REP-300

Market Strategy
Much awaited gas tariff hike gets nod from the ECC
24-Oct-2023

Tahir Abbas Best Securities House: 2023

Best Investment Bank: 2023
Best Investment Bank: 2022 Best Equity House: 2022 Best Equity Advisor: 2021

D: +92 21 32462742
UAN: +92 21 111 245 111
F: +92 21 32420742
E: tahir.abbas@arifhabibltd.com
Best Brokerage House: 2023
Corporate Finance House: 2023
Best Economic Research House: 2023 Top 25 Companies Excellence Award
Best Equity Sales Person (Runner up): 2023 (2019, 2018 & 2017) Leading Brokerage House for RDA 2021
Best Money Market Broker
(Islamic) 2021
Market Strategy
Much awaited gas tariff hike gets nod from the ECC
Exhibit: Proposed Gas Rates
 The ECC has approved the much-awaited gas tariff hike yesterday which will now be presented to the Existing Proposed
PKR/mmbtu Change
federal cabinet for final approval, after which OGRA will issue gas process revision notification. With the Rates Rates*
Domestic
recent approval the weighted average gas price is expected to go up by 53% to PKR 1,397/mmbtu (PKR
Protected**
914/mmbtu earlier). Up to 0.25 hm3 121 121 0%
Up to 0.50 hm3 150 150 0%
 The gas tariff for non-protected domestic consumers would increase up to 173%, commercial by 136%, Up to 0.60 hm3 200 200 0%
export industry by 86%, non-export industry by 117%, fertilizer by 14%, and CNG by 144%. The revised Up to 0.90 hm3 250 250 0%
gas prices shall be applicable from 1st Nov23. Non-Protected***
Up to 0.25 hm3 200 300 50%
 Gas prices revised for the fertilizer sector?: Important to mention that the pricing for fertilizer Up to 0.6 hm3 300 600 100%
Up to 1.0 hm3 400 1,000 150%
consumers on MARI’s network are yet to be finalized, however, as per the summary to the ECC, the
Up to 1.5 hm3 600 1,200 100%
proposed MARI gas pricing for the fertilizer sector is PKR 580/mmbtu for feed gas and PKR 1,580/mmbtu Up to 2.0 hm3 800 1,600 100%
for fuel gas. Accordingly, the ECC approved the same pricing for the plants operating on SNGP and SSGC Up to 3.0 hm3 1,100 3,000 173%
network (PKR 580/mmbtu and PKR 1,580/mmbtu for feed and fuel gas respectively). Up to 4.0 hm3 2,000 3,500 75%
Above 4.0 hm3 3,100 4,000 29%
 Positive GDS expected with the said revision: We have estimated the revenue impact of the said Bulk 1,600 2,000 25%
Special Commercial^ 697 697 0%
increase and our working suggests that the revised gas prices would create a positive GDS of PKR 57bn.
Commercial 1,650 3,900 136%
As per the estimated revenue requirement of SSGC and SNGP, the total revenue requirement is PKR Power (KE, SNPC, EPQL) 1,050 1,050 0%
697bn, while annual revenue would be PKR 755bn with the above tariff hike. Power (Liberty) 2,406 3,890 62%
Fertilizer - Feed (Engro) 200 200 0%
Exhibit: Revenue Requirements and Expected Revenue Collection Fertilizer - Feed (FFBQL) 510 580 14%
SSGC SNGP Total Fertilizer – Fuel 1,500 1,580 5%
Total Revenue requirement (ERR FY24) PKR mn 339,009 358,421 697,430 Cement 1,500 4,400 193%
Gas Volumes mmcf 256,113 308,130 564,243 Process (Export) 1,100 2,050 86%
Gas Volumes bbtu 250,991 289,358 540,349 Process (Non-Export) 1,200 2,600 117%
Gas Volumes mmcfd 702 844 1,546 Captive (Export) 1,100 2,050 86%
Captive (Non-Export) 1,200 2,600 117%
Full year production mmcfd 1,546 CNG 1,805 4,400 144%
Full year production mmbtu 540,349 Weighted Average 914 1,397 53%
Revenue (annual) post tariff increase PKR mn 754,809 Source (s): Media, OGRA, AHL Research, *Effective from 01-Nov-2023,
Total Revenue requirement (ERR FY24) PKR mn 697,430 **Protected category to pay a fixed charge of PKR 400 /month.
Surplus/(deficit) PKR mn 57,379 ***Non-protected category to pay a fixed charge of PKR 1,000/month and
Source (s): OGRA, AHL Research 2,000/month.

2
Page 07
Market Strategy
Much awaited gas tariff hike gets nod from the ECC
 Fixed charges to ease off cash flows: The ECC also approved fixed monthly charges, from PKR 10month Exhibit: Additional Revenue Collection on Revised Fixed Charges
to PKR 400/month, and for unprotected consumers, from PKR 460/month to PKR 1000/month and Previous Revised Change
PKR2000/month (depending on the slabs). We estimate a total additional impact of PKR 84bn from this Fixed Charges
increase. Protected PKR/month 10 400 390
Un-Protected PKR/month 460 1,500 1,040
 Estimated GDS and fixed charges: Cumulative increase from gas tariff and change in fixed meter charge
Connectios (mn)
would result in PKR 141bn as per our estimates. Moreover, in order to ensure the transfer of surplus
Protected No. 6.23 6.23 -
revenues within gas distribution companies, cost of gas equalization mechanism would be devised with
Un-Protected No. 4.41 4.41 -
SNGP and SSGC and OGRA will consider inter-company adjustments while determining the revenue
Total No. 10.64 10.64 -
requirement of the gas utilities.
Total Annual Collection
 Surplus revenue to ease off RLNG circular debt: Also, it is important to mention that, the surplus Protected PKR bn 0.7 29.9 29.1
revenue would be utilized to meet the tariff differential in RLNG diversion to the domestic sector. This Un-Protected PKR bn 24.3 79.4 55.0
would bode well for the PSO as the company receivables from SNGP increased by PKR 72bn and PKR Total PKR bn 25.1 109.3 84.2
133bn in FY23 and FY22 respectively.
Source (s): OGRA, AHL Research
 Blended pricing to minimize disparity: Lastly, to minimize the disparity in north and south, both of the
Exhibit: Blended Gas Rates
gas utilities would offer gas at blended pricing of natural gas and RLNG. We believe that this would also
help in curtailing the circular debt of RLNG chain as to an extent as this is the replacement of the WACOG % SSGC SNGP
mechanism. Please see the table for the revised expected gas tariff for SNGP and SSGC with blending RLNG 10.0% 40.0%
Export Industry
prices. (Process/Captive) Domestic Gas 90.0% 60.0%

Non-Export Industry RLNG 10.0% 80.0%

(Process/Captive) Domestic Gas 90.0% 20.0%
PKR/mmbtu

Export Industry
Blended 2,208 2,680
(Process/Captive)

Non-Export Industry
Blended 2,703 3,420
(Process/Captive)
Source (s): OGRA, AHL Research

3
Page 07
Market Strategy
Sectoral impact of gas tariff increase
 Exploration and Production and Gas utilities – big positive for cash flow
The revision in consumer gas price is expected to further curb the mounting up of gas circular debt of
E&P companies (which have been stuck vicious cycle of circular debt for a long time) and of domestic gas
utilities (SNGP, SSGC). Back in Feb’23, the government increased gas prices which elicited a slowdown in
overdue receivables of OGDC and PPL to PKR 511bn in Jun’23 (PKR 498bn in Mar’23) and PKR 456bn in
Jun’23 (PKR 434bn in Mar’23), respectively. Albeit, 3-year average gas revenue of OGDC and PPL has a
respective 41% and 62% contribution to the total revenue. Hence, a hike in gas prices will be positive for
these companies, as it will not only improve the cash flow position, it will also potentially increase their
payouts (due to improved cash earnings).

 OMCs – PSO to get cash flow relief

Furthermore, the PSO supplies RLNG to industrial sector, which during the winters is shifted domestic
sector leading to increase price differential. Therefore, the higher GDS alongside fixed charges would
help government to reduce the circular debt of RLNG chain and could be used to settle price differential.
Also, it is noteworthy that blending pricing would also help in curtailing RLNG sector circular debt. Lastly,
PSO ST borrowings increased significantly from PKR 156bn to PKR 423bn and receivable from SNGP
increased from PKR 226bn to PKR 298bn. An estimated reduction for every PKR 50bn from short-term
borrowing amid improved cashflows from SNGP would result in annualized earnings impact of PKR
14.30/share.

 Fertilizer – uniform tariff across the board

Feed and fuel stock prices are forecasted to increase to PKR 580/mmbtu (current PKR 510/mmbtu) and
PKR 1,580/mmbtu (current PKR 1,500/mmbtu), respectively. To recall, the OGRA notified revised gas
prices in Feb’23 to consumers under SSGC and SNGPL network, after which FFBL and EFERT jacked up
their respective manufactured fertilizer prices in order to nullify the impact. With further revision in feed
and fuel prices due, the impact of the potential hike would be minimal. For EFERT, the impact would be
lower due to its partial gas dependency on PP12 policy; hence the company would need to increase
prices by PKR 98/bag to completely pass on the impact.

4
Page 07
Market Strategy
Sectoral impact of gas tariff increase
Whereas, impact on FFBL would primarily be on its feed gas, for which the impact of PKR 79/bag for urea
and PKR 37/bag for DAP will have to be passed on. In case OGRA notifies a revision in feed and fuel prices
of consumers under MARI network, the impact of this will be significant. FFC continues to receive feed
and fuel gas at a price of PKR 302/mmbtu and PKR 1,023/mmbtu. Therefore, after a potential revision in
gas prices the company will have to augment urea prices by PKR 469/bag to completely pass on the
impact.

 Cement
Gas tariff for cement players using captive power plants is expected swell up to PKR 2,600/mmbtu from
the current PKR 1,200/mmbtu (+117%). It is pertinent to note that very few key players have a captive
gas or dual-fired power plant (namely LUCK, DGKC and MLCF under the AHL cement universe) and only
LUCK’s dependency on gas based power generation remains notable. Therefore, our workings suggest
that LUCK will have to raise prices by nearly PKR 45/bag in order to completely pass on the impact of
higher gas prices. We believe LUCK will pass on the impact.

 Steel
Gas tariff for industries (non-exports) is expected to be raised to PKR 2,600/mmbtu (+117%). Usage of gas
by Long steel players (manufacturers of rebars: ASTL and MUGHAL) during the reheating process is very
low. Meanwhile, we believe hike in gas tariff will necessitate a PKR ~4000/ton increase in ASTL’s rebar
prices to completely pass on the impact. While for MUGHAL our workings suggest that the impact is
expected to be slightly on higher side since it has a 27MW captive gas power plant which increases the
company’s exposure to the gas price hike, therefore prices may have to be increased by PKR
~15,000/ton.

5
Page 07
Market Strategy
Sectoral impact of gas tariff increase
 Chemical:
The rise in gas prices has a detrimental impact on chemical companies covered by AHL, EPCL, and
LOTCHEM. This is primarily because EPCL and LOTCHEM rely on a gas-based captive power plant to
meet their energy needs.
Given the ongoing gas shortage in the country, EPCL has already been adversely affected by to gas
supply shortage. The gas price for captive power plants used by EPCL has increased to PKR
2,600/mmbtu form PKR 1,200/mmbtu earlier, representing a substantial 117% increase. Consequently,
we anticipate that the gas price hike will have a negative impact on EPCL's earnings in CY24E, reducing
by PKR 3.57/share (-41%). It is pertinent to note that, EPCL will need to raise PVC prices by USD 94/ton
in order to fully offset the impact.
The gas prices for LOTCHEM has increased to PKR 2,050/mmbtu from PKR 1,100/mmbtu, +86.4%. The
gas price hike will have a negative impact on LOTCHEM's earnings in CY24E, reducing it by PKR
1.19/share (-22%). It is pertinent to note that, LOTCHEM will need to raise PTA prices by USD 20/ton in
order to fully offset the impact.

 Impact on inflation:
The total direct weight of gas price in the National CPI basket is ~0.7%. With an average 64% increase in
gas prices across all income quintiles (other than protected class), it could potentially result in an
inflationary increase of about 77bps. With the current inflation rate standing at 31.4% as of Sep’23, we
anticipate that, taking this effect into account, the average CPI for the FY24 will likely reach 24.5% YoY.

6
Page 07
Analyst Certification and Disclaimer – Neutral
Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect the personal views of the analyst(s)
about the subject security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views
expressed by research analyst(s) in this report. In addition, we currently do not have any interest (financial or otherwise) in the subject security (ies). Furthermore, compensation of the Analyst(s) is not
determined nor based on any other service(s) that AHL is offering. Analyst(s) are not subject to the supervision or control of any employee of AHL’s non-research departments, and no personal engaged in
providing non-research services have any influence or control over the compensatory evaluation of the Analyst(s).

Equity Research Ratings

Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as Jun 2024 for Target Price. In addition, return excludes all type of taxes. For
more details, kindly refer the following table;
Rating Description
BUY Upside of subject security(ies) is more than +15% from last closing of market price(s)
HOLD Upside of subject security(ies) is between -15% and +15% from last closing of market price(s)
SELL Upside of subject security(ies) is less than -15% from last closing of market price(s)

Equity Valuation Methodology

AHL Research uses the following valuation technique(s) to arrive at the period end target prices;
 Discounted Cash Flow (DCF)
 Dividend Discount Model (DDM)
 Sum of the Parts (SoTP)
 Justified Price to Book (JPTB)
 Reserved Base Valuation (RBV)

Risks: The following risks may potentially impact our valuations of subject security (ies);
 Market risk
 Interest Rate Risk
 Exchange Rate (Currency) Risk

Disclaimer: This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase or sale of any security. This
publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The
information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is
accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information
given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any
prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information
current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is
not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user
assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment
in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or
any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report.
Disclosure required under Research Analyst Regulations, 2015:
In order to avoid any conflict of interest, we hereby disclosed that;
Arif Habib Limited (AHL) has a shareholding in NBP, FCCL and UNITY.