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Karachi, September 10, 2012 (PPI-OT): ENGRO’s share price rallied strongly on Friday amid rumors of some immediate relief in the form of gas supply resolution for Enven.
According to AKD Securities, market hearsay suggest that there could be a network switch from Sui to Mari for Enven, with the gas supply for the base plant diverted towards Enven. However, with gas from Mari being of low btu quality, there would likely be some modifications required at Enven in order to run on low btu, as the plant is designed to run on pipeline quality gas. AKD Securities believes that this option is workable, however feasibility would depend upon i) the rate of feed stock gas and ii) gas supply from Mari in addition to allocation for base plant.
The current situation: ENGRO’s base plant gets ~90mmcfd-95mmcfd of gas from the Mari field. However, Mari gas is of low btu (720btu/scf). Enven is designed to run on pipeline quality gas (980btu/scf), where the plant would need modifications to run on low btu. Assuming gas supply of 95mmcfd and zero fuel efficiency gains (i.e fuel stock gas consumption @ 5.5mmbtu/ton), AKD Securities estimates that Enven plant can run at ~70% (925k tpa), similar to the production level of the base plant (875k tpa – 900ktpa).
Building up scenarios for gas supply switch: AKD Securities has provided AKD Securities’ scenario analysis for the gas supply switch from Sui to Mari for Enven. AKD Securities has run AKD Securities’ scenarios at the current urea price (PKR,1650/bag) and not taken any fuel efficiency gains for Enven. Below are the brief descriptions of AKD Securities’ scenarios (Scenarios 2-4 assume that gas is completely diverted from the base plant to Enven.)
EFERTS – Scenario Analysis of gas switch
| (PKR million) | Urea revenue | EBITDA |
| Scenario 1 (Base case) |
34,753 |
18,340 |
| Scenario 2 (Enven@70%, with feedstock subsidy) |
28,148 |
13,487 |
| Scenario 3 (Enven@70%, with feedstock subsidy) |
28,148 |
19,395 |
| Scenario 4 (Enven@90%, with feedstock subsidy) |
36,190 |
24,936 |
Scenario 1 (Base case): For AKD Securities’ base case, AKD Securities has assumed base plant and Enven capacity utilizations fo 90% and 20%, respectively. It would only make sense for Engro to divert Mari gas to Enven if the feedstock gas is provided at subsidized rate (@ US$0.7/mmbtu) and Enven gets additional gas from Mari.
Scenario 2 (Enven@70%, w/o feedstock @ US$ 0.7/mmbtu): EBITDA for Engro Fertilizers, assuming 70% Enven utilization without any feedstock subsidy, would be PKR 13.5 billion, significantly lower than AKD Securities’ base case estimate of PKR 18.3 billion, making such a plan unfeasible.
Scenario 3 (Enven@70%, w/o feedstock @ US$ 0.7/mmbtu): Engro would be a winner in such a scenario, where AKD Securities estimates the company’s EBITDA to stand at PKR 19.4 billion, PKR 1.1 billion higher than AKD Securities’ base case.
Scenario 4 (Enven@90%, with feedstock subsidy): Given the rising production profile of Mari gas field, it could be possible for Mari to provide higher than the designated supply of gas to ENGRO, which coupled with subsidized feedstock could result in annualized EBITDA of PKR 24.9 billion.
The big question? AKD Securities believes pricing for feedstock gas from Mari will boil down to ENGRO’s negotiation. From AKD Securities’ vantage ENGRO should negotiate for feedstock rate as per current pricing to Enven where differential should be adjusted in Gas Development Surcharge similar to prevailing case for Enven on Sui Northern’s network. At present, pricing differential (between rate specified in Fertilizer Policy 2001 and current consumer market rates) on gas allocation from SNGPL’s network to Enven is adjusted in Gas Development Surcharge. This should be extended to Mari gas allocation from ENGRO’s original plant to Enven in AKD Securities’ view. Recall, as per fertilizer policy 2001, it is the governments prerogative to dedicate gas to fertilizer plants.
Investment Perspective: Developments regarding gas supply resolution of Enven should keep interest elevated in ENGRO, particularly if feedstock subsidy remains intact. AKD Securities currently has a Buy stance on ENGRO with a target price of PKR 208/share. Moreover, over the longer term, AKD Securities continues to retain faith in ENGRO where the GoP decision to allow fertilizer companies to directly purchases gas from E and P companies should compensate for any loss in current feedstock subsidy.