NRL: Further downside to open valuation
While final shape of new ex-refinery pricing formula is yet to emerge, we see three upshots of any acceptable formula to the industry (1) improvement in existing formula; (2) future improvement will be subject to tangible progress on refinery up- gradation/expansion; and (3) limited possibility of reduction in consumer prices without cut in government taxes.
Looking at the available details on the govt. proposed formula, we believe refineries will face significant earnings erosion and hence the formula is not viable, in our view. Similarly, industry demands to raise deemed duty, improve pricing for gasoline and incentives for further expansion are optimistic. We expect stakeholders to settle on some middle ground.
We think refining stock prices are beginning to incorporate the downside risk. In relative terms, National Refinery Ltd should do well under the govt. proposed formula with estimated FY11E earnings of PRs27/sh (P/E of 6.3x). We believe any further downside in stock price will open up valuation.
KASB Securities and Economics Research
January 22 2010
Pakistan Oil Refining & Marketing: Encouraging oil sales trend in 1HFY10
FY10 industry sales estimate revised up
Provisional oil sales data in 1HFY10 exhibit encouraging trends with 14% YoY growth. We observe two key trends: (1) overall sales growth is broad-based led by power fuel, gasoline and aviation fuel, and (2) diesel sales are holding up well in 1HFY10 with 1% YoY growth. As a result, we raise our FY10 industry sales estimates to 9% from 7.5% but we leave our earnings estimate unchanged for now. Overall, we now forecast three-year volume CAGR of 6% over 2009-2012E. We believe Pakistan State Oil, our top pick, is best positioned to benefit from FO sales with 89% market share in the segment. We also like Attock Petroleum Ltd as it improves its market share while maintaining stable earnings.
Structural price changes driving gasoline sales growth
Gasoline consumption has jumped 34% in 1HFY10 with monthly sales trend surprising on the upside. January prices for CNG (up18%) and petrol (down 1%) have reduced the historical spread with pricing of passenger car fuels, suggesting continuation of current strong monthly sales. We do not expect a reversal of new pricing dynamics between CNG and petrol as this would require (1) oil price to spike above US$90/bbl, which will translate into higher gasoline prices, and/or (2) a cut in government taxes on CNG or possibly the subsidy on input CNG cost.
Furnace oil has expectedly posted strong growth of 22%. We are comfortable with our estimate of 15% growth in FY10 based on likely demand from existing and new IPPs. We see upside from rental power projects estimated at 7-8%.
Higher oil prices pose risk of energy sector debt
Government structural reforms in the power sector remain largely on track despite a few hiccups. To eliminate reliance on subsidy, the government has raised power tariff by 12.5% in January 2010 (cumulative 17% since October 2009). Though there are plans to raise tariff by another 6% in April, we do not think it will be sufficient to eliminate power subsidy. Despite higher oil prices and volume growth, the government has managed to keep a lid on receivables amount post the PRs85bn energy bond issue last September. Overall receivables amount on PSO’s balance sheet is reported at PRs68bn in January (PRs60bn in September).
KASB Research
December 14 2010
POL: Small glitch in an attractive story
We believe exploration drilling in Makori West 1 has high chances of going dry while further production enhancement from Manzalai may encounter 1-3 months delay, contrary to market expectation of production addition in Jan 10.
While both the issues can trigger near-term negative price reaction as sentiment shifts from production growth to exploration write-offs on ongoing exploration efforts, there is no change in our conviction on POL.
We estimate 2QFY10 earnings of PRs6.9/share (up 15% YoY) translating into 1HFY10E earnings of PRs12.9/share. Likely cash payout of PRs4-5/share remains the key excitement factor in the results, in our view.
Overall, POL’s volume growth story is progressing smoothly with an anticipated 57% increase in FY10E and 30% in FY11E.
KASB Securities and Economics Research
January 6 2010
