OMCs reliance on short-term loans ups financial risks

KARACHI: The huge reliance of oil marketing companies (OMCs) on short-term borrowings increases the financial risk of the sector, indicated a study.

“The borrowing needs of the sector arise from working capital financing for which the sector relies heavily on short-term borrowings as they constitute an average of 90 percent of the total borrowings,” Pakistan Credit Rating Agency (PACRA)’s study on OMCs stated.

As per latest available figures, local consumption of petroleum products across all sectors increased, with cumulative consumption amounting to 23.1 million tonnes. Resultantly, profitability of the sector improved on the back of increased sales and higher oil prices. Additionally, the government transferred a subsidy to OMCs in the form of price differential claim during the second half of the last fiscal.

Although the sector relies largely on short-term borrowings to finance working capital needs, inherently a high financial risk, interest coverage in FY22 improved significantly.

Owing to torrential rains / floods in early FY23, imports of petroleum products in the first three months of the same period declined in volume by 31 percent YoY (1.1 million tonnes), reflecting high pump prices and suppressed demand.

The Russia-Ukraine conflict which began in early 2022 set the pace for energy markets for the rest of the year, seeing as Russia is one of the largest energy exporters in the world.

Expected supply gluts, a global recession on the horizon, price spirals due to production cuts by OPEC+, and Pakistan’s GDP estimated to slow down to 2.9 percent by year-end 2022 could cause the oil markets to suffer considerably.

In the medium-term, since import of petroleum group comprised 22 percent in FY22 compared to 14.6 percent in FY21 of total import bill, the OMCs may suffer as well.

Heavy dependence on petroleum imports, combined with almost stagnant local production (10.3 million tonnes in FY22, a decline of 0.045 percent YoY), along with currency depreciation against the dollar, exposes the sector to considerable market risk.

Despite current challenges, major OMCs in the country fared considerably well in FY22. The government’s decision to revise down the turnover tax rate from 0.75 percent to 0.5 percent for OMCs is likely to further improve average profits for the sector.

According to the report, OMCs in Pakistan have a cumulative Mogas storage capacity of 798,525 tonnes and cumulative HSD storage capacity of 978,750 tonnes that puts the cumulative storage capacity at 1,777,275 tonnes.

As per FY22 consumption figures, storage capacity can cover 32 days of average Mogas consumption and 40 days of average HSD consumption, exceeding OGRA’s minimum requirement of 20 days.