OGDC, PPL Witness Improvement in Recoveries From Customers

Oil and Gas exploration companies were among the top affected companies of the recent spikes in gas rates. However, post adjustment/increase in gas prices, there has been some improvement in the cashflows of the companies, according to a report by Topline Securities. To recall, the Government of Pakistan under the IMF program sizably increased gas prices by ~75 percent in November 2023 and ~20 percent in February 2024 to contain the annual pile-up of the gas sector circular debt which amounted to around Rs. 3 trillion by January 2024. To quantify the impact, the Topline report assessed the March 2024 quarter accounts of the Oil and Gas Development Company Limited (OGDC) and Pakistan Petroleum Limited (PPL). As per this, the change in receivables to net sales ratio in 3QFY24/9MFY24 has fallen to 21 percent/20 percent of the net sales for both companies cumulatively compared to the last six years (FY18-23) average of 29 percent, signaling partial Improvement in recoveries of the E&P companies. In the last 6 years, from FY18-23, OGDC’s change in receivables to sales ratio averaged 27 percent with a range of 21 -30 percent. This ratio suggests roughly on average 27 percent of the sales remained uncollected based on our crude estimates. However, during 3QFY24/9MFY24 this has come down to 20/14 percent. Under the new IMF program, gas tariffs will increase uniformly which will further improve the recoveries of Sui companies, thus benefiting the E&P company’s recoveries and helping them to announce regular/historic dividends. In case of PPL, during the last 6 years, the Topline report analyzed the company’s receivables from Sui Companies as it argues that is the true depiction of gas sector circular debt. PPL’s change in receivables from Sui Companies to net sales ratio averaged 35 percent with a range of 8-52 percent (FY23: 52 percent) in the last six years from FY18-23. This suggests approximately 35 percent of the net sales remained uncollected in the last 6 years.  However, during 3QFY24/9MFY24, this ratio (Sui receivables) has come down to 22%/30%, showing marked improvement from the FY23 ratio of 52 percent. To note, PPL in its 3QFY24 report has also mentioned this improvement by stating that, the collection ratio from customers has improved to 74 percent vs. 49 percent in the corresponding period.