PSO to benefit most from margin increase

PSOThis has been one good week for Pakistan State Oil Company (PSO). First, there was earnings surprise and now margins of oil marketing companies (OMCs) increased. PSO is expected to be the prime beneficiary considering its market leader position both in motor gasoline (27% share) and high speed diesel (53% share) of the segments.

With escalation in OMC margins, PSO’s earnings will be bolstered by Rs6.18/share on an annualized basis. In the near term, this will help the company in diluting the negativity on account of inventory losses expected to be brought on by declining domestic petroleum product prices. This coupled with above expected result announcement will remain the key short term price catalysts, where analysts see the scrip enjoying renewed investors’ interest.

With international crude oil price on the steep decline over the last 30 days, prices of petroleum products in the domestic market are likely to witness a slide as well and that too by quite some velocity according to the summary put forward by Oil and Gas Regulatory Authority (OGRA). As per this summary, prices of petroleum products can be brought down within the range of Rs7.11 to Rs14.93 per litre beginning November this year.

Keeping this price decline in mind, the Economic Coordination Committee (ECC) of the Cabinet has decided to increase the margins on petroleum products for both dealers and OMCs; after lingering it on for more than six months due to continuous escalation in international oil prices.

As per media reports, margin for OMCs on HSD has been increased by 26% or Rs0.49/liter and for MS the increase 5% or Rs0.12/liter respectively. Resultantly, OMCs will now be charging a flat margin of PkR2.35/litre each on both MS and HSD.

In mid October analysts have warned that the decline in international oil prices will provide the Government of Pakistan (GoP) with cushion to push through the margin increase for OMCs on petroleum products.

In addition to PSO, the move will augment earnings of APL by Rs4.18/share or 8% of the Company’s FY14 earnings. Currently, APL ranks behind PSO in terms of HSD volumetric sales, having market share of 12%. Similarly, SHEL having 7% and 9% of MS and HSD markets will see its bottomline expanding by Rs319 million (EPS impact: Rs2.98) as a result of increased margins.

Keeping in view the recent positive developments in the sector, analysts believe the sector in general and PSO in particular is well set for a short term rally. However, for the medium term, the stock’s performance can unlock on any breakthrough by the GoP on circular debt issue, where increasing liquidity will provide the Company with much needed respite.



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