JS Securities Limited - JS Research.

Karachi -- January 06, 2023 (PPI-OT)

Efforts to curtail gas circular debt gather speed

In another effort to successfully complete the lingering ninth review of the ongoing IMF program, Pakistan government has reportedly increased its pace on resolution of gas circular debt plan with formation of a committee.

IMF in its recent Staff Report placed much emphasis on burgeoning gas circular debt and the need to address the same. In the same report, Pakistan government had ensured it has begun work on the Gas Circular Debt Management Plan (CDMP).

From the listed space, any liquidity injection in the gas chain bodes well to unlock valuations of OGDC, PPL, PSO and SNGP. Since announcement of the committee being formed, these stocks have reported returns of 14% - 38%, vs KSE100 performance of 4% during the same time. Despite recent run up, the said stocks trade at earning multiples of ~2.5x.

As a part of the CDMP, any measures taken regarding gas price increase across the board, would have negative implications on costs of the fertilizer, cement (LUCK and CHCC), textiles sectors and companies that run captive plants on gas.

Attempt to chalk out gas circular debt plan

In another effort to successfully complete the lingering ninth review of the ongoing IMF program, the government has reportedly increased its pace on resolution of gas circular debt. The government formed a committee comprising public and private sector representatives that would devise a detailed road map to address the issue. The road map would reportedly provide a strategy to reduce current outstanding gas circular debt of Rs1.6trn to Rs500bn, contracting it by almost 70%. The gas circular debt was estimated at Rs720bn as at Mar-2022 and at Rs620bn as at Jun-2021.

Further exaggerating the impact of the usual culprits - UFG losses, lower bill recovery and subsidized gas rates - has been by the sharp rise in international RLNG prices post Russia-Ukraine war and steep PKR depreciation. This has led to a situation of a higher bill to foot and lower funds available with the government to pay to Sui companies (SSGC and SNGP), followed by ballooning receivables on OGDC, PPL and PSO's books. A strategic issue has also been higher reliance on RLNG amid lower indigenous gas exploration.

To comply with IMF recommendations

IMF in its recent Staff Report has given much attention to the burgeoning gas circular debt and the need to address the same by establishing reliable circular debt data, a gas...