Sui North Gas (SNGP) - OGRA approves 6.6% hike in gas prices

Against the demand for a 40-42% hike by Sui North (SNGP), the Oil and Gas Regulatory Authority (OGRA) has decided to allow a 6.6% hike. SNGP demanded an exorbitant hike to cover the shortfall of Rs207bn arising due to the diversion of RLNG to domestic consumers and a late payment surcharge of Rs96bn. RLNG is being diverted to domestic consumers as captives are moving away from self-gas-based electricity generation to grid consumption after a significant gas price hike to Rs3500/mmbtu and the imposition of a grid levy of Rs791/mmbtu.

§ The government will have to announce its decision regarding OGRA’s recommendation within 40 days. The IMF has also set a structural benchmark for the government to announce gas price adjustments by July 1, 2025.

§ Majority of the proposed hike was rejected after disallowing a Late Payment Surcharge of Rs95bn, in line with our expectations and continuing past practice. In our previous note released on Apr 11, 2025, we mentioned that “SNGP has incorporated Rs96bn for FY26 on account of late payment surcharge as per regular practice in Estimate Revenue Requirement (ERR). However, OGRA generally declines this demand, and we also expect OGRA will deny this”.

§ While on diversion of RLNG to domestic consumers, the diverted volume of RLNG to domestic consumers is reduced by 19%, lowering the Rs57bn burden on consumers. The decline in diversion volume is after (1) Pakistan LNG Limited (PLL) confirms that it has made arrangements with ENI to divert its cargoes outside Pakistan on the petitioner’s request for Jul 2025 to Dec 2025. As a result of the likely deferment of RLNG Cargoes by PLL, the curtailment of indigenous gas volumes is reduced from a previously estimated 329mmcfd to 295mmcfd (or 354 BBTU/day to 317 BBTU/day).

§ SNGP average operating assets adjusted downward, while WACC increased: SNGP demanded average operating assets of Rs123.8bn, while OGRA has allowed Rs104bn. However, the return on asset (WACC) is improved to 25.92% vs. SNGP’s projected number of 23.30%.

§ Unaccounted for Gas (UFG) projected at 7.25%: This is a Determination of Estimated Revenue Requirement (DERR) that will be followed by a couple of reviews. The actual UFG generally differs from the initial UFG given in ERR/DERR.

§ Expected Earnings assuming UFG disallowance of 1% and 88% finance cost as pass-through: Based on the asset size of Rs104bn with a required return of 25.92%, the company can earn EPS of over Rs28/share after adjusting for 1% UFG disallowance (Rs2-3bn) and assuming 88% of finance cost as pass-through (taking cue from FY23 decision). Every 10% financial disallowance will negatively impact Rs1.7/share to SNGP earnings at a loan book size of Rs135bn.

§ Way forward: Amidst surplus RLNG available in the system, SNGP is forced to curtail over 300 MMCFD of natural gas from local E&P companies, having an annual impact on FX reserves to over US$1.3-1.5bn. Curtailment may increase going forward as the grid levy of Rs791/mmbtu rises from Jul 2025 to Feb 2026 to transport captive users to the national grid. In our view, to avoid further curtailment of indigenous gas, the government shall have to negotiate with Qatar for either a downward revision in several cargoes and/or the price of RLNGper the existing 15-year agreement (signed in Feb 2016), with Qatar providing an option of price review after 10 years (i.e. Feb 2026), and failure to reach consensus over price the deal tenure shall be shortened to 11 years, as per news report.

§ We maintain our BUY stance on SNGP as the company trades at FY25-FY26 PE of 4.0-4.5x. Key risks to our earnings would be (1) higher than estimated UFG (our assumption 1-1.8%) and (2) disallowance of finance cost (our assumption 12% disallowance).

Courtesy- Topline Pakistan Research