Tribune: KARACHI: Chevrons potential departure from Pakistan may set off a wave of consolidation in the oil marketing

sector, and may provide an opportunity for players like Byco Petroleum and Attock Petroleum to buy out what is currently the third-largest retail network in the country.

On March 13, Businessweek reported that the US-based Chevron announced in its global analyst briefing that it may be exiting the retail oil business in three markets: Australia, Egypt and Pakistan. The company did not offer much in terms of details, though the announcement seems to be part of the worldwide trend of the major global oil companies shedding their downstream assets refining, marketing and retail sales to focus on the more profitable upstream businesses, such as oil and gas exploration and development. In a report issued to clients, US financial giant Bank of America Merrill Lynch stated that Chevrons exit from the market may trigger better government regulations and ultimately benefit existing players. An increase in the marketing margins is a key demand of the industry, even after the 30-35% upgrade last year, said Mohammad Fawad Khan, a research analyst at KASB Securities (the Pakistani research affiliate of Bank of America Merrill Lynch), in his note to clients. We contend that Chevrons plans to exit Pakistans downstream space will eventually benefit existing players as the government focuses on key issues faced by the industry. Chevron has 540 retail outlets in Pakistan that operate under the Caltex brand name. The companys share in the Pakistani market comes to about 5%, placing it in fourth place behind Pakistan State Oil, Shell Pakistan, and Attock Petroleum. It is the largest petroleum retailer not to be listed on the Karachi Stock Exchange. In addition to its retail outlets, Chevron has 12 storage depots with a capacity of about 12,000 tons, an 11% stake in a cross-country white oil pipeline, and a 12% stake in Pakistan Refinery Ltd. The company also has a relatively high market share of about 23% in the high-margin lubricants segment.
Potential buyers

While no company has explicitly stepped up to say that they are interested in buying out Caltex from Chevron, Khan reckons that Attock Petroleum and Byco Petroleum two companies that have been aggressively expanding their retail networks might be interested. Byco Petroleum gave a cautious response to the news. We are open to look at all such options, said Mohammad Wasi Khan, the head of Bycos chemical manufacturing business and one who is also involved in the companys expansion into the retail space. Khan was careful not to mention Caltex by name and added that the company had yet to announce firm plans of the sale within Pakistan. Officials at Attock Petroleum were not available for comment when contacted by The Express Tribune because their office hours had ended.

Byco Petroleum currently has about 216 retail outlets across Pakistan and a market share of about 1.5%. Attock Petroleum a subsidiary of the Attock Group has about 331 retail outlets but a market share of around 8%.
Possible deal size and structure

Chevron does not disclose how much it earns in Pakistan but Fawad Khan reckons that the companys assets in the country would sell for anywhere between Rs10 billion and Rs16 billion ($110 million to $176 million), based on industry comparables and publicly available data. Given the companys relative strength in the lubricant business, the company may explore the option of either retaining that business or selling it separately to get a higher price. PSO, the largest oil marketing company in the country, has a relatively weak market share in the lubricant business and may make a bid for the Caltex lube brands. PSO has the right of first refusal on Chevrons stake in PRL.

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Caltex Pakistan Assets Being Sized Up by Buyers

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- Chevrons reported plans to exit Pakistans downstream space will eventually benefit existing players as the govt. focuses on key issues faced by the industry in an effort to improve the operating environment. - Increase in the marketing margin remains a key demand even after last years 3035% upgrade, in our view. Our sensitivity analysis yield 37% upside to earnings of PSO and APL for every 10% increase in margin. - We believe the downstream industry will undergo a consolidation phase over the medium term despite pockets of growth opportunities across fuel oil segment. - Exit of Chevron and acquisition by an existing player is unlikely to have any implication on prices and margin as most fuel products are regulated. - While we do not rule out the possibility of new player entering the market, APL and Byco appear to be key contenders among existing players. Margin relief likely as Chevron prepares to pack up We contend Chevrons reported plans to exit Pakistans downstream space will eventually benefit existing players as the govt. focuses on key issues faced by the industry in an effort to improve the operating environment. Increase in the marketing margin remains a key demand even after last years 3035% upgrade, in our view, as higher oil prices, rupee depreciation and inflation erode overall profitability. Our sensitivity analysis yield 37% upside to earnings of Pakistan State Oil and Attock Petroleum Ltd for every 10% increase in margin. Shell Pakistan would remain a key beneficiary among noncovered companies. All signs of industry consolidation We note operating environment for small players like Chevron has become increasingly difficult as a result of (1) fixedmargin environment, (2) competitive landscape in favor of integrated players (Chevron is a standalone marketing company), (3) fiscal regime (turnover tax), (4) oil prices volatility, and (5) low operational and cost efficiency. Many of the above reasons are not unique to Chevron. This underpins our view that over the mediumterm, downstream industry will undergo a consolidation phase despite pockets of growth opportunities across fuel oil segment. existing players may emerge as key contenders While we do not rule out the possibility of new player entering the market, APL and Byco appear to be key contenders among existing players. Both have refining backup, strong financial muscle and intentions to increase their foot print. Exit of Chevron and acquisition by existing player is unlikely to have any implication on prices and margin as most of fuel products are regulated. Though Chevrons financials are not available, based on comparables, we see deal size of PRs1016bn. but change in deal structure may entice more players Strong position in high margin lube segment (23% market share) remains a key jewel. We will not be surprised if Chevron decides to maintain its position in the segment or the lube segment is stripped off and sold separately in order to fetch better price. The latter may entice staterun PSO to participate in the deal as the company is yet to gain M/S in lube, commensurate to its retail presence. The standalone lube segment will allow PSO to avoid acquiring fuel business in which the company already has a very strong position. With strong earnings in the last two years, PSOs

balance sheet still has room for acquisition related debt, in our view. PSO is also a partner in Pakistan Refinery Ltd, in which Chevron owns 12% stake and enjoys preemptive right should Chevron decide to divest the stake. Source: KASB Securities Limited, Analyst report titled OMCs: Chevrons exit may benefit existing players published on 26 March 201