KAPCO enhancing power generation capacity

Nov 20 - 26, 2006

KAPCO's management has confirmed the approval of Private Power and Infrastructure Board (PPIB) to initiate expansion of power generation capacity by approximately 450MW to 2050MW from the existing nameplate capacity of 1,600MW. Following this approval, the company is now in the process of approaching the National Electric Regulatory Authority (NEPRA) for tariff determination.

Earlier in May 2005, KAPCO appointed Fichtner GmbH & Co. KG to conduct a feasibility study for the expansion of power generation capacity, which later on was submitted to the PPIB for endorsement.

Despite lowering dividend stream from FY07 onwards due to the levy of corporate taxation, KAPCO's attractiveness still lies in its awesome dividend yield for FY07 and FY08.

KAPCO's earnings for 1Q/FY07 depicted 46% decline to Rs 1,119 million as against Rs 2,067 million during the same period last year. This translated into an EPS at Rs 1.27 compared to previous Rs 2.35. Net sales portrayed 30% increment to Rs8.7bn as against Rs6.7bn during the preceding year. However, a massive hike of 58% was also witnessed in the cost of sales to Rs6.8bn compared to Rs4.3bn previously. The cost of sales was mainly higher due to 60% increment in the fuel charges to Rs5.9bn along with approximately 10 fold upsurge in gas turbines' overhaul cost to Rs219m. During the period, the company commenced two planned overhauls of its gas turbines in order to ensure high standard maintenance and operations. The load factor of the company stood at 69.2% with net output of 2,054GWh along with commercial availability of 98.3%.


The administrative and general expenses also increased by 20% to Rs58m as against Rs48m during the same period last year. However, 17% surge in the other operating income to Rs87m and 19% decline in finance cost to Rs310m provided some support to the bottom-line. Moreover, following the expiry of the company's 10-year tax exemption, deferred tax provisioning for the period ultimately restricted the bottom line growth to Rs1,119million. Taxation expenditure for the period stood at Rs556m, almost 22 times higher than last year. Going forward, the levy of corporate taxation will lower KAPCO's earnings and dividend stream, nonetheless, the company will benefit from the tax shield arising out of the financial charges.



Mari Gas is pursuing a number of exploration and expansion projects in Ziarat field, Kohat block and Sujawal block and Mari Habib Rahi Shallow Reservoir, Pirkoh Reservoir, Mari Goru-B Deep Reservoir and Zarghum South Gas Field. In Mari Habib Rahi Shallow Reservoir, the company has prepared Terms of Reference (TOR) in order to install compressors to deplete the reservoir uniformly and to attain maximum recovery factor. Mari Gas is also planning to construct production facilities at Mari Goru-B Reservoir for 10 deep wells and drilling of 3 upfront wells in order to supply 109MMCFD gas to two IPPs being set up at Daharki. Moreover, preparations for drilling of three wells each in SML and Pirkoh formations are also in process and the company expected to spud Pirkoh well-1 in November 2006, while drilling operation of SML appraisal wells is expected to be started in February 2007.

Mari Gas Company's earnings for the first quarter ended September 2006 depicted a sanguine 62% upsurge to Rs154m translating into an EPS at Rs4.19 as against Rs95m and an EPS at Rs2.58 during the corresponding period of last year. Following this exceptional earning growth, Mari Gas Company's share prices have depicted exceptional performance by depicting 23% upsurge in just five post-result sessions.

The sales of the company stood at Rs838m, 12% higher compared to Rs751m during the corresponding period last year. Higher sales revenues are attributable to increase in average selling price coupled with sustained production levels from the company-owned fields. Operating expenses of the company also remained almost intact at Rs256m, while exploration expenditure depicted a notable decline of Rs75m to Rs150m compared to Rs225m in the corresponding period last year. Consequently, the operating income of the company surged by 77% to Rs327m as against Rs185m previously. However, 53% increase in other charges coupled with 75% upsurge in taxation expenses restricted growth in the bottom line. The effective tax rate of Mari also depicted an increment of approximately 2pps. Other income of the company stood 28% higher as against the same period last year while finance cost remained almost intact at Rs13m.


The sales revenue of the company depicted 12% upsurge primarily on the back of higher sales prices during the period. Average selling price of the company depicted 22% upsurge compared to last year. According to the quarterly accounts of the company the gas production during the period remained almost intact at 42,601 MMSCF with an average rate of 463 MMSCF/day as against 42,589 MMSCF. Currently, the shareholders are entitled to a guaranteed rate of return at 30% per annum and this return is escalable if the company's gas production increases beyond the level of 425 MMSCFD at the rate of 1% for each additional 20 MMSCFD of gas or equivalent oil produced subject to a maximum of 45% per annum.


PSO, the largest oil marketing company so far owned by the state, has an edge over its competitors owing to its huge storage capacity and more often PSO gains an advantageous position due to inventory margins when oil prices go up internationally.

However, this time this plus point goes into negative when the international oil prices dropped considerably, causing considerable inventory losses to PSO.

Consequently, it affected its profit earnings for the first quarter of the current financial year. The lackluster profitability is primarily attributable to substantial inventory losses during the quarter ensuing from receding international oil prices. Sales revenues of the company increased 44% to Rs86.2billion as against Rs59.7billion previously, while the cost of sales was also surged 55% to Rs84.4billion. Consequently, gross profit and margins of the company significantly declined by a respective 65% and 6.6pps to Rs1.8bn and 2.1%, respectively. However, other higher income coupled with lower operating expenses lent some support to the bottom line. Other income of the company depicted 69% upsurge to Rs507m while operating expenses declined by 12% to Rs1,258million as against Rs1,428million during the same period last year. Finance cost for the quarter stood at Rs236m, 39% higher as against Rs170m during the same quarter last year.

PSO's share price lost nearly 20% during the last few months pertinently following the lukewarm domestic POL demand lately coupled with lower earnings for the first quarter of the financial year 2007.

Currently, trading at Rs282, the scrip is at extremely lucrative valuations with a PER of 6.9x and offering 10.6% dividend yield going forward with positive stance.

Pakistan State Oil's earnings for the first quarter ended September 2006 plunged by 77% to Rs567million translating into an EPS at Rs3.30 as against Rs2, 502 million and an EPS at Rs14.59 during the corresponding quarter of last year.

PSO's cost of goods sold during the quarter extraordinarily surged by 55% on the back of a sharp decline in the international oil prices which eventually resulted in a huge inventory losses as the company follows a FIFO inventory system and a storage capacity of approximately 15-20 days.

During July 2006, international crude oil prices have attained record levels, approaching the US$78/bbl level, on the back of severe global demand-supply imbalances ensuing from the Middle East war. However, the prices receded sharply to the level of US$58/bbl due to improved supply situation coupled with settling down of the conflict in Middle East. During the period of this phenomenal fluctuation in international oil prices, the Pakistan government kept the domestic POL price intact. In the medium term, the international oil prices are likely to remain range bound between US$58-62/bbl as the OPEC has recently cut down its supply to sustain the current price levels, therefore, we expect no further extraordinary fluctuations in inventory valuations for OMCs going forward.

The overall sales revenues of PSO during July-September 2006 depicted an increment of 44% compared to the same period last year along with decent enhancement in the market share. As per the quarterly accounts of the company, PSO's market share during the quarter stood at approximately 68% mainly on the back of exceptional performance in furnace oil which registered 98% growth over the same period last year. PSO enhanced its white oil market share owing to its aggressive marketing initiatives by launching many new products in collaboration with major brands. PSO's share in MoGas increased by 1.5% to 46.1% as against 44.6% previously. Similarly, market share of LDO stood at 59.8%, 4.2pps higher as against 55.6% previously, while furnace oil share also increase by 5.7pps to 80.2% as against 75.5%.

According to the figures released by OCAC, OMC industry sales volumes during July-September 2006 surged by approximately 20%. Furnace oil sales were primarily behind these sanguine overall sales volumes. Furnace oil during the quarter surged exceptionally by 84% with September 2006 sales depicting 60% growth over the same month last year. During the quarter, sales volumes of LDO, kerosene and others depicted increments at approximately 13%, 6% and 43%, respectively.

On the other hand, HSD, MoGas and JP-1 declined at approx. 5%, 10% and 4%, respectively.