SNGPL is the largest integrated gas company in the country, involved in the distribution and transmission of gas in the north of the country, besides construction of high pressure transmission and low pressure distribution systems.
SNGPL was incorporated as a private limited company in 1963. Later, in 1964, it converted into a public limited company. It is listed on all the three stock exchanges of the country. SNGPL's transmission system extends from Sui to Peshawar in NWFP. The company's distribution system comprises of 46,964-km of pipeline, spreading over 831 main towns and adjoining villages.

===================================================
COMPANY SNAPSHOT
===================================================
Name of company      SUI NORTHERN GAS PIPELINES LTD
===================================================
Nature of Business                      Gas Utility
Ticker                                         SNGP
Gas Sales FY '09                 Rs 168,933,831,000
Gas Sales FY '09                 Rs 161,629,828,000
Share price (avg.)               Rs 28.59 per share
Market Capitalisation                15,701,116,950
===================================================

The Company extended its distribution network by over 8,200-km, in addition to 237-km of high pressure Transmission Lines, by adding 377 new towns, villages and Tehsil Headquarters in its existing system, Gas supply was commissioned for Independent Power Producers (IPPs) M/s Saif Energy and M/s Sapphire, in order to help alleviate power crisis in the country.
As an Engineering, Procurement and Construction (EPC) contractor, SNGPL constructed and commissioned pipelines for M/s MOL and M/s Oil and Gas Development Company Limited (OGDCL) to receive 265MMCFD gas from Manzalai and Makori-3 fields (Khyber Pakhtunkhwa) and 18 MMCFD from Nashpa Field, respectively. A gas pipeline project was also completed by SNGPL for M/s Engro Energy as an EPC contractor.
Recent results (1H11)
Net gas sales increased to Rs 94.2 billion against Rs 75.4 billion on account of slight increase in sales as well as price hike in gas prices. On the same note, the cost of gas also increased more than proportionately to the increase in sales price of gas. Due to this, the gross profit was lower at Rs 1.4 billion as compared to Rs 2.0 billion in H1FY10. Selling and administrative expenses also increased, resulting in lower operating profits of Rs 2.46 billion in 1H11 as compared to 1H10. However, financial charges decreased substantially to Rs 1.77 billion as compared to Rs 2.9 billion in the same period last year.
The gas sales for the half year ended December 31, 2010 were 292,997 MMCF as against 284,944 MMCF during the same period last year. During the half year under report, the Company has earned after tax profit of Rs 468 million (December 31, 2009: Rs 274 million), giving an EPS of Rs 0.85 (December 31, 2009: Rs 0.50).
Despite gas supply problems, the company commissioned 62-km transmission pipelines (including 14.7 km MOL Line) and 1,509-km distribution lines during 1st and 2nd quarter of FY2010-11.
Recent performance (FY10)
OGRA raised the benchmark for the Unaccounted-For-Gas to 7% against the upper and lower target of 5.50% and 4.50% respectively fixed earlier. Furthermore the Late Payment Surcharge (LPS) was also allowed as non-operating income of the Company. Revision of UFG benchmark and allowance of LPS as non-operating income positively impacted the earnings per share of the company, from 1.69 to 4.65.
Gas sales in FY10 were 7.64% higher than sales of FY09, with only a marginal increase in volume. However, net sales decreased by 4.32% due to increase in gas development surcharge. Due to decrease in net sales and increase in cost of gas sold, gross profit declined by 68.10%. But the significant decrease in operating expenses of 74.66% due to the UFG respite, combined with huge increase in other income of 542% which was mainly interest income on late payment of gas bills, there was an overall positive effect of 70.66% increase in operating profit.

=============================================================
Gas Sales (MMCF)             584,895        586,741      0.32
GAS SALES                160,714,737    172,994,645      7.64
Net Sales                168,933,831    161,629,828     -4.32
Cost of gas sold         151,337,339    156,016,865      3.09
GROSS PROFIT              17,596,492      5,612,963    -68.10
Operating expenses        16,734,729      4,239,910    -74.66
OTHER INCOME               1,210,008      7,772,320    542.34
PROFIT FROM OPERATIONS     5,358,727      9,145,373     70.66
Financial charges            653,182      4,650,154    611.92
PROFIT BEFORE TAXATION     1,730,240      3,879,719    124.23
PROVISION FOR TAXATION       799,704      1,325,368     65.73
PROFIT AFTER TAXATION        930,536      2,554,563    174.53
EPS                             1.69           4.65    175.15
=============================================================

Financial charges showed a significant increase of 611%. This was due to interest payments due to late payment to gas suppliers of the value Rs 3,882,924,000. Taxation also showed a significant increase due to category of 'current tax' amounting to Rs 873,859,000. However the increase in operating profit was sufficient to cover the finance cost and taxation, leading to a net 174% increase in net profit.
Stock versus sectoral comparison
SNGPL has significantly higher long-term liabilities of Rs 58,380,114,000 compared to the average in the industry of Rs 44,218,047,000. A look at the balance sheet shows that the main contributor is deferred credit, suggesting that SNGPL is not adequately managing its payments due to gas suppliers. However SNGPL has invested more in fixed assets ie Rs 87,462,235,000 while the industry average is Rs 65,193,535.
SNGPL also has higher sales compared to the industry average, which is indicative of a strong standing in the industry. SNGPL's net sales are Rs 161,628,828,000 while industry net sales are Rs 136,951,723,000. However the profit scenario is discouraging as SNGPL, despite having higher gross profit, has lower operating and net profit. This suggests that the company is not managing its operating costs effectively, leading to inefficient operations. Net profit for the industry is Rs 3,476,854,000 while for SNFPL it is Rs 2,554,563.
Beta analysis of the company shows that beta of SNGPL is 0.88. As the beta is close to market beta of 1.00, it shows that the stock prices of SNGPL vary almost in congruency with market stock prices, which suggests a stable SNGPL stock.

==============================================
KEY RATIOS
==============================================
PROFITABILITY               SNGPL     Industry
                                       Average
==============================================
ROA                          0.02         0.03
ROE                          0.14         0.22
Net profit to sales          0.02         0.03
Gross Profit Ratio           0.03         0.03
----------------------------------------------
DEBT MANAGEMENT             SNGPL     Industry
                                       Average
----------------------------------------------
Debt to equity               6.40         6.64
TIE                          1.97         2.18
----------------------------------------------
LIQUIDITY                   SNGPL     Industry
                                       Average
----------------------------------------------
Current ratio                0.83         0.92
Quick ratio                  0.73         0.70
----------------------------------------------
EFFICIENCY                  SNGPL     Industry
                                       Average
----------------------------------------------
Operating Cycle               102          127
Inventory turnover           5.64         7.15
Total asset turnover         1.17         1.09
Fixed asset turnover         1.87         2.28
----------------------------------------------
INVESTMENT                  SNGPL     Industry
                                       Average
----------------------------------------------
EPS                          4.65         5.60
Market Value per share      28.59        22.25
P/ E ratio                   6.15         4.29
Cash Dividend                2.00         1.75
==============================================

The figures and ratios of SNGPL compare favourably to the industry average.
Profitability ratios
All the ratios are lower than the industry average indicating low profitability due to operating inefficiencies. Net profit margin is 0.02 compared to industry average of 0.03. However, the gross profit margin of SNGPL is equal to industry average, indicating that operating losses occur during the operating expenses stage.
Debt management
Debt to equity ratio is 6.40, slightly lesser than the industry average of 6.64. This shows that the company is less leveraged as compared to competitors. However the TIE ratio of 1.97 is lower than the industry average of 2.18, due to lower profits of the company.
Liquidity
The current ratio 0.83 is lower than the industry average of 0.92 due to lesser current assets of SNGPL. However the quick ratio is 0.73, higher than the industry average of 0.70, due to high amount of receivables of SNGPL.
Efficiency
The operating cycle takes 102 days against the industry average of 127 days. Consequently the inventory turnover ratio is higher than the industry average. This shows that the company has an efficient working capital cycle. Total assets turnover is also higher at 1.17 compared to industry average of 1.09, but fixed assets turnover is lower at 1.87 compared to 2.28, suggesting that a sufficient amount of sales are not being made according to the amount of fixed assets.
Investment
The company has a lower EPS of Rs 4.65 per share as against Rs 5.60 per share, but a higher market value of Rs 28.59 per share as against Rs 22.25 per share and offers a dividend of Rs 2 per share as against Rs 1.75 per share. The P/E ratio is 6.15 as against 4.29 which show that the stock is undervalued. Its market price has potential to increase in the future.
Profitability
The operating expenses decreased from Rs 16,734,729,000 to Rs 4,239,910,000 over FY09-10, leading to major change in the revenue-expense structure.
The profitability ratios which had declined in FY09 recovered in FY10. The return on equity rose from 0.06 to 0.14. Return on assets and net profit margin showed a similar trend. The gross profit margin declined from 0.10 to 0.03 due to rise in the cost of gas. The EBITDA margin rose from 0.04 to 0.07.
Liquidity
The current ratio of the firm have declined and stayed constant at 0.83 in FY10, illustrating that the firm may experience problems in financing its short term obligations given that the net income for the period has also declined. SNGPL is experiencing liquidity risks due to an increase in debtors; increase in dollar value and due to a shortage of funds.
Asset management
The sales to equity ratio declined in FY10 from 10.46 to 8.64. This can be attributed to decrease in net sales. Fixed asset turnover has decreased from 2.16 to 1.87. The total asset turnover showed a similar trend, declining from 1.38 to 1.17.
The inventory turnover ratio decreased in FY10 from 7.13 to 5.64. However the day sales outstanding rose from 55.54 to 96.
Debt management
The TIE ratio declined over FY10 from 8.20 to 1.97. Although the net income increased, finance cost also increased by a huge amount, thus causing TIE to fall. The debt to asset ratio did not show significant change showing no significant change in the debt-asset structure of the firm, varying from 0.87 in FY09 to 0.086 in FY10. The debt to equity ratio also declined slightly from 6.58 in FY09 to 6.40 in FY10, due to slight increase in the amount of debt relative to equity.
Market value ratios
The earnings per share of the company increased from Rs 1.69 per share to Rs 4.65 per share due to improvement in net income. However, the market value per share decreased from Rs 32.10 to Rs 28.59. The price to earnings ratio fell from a peak of 18.99 in FY09 to 6.15 in FY10, due to combined effect of higher EPS and lower market value.
Investor expectations
Dividend per share increased from 0 in FY09 to 2 in FY10, and the dividend yield followed a similar trend from 0 to 0.07. The dividend payout ratio also showed recovery from 0 in FY09 to 0.43 in FY10.
Future outlook
The future for gas demand and supply conditions in Pakistan remains uncertain. The industrial sector suffered from gas shortage during the winter months, due to increased demand for natural gas in households during winters.
The demand for gas has increased due to seasonal demand, transportation use and for electricity generation purposes as hydel power generation has been shut down for maintenance. Moreover, the IPI gas pipeline project is not yet finalized due to disputes in government. This has put pressure on the existing gas supplies in the country. In Northern areas people are facing gas shortage.
As far as SNGPL is concerned, a pipeline construction project in order to extend gas supply to Talash area in Lower Dir has also been started. Moreover, construction activities for laying distribution mains under Annual Distribution Development Program for various localities/villages across Punjab and Khyber Pakhtunkhwa are being carried out.
Qadirpur Interim Compression project of national importance is also being carried out by SNGPL as contractor for OGDCL. After completion of this compression project, 100MMCFD gas will be re-claimed and injected into SNGPL's transmission network. Pipeline job for removing operational constraints in transmission network is expected to be started in near future after approval of OGRA to rectify diminishing gas supplies to Muree from Pothohar gas fields and low gas pressures in winter season in areas like Lala Musa/Jehlum, by connecting Faisalabad-Lahore-Gujranwala line with Faisalabad-Sargodha-Islamabad line.
Besides this, M/s MOL Pakistan has desired to enter into a five-year contractual relationship with SNGPL and have suggested to sign a service order in this respect. These future projects would be located in Karak, Hangu and Kohat districts of Khyber Pakhtunkhwa.
The Company is also planning to participate in M/s OGDCL's Kunnar/Pasakhi Deep and Tando Allahyar integrated development project which will comprise wellhead surface facilities, gas gathering system, gas processing plant, dehydration plant and LPG extraction plant. SNGPL is also exploring business opportunities in oil and gas sector in Libya.
Internationally, world oil prices are expected to rise by about 8%, according to the current futures curve as shown. Gas prices vary with world oil prices, with the oil price/gas price ratio being 5.00 thus gas price in Pakistan is expected to rise. This would cause the profit retained by gas companies to rise. However, the Sales Tax on gas products would decline from 17% to 15% thus partly mitigating the increase in gas prices.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].