Morning Briefing for March 06, 2014 – Standard Capital

Karachi, March 06, 2014 (PPI-OT): EFERT’s Future Hinges On The Uninterrupted Supply of Gas

Reminiscence
Engro Fertlizer, having 2 Urea plants with an installed capacity of 0.97mn tons/annum (Base plant) and 1.3 mn tons/annum (Enven plant), has been witnessing tremendous growth in Urea sales since gas restoration.

According to Standard Capital, company’s Enven plant, which is the most energy efficient Urea plant, commenced its operations in 2011 with an agreement with SNGPL to get uninterrupted supply of 100 mmcfd gas from Qadirpur gas field for a period of 20 years, in addition to receiving the gas at a concessionary rate of $0.7 per mmbtu for the first 10 years. Despite the agreement, the company faced stern gas shortages in 2011 and 2012, hence putting severe burden on Company’s cash flows. Although the company has been facing gas shortages, it came up with different tactics to muddle through the gas issue and even converted its Enven plant to operate on Mari gas, and hence contributing positively to its bottom-line.

Top-line Improved Due To Availability Of Gas
EFERT in CY13 reported Revenue of Rs 50.1bn, up 62.13% YoY, while bottom-line recovered from a loss of Rs 2.9bn in CY12 to come around this time at Rs 5.5bn, and consequently posting an EPS of Re 4.66. Urea production escalated to 1.56mn tons, thereby increasing the company’s share of the Urea market to 26% in CY13 compared to 18% in CY12.

Gas Availability Going Forward
EFERT has been receiving 60 mmcfd gas from Guddu on a transitory basis, since July 2013, to run both plants. ECC also approved 22 and 10 mmcfd gas allocation from Mari SML and Reti Maru fields respectively, both of which have successfully started flowing in. To cope with any curtailment of gas in the future, EFERT entered into a long term GSA (Gas Supply Agreement) directly with the operators of KPD, Makori, and Reti Maru fields, to supply 79mmcfd gas, to be implemented in 3Q 2014, thereby enabling EFERT to run both of its plants on a consistent basis at approximately 80% overall capacity. Gas price charged under the agreement by the field operators is estimated at $4.0 per mmbtu in addition to tolling charges and capex. If on the other hand, the government lives up to its words and provides the promised gas on concessionary basis of $0.7 per mmbtu, EFERT would be able to create a strong standing in the fertilizer sector, which would be reflected in company’s bottome line in years to come.

Financial Covenant and The Ability To Pay Dividend
If EFERT is able to achieve its long term gas plan, it’s possible that the company would be able to repay 33% of its senior loans representing Rs. 13.0 billion (as of Sep 30, 2013) by the end of 2015, and hence uplifting the debt covenant to pay dividend. Given Standard Capital’s thrust of earnings increase in CY14 in lieu of long term gas supply agreement with the field operators on feedstock gas of 79mmcfd (EPS target of Re 8-10; given various scenarios), Standard Capital recommends HOLD in EFERT.

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