POL prices cut won't hurt OMCs, refineries' profit

LAHORE - Reduction in petroleum prices, as is directed by the Supreme Court, the Oil Marketing Companies and refineries profit will not be affected since their margins have been linked to international oil prices.
However, the likely cut in oil rates in the country would lower govts tax collection, as the govt, apart from normal GST, is presently pocketing around Rs 11b a month under the head of Petroleum Development Levi on oil products. It is to be noted that a special commission formed by the Supreme Court of Pakistan has finally directed the government to reduce domestic oil product prices on war footings. Besides, this the committee has also raised some reservations over the refinery pricing formula.
Experts commenting on the issue said that if government reduced the fuel prices its impact would be neutral on Oil Marketing Companies and refineries because their margins are linked to international product prices.
The experts, however, suggested cautious stance for the investors, who have invested in the refinery sector since there has been a debate going on to rationalize refinery margins.
Farhan Mehmood, an energy analyst, observed that furnace oil, which retained the major chunk of oil sales, is currently witnessing a higher demand from power plants due to gas and hydel-electricity shortages. As a result, its sales rose by 5 per cent to 6.7 million tons during 10MFY09.
According to latest statistics, Pakistan reliance on FO has increased substantially over the last 2-3 years as 32% of the electricity is now generated through FO, compared to 16% 3 years ago.
He believed the FO demand will surge once rental power plants come online in the next 1-2 years. According to our estimates, 3,000MW of rental power plants would require 2.8-3.3mn tons of FO. This paints a favorable landscape for OMCs in general and PSO in specific since it holds 87% share in FO marketing.
According to the latest numbers released by Oil Companies Advisory Committee (OCAC), overall sales of fuel products recorded at 15mn tons, down 2% YoY, in 10MFY09. The decline is mainly led by diesel sales (comprises 41% of fuel sales), down 8% YoY. In contrast, furnace oil (FO) sales grew by 5%YoY.
Both oil sales and production numbers depicted negative growth of 2% and 6% respectively during 10MFY09. This excludes non-energy products like lubes, base oils and Asphalt. We believe the production decline is primarily due to long-delay of inter-corporate debt settlement by Pepco. With 50% resolution of the inter-corporate debt, we expect an improved output from refineries in months to follow.
Local refinery production came in at 7.4m tons (down 6% YoY), primarily due to liquidity constraint fueled by long-due inter-corporate circular debt. As a result, all the refineries showed negative production growth, except for Bosicor Pakistan. Low- base and plant revamp has led the production increase of Bosicor. Capacity utilization of the sector plunged to 87% compared to 99% last year. However, these numbers are expected to improve in the months to follow due to payments made by OMCs. Refineries received Rs41b out of Rs80b inter-corporate debt settlement by Pepco. In contrast to Black oil (mainly FO), White oils showed overall decline of 6%. Broad reasons of declining HSD and Mogas (petrol) consumption are 1) slowdown in transportation related activities due of economic slowdown, and 2) Availability of cheap smuggled Iranian diesel & petrol in the market. However, we expect diesel and petrol sales to reverse upon economic recovery in FY10. Additionally, cut in domestic prices is the upside risk to the demand for while oil. We expect GoP will reduce oil prices in the range of 10-15% post June, provided international oil prices remain at current level.