Morning Call about – Oil consumption down 18% MoM, up 3% YoY in Feb-13 -Arif Habib Limited

Karachi, March 15, 2013 (PPI-OT): Oil sales down a hefty 18% MoM in Feb-13, thanks to deliberate supply cuts Oil sales (excluding non- energy) posted a hefty 18% MoM fall in Feb-13 to 1.4mn tons.

According to Arif Habib Limited this massive decline mainly emanated from a gigantic 30% MoM drop in FO demand (39% contribution), which was further dragged by 12% and 6% fall in Motor Spirit (MS) and High Speed Diesel (HSD), respectively. As per Arif Habib Limited discussions with companies’ management, drop in Furnace Oil (FO) was mainly led by deliberate supply cuts to power sector by major provider i.e. PSO, due to circular debt issue.

On the other hand, as far as growth decline in MS is concerned, a high base-effect was in place during Feb-13 consumption numbers as Jan-13 saw massive growth in petrol sales amid gas (CNG) shortage going through roof. A YoY comparison for Feb-13 mirrors quite an opposite picture, where the sector posted rather 3% YoY growth in oil consumption.

This was mainly on account of strong demand pull-back in MS and HSD by 27% YoY and 3% YoY, respectively, as extreme scarcity of CNG revitalized the demand of conventional fuels. FO, on the other hand despite lower hydel generation, posted a YoY drop of 9% in Feb-13 to 0.5mn tons, as the OMCs remained reluctant to increase their exposure to the circular debt-plagued FO market.

Oil Sales for Feb-13 (000) tons

Products Industry PSO SHEL APL Industry PSO SHEL APL
MS 267 133 56 17 -12% -14% -12% -6%
HSD 498 274 77 47 -6% -7% 4% -6%
FO 532 369 9 65 -30% -35% 46% -13%
JP 65 34 17 1 0% 5% -19% 61%
Other 18 10 0.5 2 -2% 6% -16% -17%
Total 1,380 820 159 130 -18% -23% -3% -10%

Source: OCAC

MoM Change

Oil consumption remained flat in 8MFY13

For the cumulative 8MFY13, oil consumption remained flat around 12.6mn tons as the massive 18% YoY growth achieved in MS volumes was largely diluted by a 3% and 1% fall in HSD and FO volumes, respectively. The impact of mild percentage drop in these segments has a wider impact on the total sales as later both contribute around 78% of the total oil consumption.

Oil Sales for 8MFY13 (000) tons

Products Industry PSO SHEL APL Industry PSO SHEL APL
MS

2,149

1,097

432

124

18%

22%

22%

-1%

HSD

4,310

2,484

624

410

-3%

4%

-15%

-12%

FO

5,559

4,155

39

523

-1%

-5%

26%

22%

JP

465

271

155

5

-17%

-24%

-7%

-41%

Other

157

76

5

11

-29%

-10%

-77%

-72%

Total

12,640

8,083

1,255

1,074

0%

0%

-4%

1%

Source: OCAC YoY Change

PSO’s market share dropped by 4 percentage points in Feb-13 A steep 35% fall in FO volumes led PSO’s market share to drop by 5 percentage points to 59% in Feb-13 compared to 64% in Jan-13 as FO constitutes around 50% of the total volumetric sales of PSO. However on a cumulative 8MFY13 basis, the Oil Giant holds its leadership position at 64%market share.

MS; substitution effect to support demand going forward

Lower gas availability for transportation sector coupled with ban on the installation of CNG kits in new vehicles has led to strong substitution effect for Petrol, evident from a massive 14% YoY jump in MS sales to 2.1mn tons. Arif Habib Limited believes this demand momentum to gather pace going forward, as continued substitution effect is expected to take MS demand up 18% YoY in FY13 to 3.2mn tons.

HSD; demand to remain sluggish

Increased use of CNG in public transportation across the country has been taking its toll on the HSD demand leading to a 3% YoY drop in 8MFY13. Arif Habib Limited expects this sluggish trend to continue with FY13 demand clocking in at 6.6mn tons compared to 6.8mn tons in FY12, a 3% YoY fall. FO; consumption remains at the mercy of liquidity Despite higher FO demand with lower gas availability, FO consumption remains subdued as OMCs are reluctant to supply FO on credit to the power sector due to continued liquidity constraints. Arif Habib Limited expects FO consumption to remain flat in FY13 to ~8.4mn tons.

Outlook and Recommendation

Arif Habib Limited expects oil consumption to post a modest 2.5% YoY growth in FY13 to 19.3mn tons compared to 18.8mn tons in FY12. MS is expected to lead the way with an 18% YoY growth, while HSD is expected to remain the major drag with an anticipated 3% YoY fall in volumes.

Arif Habib Limited maintains ‘Hold’ stance on PSO and APL with Jun-13 DCF based target prices of PKR 234/share (adjusted) and PKR 514/share, offering 13% and 7% upside potential, respectively. PSO and APL are trading at FY13E PEx of 4.2x and 8.1x, respectively.

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