Impact of sliding international crude oil prices had yet to be seen. And one such direct impact was due on domestic petroleum products prices. With reduction in petroleum prices in the country due to continuous falling of crude oil prices, the stage was finally set for the long awaited increase in OMC and dealers margins.
The announcement from the Economic Coordination Committee (ECC) made margins on both motor gasoline (petrol) and high speed diesel (HSD) equal i.e. Rs2.35 per litre. However, the increase is greater for HSD where OMC margins jumped up by Rs0.49 per litre compared to Rs0.12 per litre increase in that of petrol. Dealers margins also inched from Rs2.30 per litre to Rs2.60 per litre.
What is worth mentioning here is that the OMC sector has been demanding a rise in margins for a long time as can be seen from the last increment that took place in April 2013. Though the request made little sense when the oil prices were rising, decline in international prices provided the government a cushion to go ahead with the long anticipated call.
Firm that will benefit from this attempt has to be Pakistan State Oil (PSO), which holds the highest market share in both the petroleum products. However, the retail nature of these fuels would help other OMCs like APL and Shell as well.
And so the brokerage houses have been forced to tweak their EPS estimated for FY15; on average, initial estimates for PSOs EPS for FY15 have risen by eight percent, while estimates for APL have increased by six percent on average.
What must not be forgotten is the negative impact of the falling crude oil prices, and hence the domestic petroleum prices: Where the OMCs have luckily ducked high inventory losses in 1QFY15, chance are that 2QFY15 will bring much higher inventory losses.
Keeping in mind that the increase in margins has been advocated for a long time, OMC stocks are set for a rally.
But investor should watch out as this spur will be short- lived as everything comes down to the circular debt, resolution of which is the only source of long-term optimism in the sector.
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OMC Margin Revision
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Petroleum Product Previous margins Revised Margins Chg
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Motor Gasoline Rs2.23/litre Rs 2.35/litre Rs 0.12/litre or 5.38%
HSD Rs1.86/litre Rs 2.35/litre Rs 0.49/litre or 26.34%
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