Latest

SNGP Secures Key Financial Relief: OGRA Allows 88% Finance Cost Pass-Through

SNGP

KARACHI, December 24 2024:In a significant development for Sui Northern Gas Pipelines Limited (SNGP), the Oil and Gas Regulatory Authority (OGRA) has approved 88% of the requested finance cost for FY23 as pass-through in the company’s motion for review of its Final Revenue Requirement (FRR).

This decision comes after SNGP submitted an independent auditor’s certificate, aligning with directives issued on March 15, 2023. The allowance is tied to financing costs incurred due to revenue shortfalls from RLNG diversion, subsidized RLNG sales for fertilizers and export-oriented industries, and receivables stuck in circular debt related to the power sector.

Breakdown of the Allowance

  • Request vs. Approval: SNGP had requested an allowance of PKR 9.7 billion in finance costs. OGRA approved PKR 8.5 billion, or 88% of the total.
  • Previous Status: OGRA had earlier withheld this approval until an independent audit certification was provided, which has now been fulfilled.

Implications for FY25 Earnings

  • On December 17, 2024, OGRA had already allowed 50% finance cost as pass-through in the Estimated Revenue Requirement (ERR) for FY25. This translated to an earnings estimate of PKR 17.3/share for FY25.
  • With the latest precedent of 88% finance cost pass-through, the FY25 earnings estimate rises significantly to PKR 26.5/share, equating to a compelling FY25E Price-to-Earnings (P/E) ratio of 3.9x.

Why Finance Costs Are Likely to Continue as Pass-Through

The continuation of finance cost pass-through aligns with directives allowing such costs to offset financing for circular debt shortfalls, RLNG subsidies, and revenue differentials. As of June 2024, SNGP’s revenue shortfall stands at a staggering PKR 589 billion, with PKR 150 billion in borrowings requested to address these issues. Notably, PKR 40 billion of this amount was borrowed following Ministry of Energy directions for onward payments to PSO.

Until a significant portion of this shortfall is resolved, OGRA is expected to approve a substantial portion of SNGP’s finance costs as pass-through, ensuring the company’s financial stability.

Investment Outlook

Given these favorable developments, we maintain our BUY stance on SNGP. The stock, currently trading at a FY25E P/E of 3.9x, represents an attractive investment opportunity, supported by robust regulatory backing and improved earnings visibility.

This strategic financial relief underscores OGRA’s acknowledgment of SNGP’s critical role in managing Pakistan’s energy sector amidst the challenges of circular debt and revenue shortfalls.

Leave a Reply

Your email address will not be published. Required fields are marked *