IGI Securities Limited – Day Break
Web Desk
Karachi, January 04, 2018 (PPI-OT): Oil and Gas Marketing Companies – FO Turmoil Drags Total Volumes Down in Dec-17; Lower Refining Takes a Toll on Other POL Products
Industry volumes for oil marketing companies witnessed a decline of 11%YoY to 1.87mnTons during Dec-17 bringing industry volumes for 1HFY18 to 13.17mnTon up by meagre +1%YoY. To highlight, HASCOL and APL led the growth by posting +1%YoY and +12%YoY growth during Dec-17.
MS sales increased by +12%YoY to 0.60mnTon in Dec-17, on the back of increasing demand. HSD sales increased by +9%YoY to 0.76mnTon in Dec- 17, while on monthly basis volumes dropped by 11%MoM. FO volumes depicted substantial decline of 44%YoY to 0.43mnTon in Dec-17. On monthly basis, FO volumes posted a meagre growth of +7%MoM.
We maintain our “BUY” call on PSO and HASCOL with our Dec-18 target prices of PKR 385/share and PKR 677/share respectively, offering +29% and +23% upside from their last closing.
Volumes depict 11%YoY decline in Dec-17 to 1.87mnTons
Industry volumes for oil marketing companies witnessed a decline of 11%YoY to 1.87mnTons during Dec-17 bringing industry volumes for 1HFY18 to 13.17mnTon up by meagre +1%YoY. Motor Spirit (MS)/High Speed Diesel (HSD) sales posted a rise of +12%/9%YoY during Dec-17, while Furnace Oil (FO) volumes reported a substantial decline of 44%YoY. On a monthly basis, industry volumes plummeted by 2%MoM in Dec-17 on the back of drop in HSD sales by 11%MoM and 10%YoY drop in other products as refining activity slowed down due to pileup of FO inventory as inefficient FO based power plants were closed down in Nov-17. To highlight, HASCOL and APL led the growth by posting +1%YoY and +12%YoY growth during Dec-17.
MS; Keeping a hold on the rising demand despite domestic price hike
MS sales increased by +12%YoY to 0.60mnTon in Dec-17, on the back of increasing demand. On monthly basis volumes depicted a growth of +6%MoM, despite increase of PKR 1.36/ltr in domestic price for the month of Dec-17. We believe MS demand to remain strong owing to a) increasing automobile sales, and, b) CNG curtailment. During the month, HASCOL and PSO led the growth by +43YoY and +12%YoY rise while SHEL remain laggard posting a decline of 17%YoY.
HSD; Demand remains high on rising commercial transportation
HSD sales augmented by +9%YoY to 0.76mnTon in Dec-17, while on monthly basis volumes declined by +11%MoM. In our view, demand for HSD is anticipated to remain strong owing to improving outlook of commercial transportation as infrastructure development projects pace up under CPEC. However, volumetric growth may witness contraction once white oil pipeline commences operations. For HSD, PSO and HASCOL led the chart by +26%YoY and +20%YoY growth in volumes.
FO; Closure of small inefficient FO based plants
FO volumes depicted a significant decline of 44%YoY to 0.43mnTon in Dec-17 as Government of Pakistan (GoP) abruptly directed closure of inefficient FO based IPPs in Nov-17. However, on monthly basis, FO volumes posted a growth of +7%MoM as few FO based plants resumed operations to absorb piled up inventory of refineries and OMCs. For FO, APL led the growth by posting +4%YoY jump in sales while all other OMCs witnessed a drop in volumes.
Outlook
We maintain over-weight stance on OMCs on the back of a) increased demand for MS/HSD and, b) upward revision in OMC margins by PKR 0.14/ltr for MS (yearly revision thereon linked with CPI). While coal/LNG projects start to commence power generation and GoP’s decision to shut down FO based power plants leading to lower demand for FO, we believe 3.0-3.5mn Mton of FO demand to remain owing to continuation of efficient FO based power plants. However, in retail segment we expect HASCOL to gain further market share through aggressive expansion as demand rises on CPEC projects gaining traction. With SHEL losing its market share, we expect PSO to capture its market share as company is expanding its storage capacity to ease supply chain issues and has been capturing SHEL’s market share in recent months.
Recommendation
We maintain our “BUY” call on PSO and APL with our Dec-18 target prices of PKR 385/share and PKR 677/share respectively, offering +29% and +23% upside from their last closing.
