What is the reason behind PE Discount Disparity: OGDC and PPL vs MARI and POL

Explore the factors behind the 40% PE (Price-to-Earnings) discount of government-owned OGDC and PPL compared to privately managed MARI and POL in the oil and gas exploration industry. Delve into management, circular debt, dividend policies, and their impact on these companies' valuations.

Sep 25, 2023

Quiz Question on PE Discount Disparity: OGDC and PPL vs. MARI and POL

We know that the profits of oil and gas exploration companies go up when international oil prices go up.
We also know if the dollar depreciates, they make more money.
We also know that if you are betting on the oil price, you should buy a company that has more sales coming from oil as compared to natural gas! But if you want a disconnection from international oil price volatility, you should buy a company that has a higher share of natural gas in its sales mix.
But I have one more question to ask from you to lead you to the biggest issue these companies face. So, here we go!
OGDC and PPL are government owned while MARI and POL are privately managed and owned. Why do OGDC and PPL trade at a 40% PE discount over the other two?
Is it the management? Is it the circular debt? Is it a lack of dividends? or all of the above?
A difficult one for my savvy readers
We know the circular debt is an issue, but is it related to OGDC and PPL only because they are government-owned and managed or is it an industry-wide issue?
Your answer will determine how much % of your portfolio should you allocate to this sector.


The reason for the 40% discount is just one! They don't get the cash. For the oil chain, we call it circular debt.
See these companies have no option but to sell their output to the government, especially when we talk about natural gas.
The government owns the pipelines + the company that sells natural gas to consumers. So gas explorers have no option but to sell their output to the government.
Also, the government wants to act like a mother i.e. not asking for the actual price of output from her kids just so that kids pay less, while the mother herself is broke. She doesn't have cash - none whatsoever.
So when kids don't pay in full, the mother doesn't have the cash to pay the kiryana store, and her debt keeps on increasing. How long do you think kiryana store will keep giving her the debt? Not long!
But what if, the kiryana store is owned by the mother? In that case, the mother can keep taking the debt but in the end, kiryana store will suffer.
This is exactly the case in our oil chain and OGDC and PPL are stuck. After Mari's new gas discoveries, it is also seeing this pressure.
But on the other hand, POL looks immune! Why? Simply because their share of gas is much lower + it's a private entity.
So when there is no cash issue, POL should, and rightly so trade at a premium to OGDC and PPL. While MARI also trades at a premium, there has been a change.
Fertilizer needs no more gas and whatever new gas they find, they will have to put it into the system. If this keeps going on (the government acting like a mother), MARI may soon see cashflow restrictions.
It won't be as tough as PPL, but it will be mentionable!
Answer to the difficult one for my savvy readers
Like that kiryana store example, yes OGDC and PPL are owned by the government and that's why their cash position is bad. But this is an industry-wide issue. It has started to happen with MARI as well. And if tomorrow, POL sees a big gas discovery, it will also face the same issue.
While we think the only solution is to increase the gas prices (which might happen in a few weeks' time - awesome for OGDC and PPL), but after the gas price hikes, looking at the choori is also important.
These two are the first steps.
The actual reform will start after that when the government decides who should be given the gas and who shouldn't. Who should be paying a premium to buy the gas and who should get a subsidy?