Owning to multiple factors, the Oil Marketing Companies (OMCs) start outperforming after showing dismal performance in fiscal 2016, the data indicates.
Independent industry experts say that rebound in international crude oil prices started proving great help to the oil marketing companies in regaining their lost profits, whereas these companies had been experiencing underperformance of 4.3 per cent as compared to the benchmark throughout last year. They said that Arab Light prices grew momentum up to 17 per cent till date and fixed margins in rupee terms on white oil products, expectations of stability and gradual rise in oil prices to contain inventory losses, strong petroleum (POL) product sales increased to 15.9 per cent has also contributed OMC to get on profitability road. These experts also pointed a major source that had been knocking the profit down of OMCs, inter-corporate debt (commonly known as circular debt), had slowdown in accumulation this year, besides overall improvement in outlook midst fast progress on China Pakistan Economic Corridor (CPEC), have contributed towards the current performance.
“We believe that strong performance is likely to continue as OMCs look geared to witness a period of super growth mainly in the White Oil segment (MS and HSD)” the industry experts said.
The decline in share of Black Oil (FO) because of lesser reliance on FO based power generation and benign oil prices should keep circular debt stock in-check going forward. Keeping strong outlook of the sector into consideration, we reinitiate our coverage on the Pakistan OMC sector and take an ‘overweight’ stance,” the experts said adding that with strong growth theme in the backdrop of CPEC (investments in road infrastructure, uptick in economic activity and potentially outrageous Chinese transshipments crossing Pakistani roads), the experts are confident on the sector’s potential of gaining steep profit.
These experts are of the view that OMC sector is set to get benefit from strong sector dynamics and improving economic fundamentals.
These experts anticipated oil sales of OMCs to grow 9 per cent in a 3-year as against last 3-year growth of 7 per cent and last 5-year growth of 4 per cent. “Robust demand of white oil is being anticipated to lead this strong growth. Within white oil, petrol sales (MOGAS) is likely to grow at a 3-year of 18 per cent driven by rising car & bike sales and affordable pump prices.
These experts are of the view that along with high petrol sales, high speed diesel sales (HSD) are also anticipated to grow at a 3-year (FY17-19) over 3 per cent against the last 10-year of 1 per cent.
They say that increased transportation activity led by China Pakistan Economic Corridor (CPEC) & development of road infrastructure would drive diesel growth. Furnace oil (FO) sales anticipated to grow at a 3-year of 6 per cent against last 3-year of 3 per cent. The growth, however, they anticipated to slowdown gradually as the government had been focusing on installation of coal and LNG based power plants. “We anticipate FO growth of 18 per cent in fiscal 2017 to 2 per cent in fiscal 2018 and flat growth in fiscal 2019”.
Relatively high & fixed margins on white oil are regulated and fixed in absolute terms at Rs 2.41 ltr (6 per cent of ex-refinery prices). This compares favourably with deregulated margin of 3-3.5 per cent on FO. Consequently, margins on white oil are independent of oil prices and low oil prices do not mean lower margins. Thus, rising volume of white oil products will generate better profits for OMCs.
Margins on white oil also linked with CPI, ‘Government has approved linkage of white oil margins with CPI from Jul 1, 2016. Accordingly, rising margins in absolute terms along with volumes will boost OMCs bottom-line. “We expect inflation to average 5-6 per cent during fiscal 2017-19. Previously, the government used to revise margins on ad hoc basis.
