Topline Maintains Buy Stance on SNGPL
Staff Report:
Islamabad: Topline has maintained it BUY stance on SNGPL as company trades at FY25-FY26 PE of 4.0-4.5x.
Key risks to our earnings would be higher than estimated UFG (our assumption 1-1.8%), and (2) disallowance of finance cost (our assumption 12% disallowance,” Topline said in report.
Against demand of 40-42% hike by Sui North (SNGP), the Oil and Gas Regulatory Authority (OGRA) has decided to allow 6.6% hike.
SNGP demanded exorbitant hike to cover shortfall of Rs207bn arising due to diversion of RLNG to domestic consumers and 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 significant gas price hike to Rs3500/mmbtu and imposition of grid levy of Rs791/mmbtu.
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The government will have to announce its decision over OGRA’s recommendation within 40 days. To highlight, IMF has also set structural benchmark for government to announce gas price adjustments by Jul 01, 2025.
Majority of the proposed hike was rejected after disallowing Late Payment Surcharge of Rs95bn, in line with our expectations and in continuation of past practice. We mentioned in our previous note released on released on Apr 11, 2025 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 Rs57bn burden on consumers.
The decline in diversion volume is after (1) confirmation by Pakistan LNG Limited (PLL) that it has made arrangement with ENI to divert its cargoes outside Pakistan on requested of petitioner for months of Jul 2025 to Dec 2025. As a result of likely deferment of RLNG Cargoes by PLL, the curtailment of indigenous gas volumes is reduced from 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) and will be followed by couple of reviews, the actual UFG generally differs from initially 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 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% disallowance in finance will have negative impact of Rs1.7/share to SNGP earnings at 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 annual impact on FX reserves to the extent of over US$1.3-1.5bn.
Curtailment may further increase going forward as grid levy of Rs791/mmbtu is set to increase further from Jul 2025 and Feb 2026 with aim to transit captive users to national grid. In our view, to avoid further curtailment of indigenous gas, Government shall have to negotiate with Qatar for either downward revision in number of cargoes and/or price of RLNG as existing 15-year agreement (signed in Feb 2016) with Qatar provides 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.
