- Chevron’s reported plans to exit Pakistan’s downstream space will eventually benefit existing players as the govt. focuses on key issues faced by the industry in an effort to improve the operating environment.
- Increase in the marketing margin remains a key demand even after last years’ 30‐35% upgrade, in our view. Our sensitivity analysis yield 3‐7% upside to earnings of PSO and APL for every 10% increase in margin.
- We believe the downstream industry will undergo a consolidation phase over the medium term despite pockets of growth opportunities across fuel oil segment.
- Exit of Chevron and acquisition by an existing player is unlikely to have any implication on prices and margin as most fuel products are regulated.
- While we do not rule out the possibility of new player entering the market, APL and Byco appear to be key contenders among existing players.
Margin relief likely as Chevron prepares to pack up
We contend Chevron’s reported plans to exit Pakistan’s downstream space will eventually benefit existing players as the govt. focuses on key issues faced by the industry in an effort to improve the operating environment. Increase in the marketing margin remains a key demand even after last years’ 30‐35% upgrade, in our view, as higher oil prices, rupee depreciation and inflation erode overall profitability. Our sensitivity analysis yield 3‐7% upside to earnings of Pakistan State Oil and Attock Petroleum Ltd for every 10% increase in margin. Shell Pakistan would remain a key beneficiary among non‐covered companies.
All signs of industry consolidation
We note operating environment for small players like Chevron has become increasingly difficult as a result of (1) fixed‐margin environment, (2) competitive landscape in favor of integrated
players (Chevron is a standalone marketing company), (3) fiscal regime (turnover tax), (4) oil prices volatility, and (5) low operational and cost efficiency. Many of the above reasons are not unique to Chevron. This underpins our view that over the medium‐term, downstream industry will undergo a consolidation phase despite pockets of growth opportunities across fuel oil segment.
…existing players may emerge as key contenders
While we do not rule out the possibility of new player entering the market, APL and Byco appear to be key contenders among existing players. Both have refining back‐up, strong financial muscle and intentions to increase their foot print. Exit of Chevron and acquisition by existing player is unlikely to have any implication on prices and margin as most of fuel products are regulated. Though Chevron’s financials are not available, based on comparables, we see deal size of PRs10‐16bn.
…but change in deal structure may entice more players
Strong position in high margin lube segment (23% market share) remains a key jewel. We will not be surprised if Chevron decides to maintain its position in the segment or the lube segment is stripped off and sold separately in order to fetch better price. The latter may entice state‐run PSO to participate in the deal as the company is yet to gain M/S in lube, commensurate to its retail presence. The standalone lube segment will allow PSO to avoid acquiring fuel business in which the company already has a very strong position. With strong earnings in the last two years, PSO’s balance sheet still has room for acquisition related debt, in our view. PSO is also a partner in Pakistan Refinery Ltd, in which Chevron owns 12% stake and enjoys preemptive right should Chevron decide to divest the stake.
Source: KASB Securities Limited, Analyst report titled OMCs: Chevron’s exit may benefit existing players published on 26 March 2012
