Shell Petroleum Company Ltd (SPC), which owns 77.4% of Shell Pakistan Ltd (SHEL), intends to divest its investment and exit Pakistan. Although no reason has explicitly been given for this move, it may be influenced by a combination of global strategy and Pakistan’s frequent balance of payment crises. To recall, SHEL has posted cumulative net losses of PKR3.0bn in the last five years while also having to issue c.PKR9.0bn rights in 2021. SHEL’s share price has hit two consecutive upper circuits since the announcement, with the market clearly believing any transaction will take place at higher levels. We concur, where we estimate a valuation of c US$170mn for SHEL, which translates to PKR229/sh (138% upside).
About Shell Pakistan
SHEL is the 3rd largest OMC in Pakistan with a market share of about 8%, similar to Attock Petroleum (APL). As per OCAC, the company has 632 petrol stations operated by a network of dealers, and 9 that are company-operated (SHEL’s own website puts the total number of outlets at 700+). Most of its presence is in prominent urban locations spread across the country. While SHEL has recently exited the jet fuel business, it remains the market leader in the high-margin lubricants segment with a share of 37%. SHEL has total storage capacity of 156k metric tons, capturing both main terminals and upcountry storages, and it has a 26% stake in a pan-country white oil pipeline (PAPCO).
Potential buyers
We believe SHEL will be a good fit for APL, where we understand the latter wants to (i) increase its penetration in the South region (more than 250 of SHEL’s petrol stations are located in Sindh including Karachi) and (ii) capture the lubricants market (20-25% margins), to add to its dominance in the asphalt segment. In terms of further synergies, SHEL has suffered from deep exchange losses in the recent past. Still, APL is relatively shielded on this front due to refinery operations within the group. APL is cash rich, while the group’s strong regional presence may also enable it to settle the transaction in US$ outside Pakistan should the need arise. In addition, SHEL may attract international buyers, who will gain access to the 5th largest population in the world via an established network. At this stage, it is unclear if the eventual buyer will have to continue paying technical / trade mark fee to SPC – this totalled a not insignificant PKR4.1bn in CY22 i.e. PKR19.5/sh of SHEL.
Biggest move since Caltex’s exit
Back in 2013, Chevron-owned Caltex was sold to a JV between France’s Total and Pak Arab Refinery. At the time, Caltex had more than 500 petrol stations in Pakistan, with a market share of c 5%. The lubricants business was not part of the deal. While the actual deal value was not disclosed, a Reuters article a few months before the deal concluded saw Chevron raising US$300mn from the sale of its downstream assets in Pakistan and Egypt. SHEL’s recent announcement follows a flurry of news flow in Pakistan’s oil marketing sector, with Taj Petroleum also announcing it is interested in buying a 41% stake in Hascol Petroleum Ltd (HASCOL).
Valuation suggests more upside
While SHEL is not in our active coverage at the moment, we think any deal may value the company at about US$170mn i.e. PKR229/sh. This is indicative only, and derived from our EV methodology, based on the estimated current market value of underlying assets. Prominent assets include 10 storage depots/terminals, 9 company-owned petrol stations, the lube blending plant, the 26% stake in PAPCO, and real estate including the head office. Estimated asset values, adjusted for debt and cash balances and 70% asset depreciation (SHEL has been in Pakistan for 75 years), results in an enterprise value of PKR229/sh.
Courtesy – Intermarket Securities Limited.