·         Gas sector circular debt has ballooned to ~PkR1.5tr according to recent news flow, with OGDC, PPL and PSO amongst those affected by it. OGDC/PPL Trade debts have increased to PkR490bn/PkR401bn, respectively, at Sep’22 quarter end, compared to PkR164bn/PkR143bn at the end of FY18.

·         As a result, OGDC and PPL have faced liquidity issues, which has led to a fall in gas production in the country, requiring greater volumes to be diverted to natural gas consumers. To note, the average daily gas throughput has dropped from 3,934MMCFD in FY19 to 3,233MMCFD in the Sep’22 quarter.

·         Our understanding is that the commission would be looking to address the low-hanging fruits on the balance sheets of OGDC and PPL, at least as the first step, namely the TFCs and T-Bills, respectively.

·         The overdue balance of OGDC’s TFCs at the end of the Sep’22 quarter stood at PkR142.65bn (PkR33.2/sh). As for PPL, the company held PkR46.8bn worth of T-Bills, translating into PkR17.2/sh.

·         While the aforementioned transactions would alleviate the liquidity crunch for the companies, it would not arrest the buildup of receivables going forward. For that, the GoP needs to approve and implement the WACOG bill, which has been in a limbo since Feb’22.

·         Successful implementation of the aforementioned transaction would provide investors a yield of 22%/39% for PPL/OGDC, respectively, with the likelihood of the former higher due to the nature of its instrument.

Courtesy –  AKD Research