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Oil price decrease unlikely to affect OMCs’ bottom line

By Farhan Sharif

KARACHI: The downward revision in the prices of two major oil products by 2-7 percent is unlikely to have major negative effect on the bottom line of major oil marketing companies (OMCs) in Pakistan.

Analysts see half-year earnings per share of Pakistan State Oil (PSO), the largest company of the sector, to remain almost unharmed, with 60 paisas per share decline, however earning per share of Shell Pakistan may receive a hit of Rs 1.40 per share during the six months.

“The impact on OMCs would not be that negative as it seems, since the major reduction has been made in petrol price, and diesel covers the major share of revenue,” said Faraz Farooq, an analyst at Jahangir Siddiqui Capital Markets. However, there would be some level of pressure on the bottom line that would reflect in the earning per share with the upcoming financial announcements.

In the latest fortnightly revision, the Oil and Gas Regulatory Authority has reduced the prices of oil products by 2-7 percent. The price of MS has been cut by Rs four per litre, or seven percent, and that of diesel by one rupee per litre, or 2.6 percent. The reduction is slightly lower than our expectation. This is the first downward revision in petroleum prices since April 1, 2004. The heavy decline in global oil prices and narrowing

The Petroleum Development Levy account has allowed the government to reduce local oil prices, according to an estimation, collection under PDL stood at around Rs 14 billion in financial year 2007 to date and the cross subsidies paid arrived at Rs 8.8 billion. Currently, the government owes about Rs 12 billion to the oil marketing companies, the analyst said.

OMCs will take some hit due to reduction in prices as their per unit rupee margin will reduce. For PSO, the annualized negative earning per share impact would be Rs 1.1 per share, wile it would be around Rs 1.6 per share for Shell and its partial impact will be in the second half of financial year 2007. While the price reduction is higher on MS than that of diesel, the effective decline in earnings is lower for OMCs since diesel occupies the major share of revenue. Diesel consumption is six times higher than that of MS.

The government’s revenue from oil products in the form of GST would decline marginally as a result of these downward revisions in prices. With oil products having only 2.2 percent weightage in the CPI basket, its direct impact on inflation would be nominal. However, the resultant decline in transport cost will eventually cool inflationary pressures as food and other essential products’ prices are somewhat linked with transport cost. In the first half of financial year 2007, CPI was recorded at 8.39 percent. This is expected to slightly cool down below 7.75 percent in the second half of financial year 2006-07.

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