AKD Securities Limited Equity Research – Daily Report

Karachi, March 28, 2019 (PPI-OT): Pakistan Energy: IMO-2020 can be a ‘lucky break’ for FO IPPs

IMO regulations (see box) limiting oil-based maritime sulphur fuel emissions are expected to rattle global refined fuels markets, where bottom of the barrel/black oil product (HSFO) is to be replaced by middle distillates globally.

Depreciative impact of the same can be seen in stifled demand for HSFO, reflected in futures prices, where an extrapolation of recent Brent/FO cracks indicates weakness in this product segment (CY20 crack to US$65/bbl Brent averages US$-13.8/bbl vs. US$-9.6/bbl seen during CY18).

Contrasting costs of generation on RFO with recently prominent RLNG based generation, we highlight the role of crack spreads in moving their relative cost of generation, where both fuel elements are pegged to crude benchmarks (in terms of long term supply agreements for RLNG) and FX variations.

Mentioning possible caveats to our assumptions, we believe older IPPs (with the majority completing their tariff period over the next decade) could be key beneficiaries of cratering HSFO prices if HSFO/Brent negative cracks of US$~18/bbl are hit, making cost of generation comparable (keeping Brent and US$/PkR rates equal).

Based on these fundamentals, we believe CY20 is lining up to be a year of major upheaval, where two emerging trends in the power chain, i.e. the rise of RLNG based generation and RFO’s demise, may be moderated. Nevertheless, HUBC remains our top-pick in the space with its multi-project status and exposure to multiple fuel sources key to a reduced risk profile.

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