The outgoing fiscal year was difficult for oil marketing companies (OMCs) as their earnings declined significantly due to inventory losses. However, momentum is shifting in their favor for the current year. Fourth quarter earnings are expected to rebound due to rising sales volumes and fuel prices, which will offset costs from a new tax. Additionally, efforts to reduce circular debt problems should improve liquidity for the sector. The outlook for sales remains positive given lower fuel costs and economic growth.

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The outgoing FY15 remained a dismal period for Oil Marketing Companies (OMCs) which
underperformed KSE‐100 by 12% owing to 75%YoY decline in 9MFY15 earnings,
primarily attributable to hefty inventory losses. Going forward, we believe the
momentum to shift in favor of OMCs where the positive sentiment in near term will be
shaped by rebound in 4QFY15 earnings driven by i) estimated 15%QoQ‐18%QoQ growth
in volumetric sales, ii) improved FO margins backed by ~16%QoQ recovery in FO prices
and iii) inventory gains. We believe the one‐off impact of chargeability from ‘super tax
@ 3%’ on 4QFY15 earnings (8%‐10% of 4QFY15 PAT) is expected to be offset by
‘inventory gains’ due to 8%QoQ‐11QoQ% recovery in petroleum prices. On circular debt
front, the government is aggressively pursuing the tariff rationalization program as
evident from its recent decision to impose a surcharge of ~PKR2.5/unit in electricity
tariff. This coupled with stringent efforts undertaken by DISCOs to maximize bill
collections and recoveries is expected to pave the way towards the achievement of
highly optimistic power sector subsidy target of PKR118bn in FY16. With average FO
prices expected to remain lower by ~14%YoY in FY16, we believe liquidity position of
PSO to further improve. Based on healthy sales outlook and easing burden of circular
debt, we re‐iterate our stance on PSO (TP: PKR507/sh) and HASCOL (TP: PKR139/sh) as
our top picks in OMC sector. Also, given potential uptick in demand of Asphalt due to
heavy allocation for roads/motorways in PSDP, APL (TP: PKR616/sh) will also remain in
limelight.
Steady core operations on robust sales outlook: OMC sector witnessed a decent growth
of 6%YoY in volumetric sales during 11MFY15 on account of substantial growth in motor
fuels HSD (up 8%YoY) and MOGAS (up 22%YoY), partially offset by 2%YoY decline in FO
sales. The growth in HSD and MOGAS sales was driven by increased demand amid 20%YoY
and 17%YoY reduction in MOGAS and HSD prices leading to 30pps contraction in petrol’s
average premium over CNG to 24% during 11MFY15. The slowdown in FO sales can be
attributed to strained liquidity position and logistics issues. It is pertinent to note that,
barring Nov’14‐Dec’14 period of severe liquidity crunch, average monthly sales of FO in
11MFY15 remained higher by 2% compared to average monthly sales during the
corresponding period last year.
Going forward, sales outlook of petroleum products is expected to remain upbeat on
account of i) considerably lower prices, ii) improved liquidity position, iii) increasing
transportation network (motorways/highways) and iv) better industrial and agriculture
activity. In addition to aforementioned variables, reduced premium over CNG at 9%
compared to FY15 average premium of 22% will keep MOGAS the primary growth driver,
posting 3 years CAGR of 15%. We also expect FO sales to remain steady on potential
improvement in liquidity position amid an expected ~14%YoY lower prices in FY16. With
33% decline in FO prices from its peak levels last year, FO continues to remain a viable
alternative for industrial sector in Pakistan. However, liquidity situation within the energy
chain will remain critical to timely and adequate supply of the said product.
Possible inventory gains to repair the dent caused by ‘Super tax’: The earnings of the
outgoing FY15 will be subject to a ‘super tax’ at 3% which is expected to dent the 4Q
profitability by 8%‐10%. To mention, government imposed a one‐time levy @ 3% on the
profits of companies earning income above PKR500mn for the tax year 2015. On the flip
side, possible inventory gains in 4QFY15 on account of 8%QoQ‐11%QoQ upward revision
in petroleum prices will shield the OMCs against the downside from chargeability of super
Oil Marketing Companies
Tides turning in favor of OMCs
Tuesday June 23, 2015
Oil & Gas Sector Performance
1M 3M 12M
Absolute % 3% 4% ‐17%
Relative to KSE % ‐2% ‐4% ‐37%
Relative Chart KSE100 vs Oil & Gas Sector
Source: BMA Research
‐30%
‐20%
‐10%
0%
10%
20%
30%
Jun‐14
Jul‐14
Aug‐14
Sep‐14
Oct‐14
Nov‐14
Dec‐14
Jan‐15
Feb‐15
Mar‐15
Apr‐15
May‐15
Jun‐15
Oil and Gas KSE100 Index
Muhammad Affan Ismail, CFA
muhammad.affan@bmacapital.com
+92 111 262 111 Ext: 2058
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tax. Going forward, we believe absence of inventory losses on stable oil prices in FY16 vs
9MFY15 inventory loss of ~PKR10bn will allow OMCs to fully realize the benefit of
volumetric growth into bottomline.
Investment Perspective: Our conviction on the sector is based on strong volumetric sales
driven by active retail outlets expansion and increasing demand of petroleum products in
the country. At the same time, sustainability in oil prices will also remain the key to our
investment case on OMC sector. On circular debt front, recent decision to impose a
surcharge of ~PKR2.5/unit in electricity tariff coupled with stringent efforts undertaken by
DISCOs to maximize bill collections and recoveries will remain pivotal to easing the
strained liquidity position of PSO. We re‐iterate our stance on PSO (TP: PKR507/sh) and
HASCOL (TP: PKR139/sh) as our top picks in OMC sector. Also, given potential uptick in
demand of Asphalt due to heavy allocation for roads/motorways in PSDP, APL (TP:
PKR616/sh) will also remain in limelight.
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