Chevron’s 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 Chevron’s 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 Chevron’s plans to exit Pakistan’s 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 company’s 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.
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 Byco’s chemical manufacturing business and one who is also involved in the company’s 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 company’s 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 company’s 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 Chevron’s stake in PRL.
Published in The Express Tribune, March 27th, 2012.