Oil marketing

1. Fortune Securities Limited | Equity Research
After posting dismal results in 1HFY15, we believe coming quarters will be a period
of recovery in the Oil Marketing Sector (OMC) mainly fuelled by:
1) Robust growth in cash based products i.e MS and HSD where we expect MS and
HSD sales to grow at FY15-FY17 CAGR of 15% and 5% respectively.
2) Convergence of FO price with gas and grid power would lead to stron FO sales.
3) Lower oil prices would reduce the pace of accumulation in circular debt.
4) Falling interest rates would reduce the finance cost where prime beneficiary
would be PSO.
5) Privatization of Discos in CY15.
Depressed 1HFY15 earnings- A non recurring event
Decline in oil prices led to a decline in FO margins and hefty inventory losses kept
earnings depressed. Earnings of PSO decreased by 72.9% during 1HFY15 to PKR
4.28bn (EPS: PKR 15.76) mainly on the back of 1) absence of hefty interest income
recorded in 1HFY14 2) inventory losses of PKR 2.7bn (EPS impact: PKR 9.94) in
1HFY15 3) Decline in FO margins. APL also recorded a decline of 45% in bottom line
mainly due to heightened inventory losses along with depressed FO margins.
HASCOL has not announced results as yet, we expect the company to post full year
earnings of PKR 577mn (EPS: PKR 6.37) in CY14 against PKR 392mn (EPS: PKR 4.32)
in CY13, up by 47.4% YoY. We expect 4QCY14 earnings of PKR 65mn (EPS: PKR 0.72),
down by 36% YoY due to inventory losses.
The stock price of OMCs has been under pressure in view of anticipated inventory
losses which have finally been recorded. Going forward, we expect profitability to
take a nominal hit from inventory losses owing to price cut in Feb-15; nonetheless
earnings are likely to return to normalized levels from coming quarter.
Shrinking price differential promises favorable volumetric outlook
Volumetric growth during 1HFY15 remained lackluster (down 1.1% YoY) mainly on
the back of 6.8% YoY decline in FO sales. Decline in FO sales can be attributed to
weakened liquidity position of IPPs. Going forward, we expect POL volumes to
rejuvenate mainly fuelled by significant growth in MS and HSD sales while we also
see improvement in FO sales due to significant reduction in FO prices (36%QoQ).
OMCs
Look Beyond FY15! 18th
March, 2015
Fortune Securities Ltd.
Sector Stance: Over Weight
Saad Yousuf
Phone: +92-21-35309112
Saad.yousuf@fortunesecurities.com
FY15E FY16E FY17E Target Price Upside % Dividend Yield Rating
APL 43.00 53.1 58.5 622 14.6% 9.6% BUY
HASCOL* 6.37 13.02 13.41 123 22.8% 5.9% BUY
Source: Company Accounts, Fortune Research
Note: HASCOL* represents CY14,CY15,CY16

2. Fortune Securities Limited | Equity Research
MS and HSD demand to blossom
MS volumes grew by a CAGR of 19.2% between FY12-14 on account of declining
gas reserves and lower gas availability to CNG sector. With decline in MS prices, the
current premium on MS to CNG stands at 41% in Feb-15 against 115% in the same
period previous year. Moreover, according to the news report the recent proposal
to increase CNG price by 25% would further trim the premium to 8.7%. Going
forward, we remain bullish on MS sales in the wake of CNG load shedding, lower
price differential between MS and CNG prices. We expect MS sales to grow at
FY15-FY17 CAGR of 15%.
Furthermore, with signs of improved economic activity we expect HSD sales to
grow at FY15-FY17 CAGR of 5%.
FO sales to grow at a FY15-FY17 CAGR of 2%
Over the past few years, FO sales posted a muted CAGR of 1.3% during (FY12-FY14)
as the circular debt issue curtailed growth in thermal generation capacity. FO prices
after dropping to PKR 29,211/ton have increased to PKR 41,763/ton(owing to
recent increase in international oil prices) or PKR 1,053/mmbtu, which is 33%
higher than captive natural gas tariff of PKR 773.28/mmbtu. However, the
recent proposal to increase gas prices for captive plants by 30% will further
diminish the price differential to 11.4%, thus strengthening the case for higher
consumption, amid gas outages in future. Going forward, being conservative we
expect FO sales to grow at a FY15-FY17 CAGR of 2%.
-
5.0
10.0
15.0
20.0
25.0
FY12 FY13 FY14
FO HSD MS
Source: OCAC, Fortune Research
Historical Sales Volume (Mn Ton)
-
5.0
10.0
15.0
20.0
25.0
30.0
FY15E FY16E FY17E
FO HSD MS
Source: Fortune Estimates
Estimated Sales Volume (Mn Ton)
27,000
37,000
47,000
57,000
67,000
77,000
87,000
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
Source: PSO
Local FO Price (PKR/Ton) (Excl. of Sales Tax)
-
40.0
80.0
120.0
160.0
200.0
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Feb-15
CNG Prices MS Price
Source: OGRA, PSO
CNG Price vs MS price (PKR/kg)

3. Fortune Securities Limited | Equity Research
Implementation of policy reforms crucial to avoid rebuilding of circular
debt
We continue to believe that implementation of favorable policy steps are needed
on inter-corporate debt which is a pre-requisite to avoid resurfacing of circular
debt. The government eagerly appears to be working on settling the issue which
includes 1) increase in tariff 2) privatization of Disco’s 3) Changing energy mix.
The government is actively seeking to revamp the DISCOs through privatization.
Five DISCOs namely, FESCO, IESCO, LESCO and NPGCL are scheduled to be
privatized within CY15. The elimination of inefficiencies post restructuring in the
downstream sector will eventually assist the government in resolving the menace
of circular debt. Moreover, falling oil price will also reduce the accretion of circular
debt due to 1) reduction in absolute value of the transmission and dispatch losses
2) Reduction in tariff differential subisdy as GoP has retained some of the price
decline through surcharges.
Furthermore, we believe another cash injection by the government is also possible
given the improvement in fiscal account and relatively lower quantum of amount
due to lower cost of generation. Moreover, GoP have agreed with IPPs to payoff
PKR 270bn by April-2015 to clear outstanding power sector receivables.
Attock Petroleum- High Octane!
Attock Petroleum Limited (APL) recorded earnings of PKR 209mn (EPS: PKR 2.52) in
2QFY15 against PKR 1,327mn (EPS: PKR 16.01), down by 84.2%YoY. Decline in
earnings was mainly on the back of 1) heightened inventory losses 2) Decline in FO
margins 3) Decline in other income due to lower cash and investments. Moreover,
lower distribution expense and tax reversal kept the bottom line green.
Continuing strong volumetric growth
APL continued to outperform the industry growth rate during 8MFY15 as the
volumetric sale of APL witnessed a YoY increase of 23%, 22% and 9% in MS, FO and
HSD respectively. The rapid increase in sales mainly stems from consistent
expansion in retail segment where the company added 23 new outlets during
2QFY15 taking total retail outlets to 491. Going forward, we expect volumetric
sales to grow at a 3 year CAGR of 12% as the company rolls out new outlets and
optimize sales on its existing network. We have assumed a market share accretion
of 80bps and 80bps in FY16 and expect APL’s market share to be 8% and 12% for
MS and HSD respectively.
Lower margins on FO should be partially offset by increased demand from retail
segment since revenues from FO approximately contributes 39% to the total
revenue. Furthermore, we expect profitability to take a small hit in 3QFY15 from
inventory losses owing to price cut in Feb-15.
We expect FY15 earnings to clock in at PKR 43/share. FY16 EPS is expected to clock
in at PKR 53.1/share mainly on the back of lower margins on FO and decline in
other income mainly due to lower cash and investment where the company’s
investment in fixed instrument has declined by 46%.
DCF based target price PKR 622/share-BUY!
We have placed a TP of PKR 622/share, implying an upside of 14.6% from current
levels. The stock also offers a FY16 dividend yield of 7.7%, taking the total return to
22.3%. Moreover the stock currently trades at FY16 PER of 10.3x.
-5%
7%
19%
31%
43%
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
APL KSE100
52 weeks Performance
Source: KSE

4. Fortune Securities Limited | Equity Research
Hascol Petroleum Limited- Spreading its wings!
We expect CY14 earnings of PKR 577mn (EPS: PKR 6.37) in CY14 against PKR 392mn
(EPS: PKR 4.32) in CY13, up by 47.4% YoY. We expect 4QCY14 earnings of PKR 65mn
(EPS: PKR 0.72), down by 36% YoY due to inventory losses. Moreover, we estimate
the company to post CY15 and CY16 earnings of PKR 1,229mn (EPS: PKR 13.5) and
PKR 1,298mn (EPS: PKR 14.3) respectively. HASCOL currently trades at an attractive
CY15 PER of 7.93x despite immunity from circular debt.
Aggressive expansion to boost future earnings
HASCOL witnessed 80% growth in its bottom line which increased to PKR 392mn
(EPS PKR 4.32) during CY13. We expect the company‘s bottom line to grow by
87.3% and 64.2% to PKR 734mn (EPS PKR 8.10) and PKR 1,205mn (EPS PKR 13.29)
in CY14 and CY15 respectively. Our estimated earnings formulate to a CY15-CY17
CAGR of 24%, mainly led by higher volumetric sales.
Impressive growth in volumetric sales
The company witnessed tremendous growth in volumetric sales, which grew at a 3
year CAGR of 60.3% marked by an aggressive expansion in the retail segment. The
company also enhanced its storage facilities during CY12-CY14. HASCOL
successfully managed to add 14 outlets during the 9mCY14 taking the total number
of outlets to 224 from 210 in CY13. We expect volumetric sales to grow at a 3 year
CAGR of 15% mainly due to 1) Continued increase in retail outlets 2) decrease in
CNG price discount to petrol price 3) expansion in storage facilities. Historically, the
company witnessed a 3 year CAGR of 129% and 90.6% in volumetric sales of
0.0
15.0
30.0
45.0
60.0
FY15E FY16E FY17E
Source: Company Accounts, Fortune Research
EPS (PKR)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY15E FY16E FY17E
FO MS HSD
Source: Fortune Estimates
Volumes (Mn Tons)
APL FY14 FY15E FY16E
EPS (PKR) 52.16 43.00 53.10
DPS (PKR) 47.50 32.50 42.00
Dividend yield 8.8% 6.0% 7.7%
P/E (x) 10.45 13.08 10.52
ROE 31.1% 24.8% 27.9%
Source: Company Accounts, Fortune Research
APL Sensitivity Analysis: Target Price w.r.t risk free rate
Interest rate 8.50% 8.00% 7.50% 7.00%
Target price (PKR/share) 589 622 658 700
Upside/(Downside) from current price 8.5% 14.6% 21.3% 28.9%
Source: Company Accounts, Fortune Research
-5%
15%
35%
55%
75%
95%
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
HASCOL KSE100
52 weeks Performance
Source: KSE

5. Fortune Securities Limited | Equity Research
MOGAS and HSD respectively which led the company to increase its market share
to 5% and 5.6% in the aforementioned products from 2.6% and 3.2% in CY13.
We expect the sales of MOGAS and HSD to grow by 45% and 24% respectively in
CY15. We have assumed market share accretion of 50bps and 75bps in CY15 and
expect HASCOL’s market share to be 5.5% and 6.0% for MS and HSD respectively.
Immune from Circular Debt
The company has carried out an impressive sales strategy during the last few years
which helped them remain immune from circular debt despite a considerable share
of FO of 43% in their product portfolio. Going forward we anticipate a handsome
growth in FO sales by 12% in CY15 mainly fuelled by significant decline in oil prices
where industrial consumers have started shifting their electricity requirements to
FO based generation.
DCF based target price PKR 123.4/share-BUY!
We have placed a DCF based Dec’15 target price of PKR 123.4/share, implying an
upside of 23% from current levels. The stock also offers a CY15 dividend yield of
6%, taking the total return to 29%.
The stock currently trades at CY15 PER of 7.7x despite being 1) less vulnerable to
circular debt 2) CY15 dividend yield of 6%.
-
3.0
6.0
9.0
12.0
15.0
CY14 CY15E CY16E
Source: Company Accounts, Fortune Research
EPS (PKR)
-
0.5
1.0
1.5
2.0
CY15E CY16E CY17E
MS HSD FO
Source: Fortune Estimates
Volume (Mn Tons)
HASCOL CY13 CY14E CY15E
EPS (PKR) 4.32 6.37 13.02
DPS (PKR) - 4.20 6.00
Dividend yield - 4.2% 6.0%
P/E (x) 23.21 15.75 7.69
ROE 36.1% 25.7% 35.9%
HASCOL Sensitivity Analysis: Target Price w.r.t risk free rate
Interest rate 8.50% 8.00% 7.50% 7.00%
Target price (PKR/share) 116.7 123.4 130.9 139.3
Upside/(Downside) from current price 22.2% 23.0% 30.6% 38.9%
Source: Company accounts, Fortune Research

6. Fortune Securities Limited | Equity Research
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