 summit may impact the domestic markets. At home, any clarity on the political front could trigger bullish sentiment, while policies and budgetary developments for the Finance Bill FY18 can be expected to sway markets.

The PRK has remained stable over the last year, weathering the worsening external account position. While current account deficit is up 90%YoY during 7MFY17 and reserve position (down US$1.75 billion from its peak) has deteriorated, PkR/US$ has remained stable at PKR104.8/US$, which is reflective of GoP's resolve to keep exchange rate stable. Going forward, analysts see little pressure on the PRK over the short term, primarily supported by an expected recovery in forex reserve position. In this regard, analysts see support from expected inflows including: 1) up to US$1.0 billion from planned Eurobond/Sukuk issue, 2) US$550 million under CSF disbursement and 3) likely US$4.0 billion from project lending and commercial loans budgeted for the year along with room for greater accretion from CPEC related inflows. Incorporating this,

AKD Securities has recently revisited its investment case for PIOC, incorporating recent cement price increase and expected continuation of clinker sales. While rally in coal price is expected to shrink gross margins (GM) and dampen earnings, recently installed 12MW WHR is expected to partially make up for the above. In this regard, the brokerage house expects an after‐tax operational savings of PKR1.11/PKR1.82 in 2HFY17/FY18. Besides, the company revealed its plans of: 1) revising up its cement expansion capacity from 2.21 million tpa to 2.52 million tpa, 2) installing separate line of 12MW WHR for the expansion and (3) setting up 24MW coal CPP. The total capex associated with the projects is expected to be around PKR25 billion. Though, the brokerage house has not incorporated the aforementioned projects due to awaited details, it expects the expansion to result in increase in FY20‐23 average earnings. Moreover, the new line of WHR and coal CPP are together expected to result in incremental earnings.

OGDC discovers hydrocarbon in District Hyderababd

Pakistan’s largest exploration and production (E&P) enterprise, Oil and Gas Development Company (OGDC) has discovered a new oil and gas reserve in Hyderabad District. The OGDC is the operator of joint venture of Nim Block having 95% share along with 5% shareholding of the Federal Government through Government Holdings.

The discovery at exploratory well Chhutto-1 is the first hydrocarbon reserve in Bulri Shah Karim, Tando Muhammad Khan in District Hyderabad. Initial results encouraged the company to drill two more wells in this licensed areas, of which one well has already been marked for immediate drilling.

The structure of Chhutto-1 was delineated, drilled and tested using OGDCL’s in-house expertise. The well was drilled down to the depth of 3,820 meters. The well has tested 8.66 million standard cubic feet per day (mmscfd) of gas and 285 barrels per day (bpd) of condensate through 32/64-inch choke at wellhead flowing pressure of 2,100 per square inch.

As declared by the Company, the discovery is the result of aggressive exploration strategy adopted by the OGDC. It has opened a new avenue and would add to the hydrocarbon reserves base of the country in general and OGDC in particular.

The OGDC has the largest acreage, production and hydrocarbon reserves in the country. It is listed at Pakistan and London Stock Exchanges with a debt-free robust balance sheet and cash reserves, although its huge financials are stuck up in the country’s chronic energy sector circular debt.

Pakistan meets around 12% of its oil requirement from indigenous resources. Historically, the OGDCL’s production has hovered between 35,000 and 45,000 bpd. The company has embarked upon an aggressive exploration and development program in the last few years to take advantage of a slowdown in drilling activities in the Middle East and around the world.

Only recently, the company launched four fresh seismic crews started operations in Kharan, Pasni, Gwadar, Zhob and Musakhel in Balochistan which remained inaccessible due to security situation for a long time. It was for the first time that its nine seismic crews were simultaneously working in various parts of the country. The number of such crews never went beyond five in the past, he claimed.

US the biggest beneficiary of output cut by Saudi-led OPEC

I posted a blog ‘US producers gulping Saudi share’ on 4th February 2017. In this blog I had expressed my apprehension that Saudi Arabia was most likely lose its market share by cutting down output. I also warned that with the improvement in oil prices, US producers would be prompt in increasing their production to gulp Saudi share.

In the recent past various reports have been released that supports my point. The reports indicate that the US production has risen to around 9 million barrels/day. These reports also confirm that the compliance by OPEC members is as high as 95 percent; Russia has not made the corresponding cut in its output.

According to EIA data, US crude inventories hit record highs last week, after eight straight weeks of build ups. This was because of increase in number of active rigs as production topped 9 million barrels per day for a second week in a row, the most since April 2016. Increase in US crude stockpiles undermine efforts by Saudi-led OPEC to contain global oil glut.

I am obliged to share a report published by Reuters ‘U.S. drillers add oil rigs for seventh week in a row: Baker Hughes’ indicating that with the improvement in crude oil price the US drillers have added a total of 293 oil rigs in 36 of the past 40 weeks. This is the biggest addition since a global oil glut crushed the market in mid 2014. The US drillers added seven oil rigs during the week ended 3rd March 2017, taking the total count up to 609, the most since October 2015. During the same week a year ago, there were 392 active oil rigs only.

According to Baker Hughes, oil rig count plunged from a record 1,609 in October 2014 to a six-year low of 316 in May 2016. This fall has been attributed to the collapse of US crude oil prices to near US$26 in February 2016, from over US$107 a barrel in June 2014.

Yet another sign of warning is a report by the US financial services firm, Cowen & Co that said its capital expenditure tracking showed 52 exploration and production (E&P) companies planned to increase spending by an average of 50 percent in 2017 over 2016.

One of the likely OPEC decisions could be to declare that the agreement reached last year is no longer binding for its members. Increasing output may not pose any problem for OPEC members but could certainly put US producers in trouble. Only price could determine who can withstand the completion.