Energy crisis affecting Pak economy

The power-gas led energy crisis to accumulate further forcing Pakistan’s energy mix towards imported oil putting pressures on external accounts while it will continue to drag GDP growth by an average 200bps.

During the next calendar year 2012, the higher oil demand induced by gas shortage would bode well for those OMCs (like Shell and APL) that have higher share of petrol in their product mix, while would bode negatively for companies (particularly PSO) having higher exposure in Furnace oil business due to circular debt.

The Pakistan State Oil (PSO) that have higher exposure to FO (57 percent to product mix and 78 percent market share) is expected to be adversely affected despite increase in the volumetric sales. Shift in power generation towards oil would increase the power subsidy that would gradually increase the circular debt. In this regard, the gov’t has shown its intention to increase the base tariff by 12-14 percent in Fiscal Year 2012 to reduce electricity subsidy but political ramification ahead of election would hinder it to pass on the complete bulk to the final consumers. Therefore, we see PSO cash flow position to remain under strain in 2012 as well.

Not to the same extend but ripple effect of the circular debt is also expected to come on the gov’t own upstream companies like OGDC and PPL, which in turns mean curtailed exploration and development activities from these companies as well as reduced cash payout for shareholders.

In power sector, Hubco will continue to pass on the impact to PSO (fuel supplier) while Nishat Power would take a hit as it has private fuel supplier, Shell Pakistan.

We expect country’s gas production to increase on an average by 3-4 percent in next 2-years, while natural growth in the gas consumption is expected to be around 5-6 percent. Resultantly, we expect gas shortage to widen further from the present 35 percent in the coming 2-years to 40 percent. Given this scenario, we expect general industries, transportation (CNG) and fertilizer to be hardest hit, which presently comprise of approx. 23pc, 5pc and 16pc of the overall consumption.

For the fertilizer companies, we expect operators on the Mari network will remain relatively immune (12-14 pc gas curtailment), while situation for producers on the Sui network is expected to remain under strain. We anticipate 55pc gas shortage on Sui Northern Gas Pipeline Limited (SNGPL) network, which comprises of 4 fertilizer units while 38-40pc for operators on Sui Southern Gas Company (SSGC).

For the power sector, we expect same gas allocation to persist in the next year given sever electricity shortage. For oil based IPPs like Hubco and Nishat Power, there will be no earning impact of gas shortage.

Besides impacting the overall economy and industrial production, the energy crisis is also affecting profitability and dividend payout capability of key listed companies.

According to Topline estimates, “in case the energy issues are fully resolved, listed firms profit growth will jump from 14pc to 17 pc in FY12, while average dividend yield of the market would increase from 9pc to 11pc in FY12”.