Karachi, September 12, 2012 (PPI-OT): The Government of Pakistan has approved the cash neutral transaction offsetting OGDC receivables against PKR 82 billion in Privately Placed Term Finance Certificates (PPTFC) issued by Power Holding (Private) Limited in an effort to partially reduce the circular debt balance within the energy chain.
According to AKD Securities, OGDCL will adjust receivables from oil refiners as well as gas companies while companies within the energy chain will adjust receivables and payables based on the Government’s pre-set mapping. Based on AKD Securities’ initial discussions, PSO will receive PKR 70.5 billion from power companies mainly KAPCO (PKR 30 billion) and Hub Power (PKR 40 billion) and will offset payables to refiners. Details of the TFC include a duration of 7 years with a 3 year grace period with an interest rate of KIBOR +1% payables semi-annually. OGDC’s stock price has reacted negatively to the announcement down approximately 1% yesterday. As a one-off, AKD Securities views the transaction as a positive giving the energy sector space as well as leading to interest income for OGDC (estimated at PKR 1.4/share) against previously held-up receivables. That said, AKD Securities views the risk of the GoP taking recurring recourse to exploration company balance sheets with concern particularly if future cash flow generation trails upcoming exploration and development expenditures. At current market price, AKD Securities recommends an Accumulate stance on OGDC with a target price of PKR 201/share!
Indian Precedence: AKD Securities views the recent transaction as taking precedence from the Indian Government’s practice of issuing Oil Bonds between 2005-2006 and 2008-2009 to partially offset oil marketing company under-recoveries. Bonds were issued in several tranches between the aforementioned period with a maturity of 20 years and interest rates ranging from 6%-9%. In 2010-2011 the Indian Government discontinued the practice of issuing oil bonds, instead providing cash assistance from budgetary sources as well as under-recovery burden sharing between upstream NOCs (discounts to realized crude price) and oil marketing companies. Under-recoveries are based after subsidy adjustment (PDS Kerosene and domestic LPG) where cash assistance from budgetary sources remains ad-hoc usually at more than half the amount of total under-recovery.
GoP Pre-Set Mapping: The GoP has present the mapping of PPTFC adjustment within the energy chain where PSO will net off PKR 70.5 billion. Details of the mapping for OGDC and PSO is provided on RHS tables. PSO has performed with the news flow where the stock gained 1.6% yesterday. That said, similar to past TFC transactions AKD Securities views the PPTFC as interim relief where continued accretion in circular debt will likely rebuild cash flow stress within the energy chain over the next 3-6 months. ATRL based on AKD Securities’ initial discussion will likely take away the larger adjustments will PKR 31 billion to be offset followed by Pakistan Refinery at PKR 16 billion and NRL at PKR 9.5 billion. As a one-off, AKD Securities views the transaction as a positive giving the energy sector space as well as leading to interest income for OGDC (estimated at PKR 1.4/share) against previously held-up receivables. That said, AKD Securities views the risk of the GoP taking recurring recourse to exploration company balance sheets with concern particularly if future cash flow generation trail upcoming exploration and development expenditures.