Govt Likely To Increase Margins on LNG for PSO

Staff Report

The government is likely to approve an increase in the margins on LNG for PSO.

The cash-strapped Pakistan State Oil (PSO) is actively pursuing the government to increase the margin on LNG from 2.5% to 3.5%.

However, this proposal is still pending approval by the Economic Coordination Committee (ECC).

This was informed during the annual general meeting.

Pakistan State Oil (PSO) conducted its Annual General Meeting (AGM) on Thursday.

In FY23, out of an earnings per share (EPS) of Rs 12, the company’s Oil Marketing Company (OMC) business contributed Rs 42.7 (including inventory losses).

On the other hand, the LNG business contributed a loss per share of Rs 34.7, primarily due to higher finance costs, as the company relied on short-term borrowing in the absence of gas dues recovery.

The management revealed that PSO received payments related to gas supplies during the 4th quarter of FY23, which led to a reduction in overdue receivables.

However, they clarified that this does not guarantee full recovery of gas dues every quarter. The company anticipates that the accumulation of circular debt will decrease once the recent gas price hike is implemented. Reduction in Turnover Tax to Boost PSO’s Earnings

In the 4th quarter of FY23, the company’s overdue receivables decreased from Rs 439 billion to Rs 387 billion on a quarter-on-quarter (QoQ) basis, with overdue payments from the gas sector decreasing from Rs 350 billion to Rs 298 billion.

In FY23, the company recorded a finance cost of Rs 40.3 billion, with interest on foreign currency loans amounting to Rs 23.6 billion.

As of the end of FY23, the company reported foreign loans of Rs 380.5 billion out of a total borrowing of Rs 422.7 billion. The management disclosed that foreign borrowing is 60-70% cheaper than local borrowing, and the company does not incur exchange differences on foreign borrowing.

Regarding the jet fuel business, the company typically earns a 1.8% margin on supplies to local airlines but yields a much higher margin on foreign airlines.

Looking ahead, PSO is considering investments in both a Greenfield US$10 billion refinery project and a US$1.2 billion Brownfield refinery project (PRL).

For the Greenfield project, the management believes that progress depends on the resolution of circular debt. As for the latter, PSO, which owns a substantial 64% stake in Pakistan Refinery (PRL), may dilute its stake to a new strategic investor.

According to media reports, the United Energy Group of China has already signed a Memorandum of Understanding (MOU) with PRL to enhance production capacity.

The report concludes by stating that the company is maintaining its FY24 EPS forecast at Rs 68.5 for PSO. However, the earnings outlook will be reevaluated once the 1st quarter FY24 report is available, which is expected to provide more clarity on circular debt in the gas sector following the anticipated increase in gas prices.

The recommendation is to continue holding the PSO stock (“Hold” stance),” Sherman Research said in a report.