The KSE registered volatile price behaviour throughout the trading week, and ended 2.93 % lower wow to close at 1569.39 as against its starting level of 1616.74.
Additional strength on the very first day, pushing the Index to 1650, culminated into profit taking at the highs. A technical correction resulted, as a reading of 70% was recorded on the RSI scale which is basically a signal that a correction is about to ensue.
Failure to hold at psychological support of 1600 on the third day turned into heavy selling in the absence of any directional information on the political and economic front.
However, the World Call scrip bagged the top five slot as its price jumped a positive 27.22% to close at 22.20, riding on the back of investor confidence in the newly found company's earnings power induced by the government's increased interest in boosting IT in Pakistan.
Choppy price behaviour was noticed in PSO which after registering an initial strength of 186.30, closed at 173.90. Speculators began assimilating the stock over the last two weeks and after pushing it past 180, offloaded the scrip to take profit.
Major breakout levels are technically always tested. In this week, the Index eased further to test the levels of 1550 on Friday. The level of 1550 is extremely critical and it if holds, then a positive outcome may be expected. We maintain major support at 1450 and resistance at 1650.
Sector Analysis
Oil and gas Sector
We have seen many changes occurring in the oil and gas sector in the previous month. Most of these changes are associated with the privatization of the Public Sector Enterprises operating in this sector. Here we will analyze issues relating to those separately.
The first advertisement for the invitation of Financial Advisor of PSO (Pakistan State Oil) was made in September 1999, but with the change in government in October everything was put on hold. Now, the Privatization Commission has again been able to place the privatization agenda back on track. PSO's name has not appeared on the new privatization list, our guess is that the government wants to privatize the smaller entities before they privatize PSO.
Currently, the government is planning to divest the non-core business interests in the Public Sector Energy Companies. The entities initially on the agenda are the LPG units of PSO, SNGPL (Sui Northern Gas Pipeline Company) and SSGC (Sui Southern Gas Company). The government has deregulated the prices of LPG prior to their final bidding. We believe that the privatization of LPG will set the precedent for further privatization, and that most of the oil and gas sector will be deregulated prior to privatization..
The oil and gas sector too large and complex to be deregulated in one go, it is therefore being deregulated in a step by step manner. Prior to privatization, the government plans to deregulate the sector first. It is the government belief that the deregulated environment will improve the profit margins of the sector, enabling the government to get better proceeds from privatization. The first POL product to be deregulated was lubricant in early 1990's, after a lapse of 7 years furnace oil was deregulated, and now the government has announced that it plans to deregulate the diesel in December. We believe that the deregulation will be completed within 2 to 3 years, and privatization will be completed within 5 years.
The unique factor about this deregulation is the focus towards the downstream sector, previously deregulation of the oil and gas sectors was focused on upstream activities. The petroleum policies of 1994, 1995 and 1997 were focused on giving incentives to the upstream sector. Yes, these incentives did have a positive response, many international oil prospecting and exploration companies started to come to Pakistan in a big way, such as Shell, Mobil and Texaco, consequently increasing the country's reserves.
Now the deregulation is focused on the downstream (Distribution and Marketing) sector, which had been left out of the deregulation picture for too long. Many companies are now seeing greater potential in the downstream segment compared to the upstream (Exploration and Refining) segment. For example, Shell International has decided to divest its upstream business interests and focus on its downstream business. For this purpose it has increased its share in Shell Pakistan from 51% to 58% and at the same time it plans to purchase 26% stake in the Karachi PARCO 800km pipeline project, which is worth USD800mn. Earlier on the Oil Marketing Companies saw limited opportunities in the downstream business, this was the key reason why the OMC's were not keen on capital expenditure.
So far, the interest generated by the privatization of has been phenomenal. There were 9 parties who were pre-qualified for the final bidding for a stake in the privatization in the SNGPL LPG business. The government has the right idea that foreign investors are interested in the oil and gas sector companies, they present companies with simple business models, are easy to manage and evaluate.
With furnace oil deregulated, within a period of one month we have seen considerable price fluctuations, initially the price climbed to Rs11,368/tonnes, and now have decreased to Rs9,778/ tonnes. PSO claims that it has not increased its margins and it will not take unfair advantage of its market position. PSO has reduced the price on furnace oil by 15% whereas Shell and Caltex have reduced it by 4% and 5% respectively. It seems that PSO deliberately plans to keep its margins low toward off competition. We believe that in the long run this policy will not be sustainable because the competition is going to depend upon efficiency. Shell and Caltex both have the advantage of having a much more efficient management structure. Comparing Shell and PSO in terms of marginal efficiency we find that Shell enjoys massive management premiums, even discounting larger network size.
With the expected deregulation of diesel in December, it appears that the government is pushing for a much quicker deregulation than what the market had expected. Certain aspects have come to light with the deregulation of Furnace oil, firstly the margins have increased considerably, secondly with the removal of freight pool the prices in northern areas are higher in comparison to the southern region, and also that the prices for the retail consumers have gone up. Even though Furnace oil is now being charged a lower amount of Development Surcharge tariff than previously and a sales tax of 15% has been imposed. Furnace oil is mainly consumed by industries and they can adjust the sales tax element against their output. But with the deregulation of other products, the consumers will not take the price hike caused by deregulation so favourably.
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