SSGCL, SNGPL FUTURE ENERGY LEADERS

They are going to play a much bigger role if they are put in the private sector's hands as planned by the present government

By AMANULLAH BASHAR
Oct 03 - 09, 2005

The Oil Companies Advisory Committee (OCAC) has once again raised price of petrol by Rs3.68 increasing the motor gasoline price from Rs52.61 to Rs56.29 per litre.

Increase in the prices of imported petroleum products seems justified in the backdrop of rocketing oil prices in the international market, yet there would probably be no rationale for increasing the petrol prices specially when the total requirement of the motor gasoline is met through domestic production and no import is involved in this category of petroleum products.

In fact, Pakistan produces surplus motor gasoline and jet fuel which is earning a sizable amount of foreign exchange for the country. If it is true that Pakistan is producing surplus motor gasoline, it looks a harsh decision on the part of the policy makers to charge international prices on the domestic products.

The rocketing oil prices may be a blessing in disguise for the two natural gas marketing companies -SSGCL & SNGPL-as they are paving the way for them as future energy leaders in Pakistan.

SSGCL

Currently, the two gas marketing companies are making impressive profits as reflected in their financial results, yet it is easy to calculate that they are going to play a much bigger role if they are put in the private sector's hands as planned by the present government.

According to Sui Southern Gas Company's (SSGC's) FY05 financial results, the profit after taxation increased marginally by 2% to Rs1,013million as against Rs997million last year. As envisaged the company declared Rs1.5/share cash dividend, identical to last year.

Taking a look at key financials, operating profit declined 5% to Rs2,152million compared to Rs2,268million during FY04.

SSGC states that capital expenditure during FY05 amounted to Rs6.2billion, substantially higher YoY. Moreover, Rs4.7billion was capitalized as addition to the fixed asset base. Nonetheless, the additional return was largely offset by excess Unaccounted For Gas (UFG).

SSGC has mentioned that OGRA issues its final determination of revenue requirements at Rs55.14billion as against the company's claim at Rs55.99million, resulting in shortfall at Rs852million. A major item contributing to reduction in revenue requirement was UFG for which the authority determined Rs694m being excess of UFG over the target at 6%.

During FY05, SSGC's sales volume and value increased by 6% and 15%, respectively. An additional 1,424-km of mains and services were laid during the year. The customer base increased by 78,578 as a result of new connections. Transmission and distribution cost as a percentage of revenue was reduced from 7.4 to 7.3%. During FY05 SSGC's Gas Development Surcharge shrank 35% to Rs1.67bn indicating that the cost of gas outpaced the hike in gas prices. SSGC has set an ambitious Rs36bn capital expenditure plan till 2008. The project is to be financed with debt and internal funds in roughly the same proportion. This expansion covers the Phase II of the company's Gas Infrastructure Rehabilitation and Expansion Plan (GIREP-II). Though given the company's historical track record the quantum of the actual annual capital expenditure may turn out to be less than envisaged. Nonetheless, with earnings linked to operating fixed assets, aggressive additions to the company's asset base are to significantly fuel SSGC's future earnings.

Analytical reports say that the sharp firming up of domestic interest rates is likely to have only a limited drag on SSGC's financials given its access to low cost funding and significant reliance on internal financing.

The company's earnings for the nine months ended March 2005 depicted 13% decline to Rs656m as against Rs757m during the corresponding period of last year. The decline in profitability resulted from lower additions to the asset base. Though capital expenditure during the period amounted to Rs4.1billion, only Rs1.7bn was capitalized. Earnings were also suppressed on account of charge for Unaccounted for Gas (UFG).

CROSS BORDER PIPELINE PROJECT MAY BOOST VALUATION

It is said that SSGC's valuations may receive a boost on progress on the regional gas pipeline project, privatization fronts and hikes in gas tariffs. Moreover, the sharp firming up of domestic interest rates is likely to have only a limited drag on SSGC's financials, giving it access to low cost funding and significant reliance on internal financing.

SNGPL

In the Northern Zone of the country where SNGPL is performing superbly as reflected in their financial performance where earnings for the period are estimated at Rs2,573 million, 12% higher as against Rs2,297million during the previous year.

SNGPL's profitability growth is to result from aggressive capital expenditure activities. Moreover, improved investor sentiment towards the scrip is to result from privatization plans (that may result in a favorable adjustment in the earnings formula), increase in gas tariffs and gas import plans from regional countries. At the same time, the strengthening of domestic interest rates is likely to have only a limited drag on the company's financials giving it access to low cost funding and significant reliance on internal financing.

We suggest entry in the scrip following the financial results announcement with a price target at Rs76. Capex during FY05 is estimated at Rs7.5billion. It is expected that profitability growth is to result from the company's ongoing capital expenditure activities along with contained financial charges. Work on SNGPL's huge Gas Infrastructure Development Plan (GIDP) is in progress.