Elixir Securities Limited – Elixir Insight

Karachi, December 05, 2017 (PPI-OT): Pakistan OMC Sector – Lowest Monthly FO Offtake in Over 11 Years

OMC sales declined 7/22% YoY/MoM in Nov-17 led by deteriorating volumes in FO which declined 29/55% YoY/MoM due to lower generation from FO based power plants.

Retail fuel growth remained muted during the outgoing month with HSD sales up -2/2% YoY/MoM while MOGAS volumes increased 7/-9% YoY/MoM likely due to street agitation during the month which shut down major road junctions in Punjab.

HASCOL continued to lead competitors in volumetric growth with sales increasing 44/53% YoY in Nov-17/5MFY18 with impetus from HSD and MOGAS which rose 49% and 41% YoY in the outgoing month.

We foresee FO sales to recover in the ongoing month with Hydel production declining in December owing to severe winter conditions while our channel checks also suggest that HUBC and KAPCO plants are back online.

However we expect FO volumes to decline in the longer term with some of the decline being negated by sharp growth in HSD and MOGAS on the back of strong construction activity and automobile demand.

FO Volumes Shrink as Country Experiences Power Abundance: Furnace Oil (FO) sales for the month of Nov-17 declined 29/55% YoY/MoM as FO based power plants remained shut owing to reduced seasonal demand in winters and addition in power production capacity. This resulted in overall 5MFY18 FO volumes to fall 7% YoY.

Meanwhile retail fuel sales growth also remained muted in the outgoing month likely due to street agitation during the month which shut down major road junctions. High Speed Diesel (HSD) sales during the month declined 2% YoY but increased 2% MoM while Motor Gasoline (including HOBC) sales increased 7% YoY but declined 9% MoM. Overall the ongoing year has been promising for retail fuel sales with HSD and MOGAS volumes up 12% and 14% YoY in 5MFY18. Resultantly, 5MFY18 overall petroleum volumes have increased 5% YoY (refer to enclosed table for details).

HASCOL Volumes Continue to Shine: In line with the recent trend in the OMC space, Hascol Petroleum (HASCOL) continued to outperform its competition with overall volumes up 44/53% YoY in Nov-17/5MFY18. For comparison industry experienced growth of -7/5% YoY in Nov-17/5MFY18.

The company has continued to gallop ahead of the competition in the retail fuel segment, reporting robust growth of 49% and 41% YoY in HSD and MOGAS respectively. This has taken its overall HSD and MOGAS volumes growth to 80% and 74% YoY respectively in 5MFY18.

FO Volumes to Recover in December But Continue Long-term Decline: We foresee FO volumes to improve in December as hydel generation declines where WAPDA generation has declined by an average 33% from November to December over the past three years. Our channel checks also suggest that Hub Power (HUBC) and Kot Addu Power (KAPCO) are also back online. However we identify that in the long term FO volumes will continue with their declining trend as coal and LNG based power capacities come online which will push FO based power plants further down the production pecking order. For details on our power generation forecast please refer to our research note “What Lies Ahead for IPP’s, OMC’s and Refineries” released on November 27th, 2017.

We foresee some of this decline to be overcome by higher retail fuel sales, i.e. HSD and MOGAS which have increased 12% and 14% YoY respectively in 5MFY18. We expect this strength to continue where i) high volumetric growth in sales of heavy vehicles ii) ongoing infrastructural development on CPEC projects and iii) subsequent transit activity will continue to drive HSD sales. Similarly we foresee MOGAS demand to remain strong due to i) lower price differential with CNG and ii) strong growth in passenger cars segment.

Outlook: Owing to the ongoing themes of declining FO volumes and possible buildup of circular debt in election year, we remain cautious on Pakistan State Oil (PSO) despite the recent decline in the stock price. In the OMC space we remain positive on Attock Petroleum Limited (APL) where we identify the company’s relatively less exposure to FO sales and Circular debt as key reasons. At our Jun-18 PT of PKR751/sh the scrip offers potential upside of 39% which includes a forward dividend yield of 10%.

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