Shell is exiting Pakistan. What does it mean and what could the transaction look like?  

Oil giant has been wanting to quit Pakistan for years. But what makes the country such a difficult market and how will the transaction play out in a forex strapped nation? 

Shell Petroleum, one of the world’s preeminent oil and gas conglomerates, has declared its intention to relinquish its stake in Shell Pakistan, its subsidiary in the nation. This resolution, made on June 14, heralds the termination of a 76-year-long partnership dating back to 1947. 

In a detailed press release that followed the announcement, Shell said that the decision to divest its interests in Pakistan was part of a constant effort to streamline its portfolio and that the oil giant was departing Pakistan. The decision, the company insisted, “was not made frivolously.” It is now looking to sell more than 77% of its shares in Shell Pakistan. 

In short they have had enough. The truth is that Shell has in earnest been streamlining their portfolio over the past few years and getting out of Pakistan has always been a part of that conversation. But what was the final straw that finally broke the camel’s back? Some would point towards  rising political instability and the conditions in the Pakistani market that make it very difficult to conduct business in this country. 

But there is more than meets the eye in Shell’s exit from Pakistan. For starters, the company is not wrapping up proceedings. Instead, the global headquarters of Shell is selling their stake in the company that is Shell Pakistan. But why are they selling? What makes Pakistan such a difficult market? Who could possibly step up as a buyer? And with the forex situation in the country seriously backlogged, can the transaction even take place right now? 

Why is Shell leaving? 

There are two parts to this. The first is that Shell has been wanting to leave Pakistan for years as it is. The second is that the oil marketing business has globally gotten tougher over the past few years — which means difficult markets like Pakistan have become more burdensome. 

“There are two aspects to this story – one that Pakistan’s economy is deteriorating as a market for Shell, and second that Shell announced a review of their retail business in Europe some 5 to 6 months ago and has been looking into the decision of divesting from retail business in the UK, Netherlands and Germany,” says  Mustafa Pasha, the Chief Investment Officer (CIO) at Lakson Investments. 

Shell first indicated that it was looking to drastically change its presence and streamline its activities back in January 2023, when the company contemplated exiting its home energy retail business in the UK, the Netherlands, and Germany citing “tough market conditions”. This means that the exit is not an isolated issue that has to do with Pakistan. But it still makes for terrible optics. 

“Whether the transaction has any real impact in Pakistan is doubtful, but the messaging is very negative, it says that people have lost confidence and are wrapping up businesses in Pakistan. However, political instability is a problem much closer to home,” adds Pasha.

Corroborating this sequence of events, columnist and independent macroeconomist Ammar H Khan says that the timing of Shell’s exit may just have to do with them finding a buyer. “Shell has been trying to exit for the last 8 to 10 years, it is possible that only now have they come across a potential buyer and have decided to officially announce this decision,” he says. “Smuggled Irani fuel entering the market has also caused the industry to face more volatility. Established and legitimate industry players like Shell who are not able to participate in the informal market are further marginalised. As long as the government implicitly keeps supporting the black market, MNCs will continue to exit our economy.” However, Habib also highlighted that operationally, this decision has little impact on the overall industry beyond sending a negative market signal and solidifying international investors’ uncertainty while dealing with the Pakistani markets. 

What made the Pakistani market so difficult for Shell? 

We know that Shell has been reconsidering its portfolio globally. But we also know that the oil giant has been unhappy being in the Pakistan market for the last decade. That is because of very specific peculiarities of this country’s oil markets that make it a difficult place to conduct business in.  

“In Pakistan the milieu for oil management companies is exceedingly arduous. The regulatory environment renders operation in the country onerous, explains Pasha. “Federally implemented price changes have precipitated significant exchange and inventory losses. For years, oil management companies have encountered impediments importing the raw materials they require.”

“Supply chain issues only exacerbate the conundrum. Collaboration with Pakistan is met with hesitation and business confidence is low. The pricing environment is a veritable minefield, stringently regulated by the government.”

As a result, many have not been surprised by the news. One highly placed industry source that wished to remain anonymous told Profit that the decision was long overdue. “Shell has been threatening to leave Pakistan for the past decade or so. This was writing on the wall,” they said. 

“Successive governments, through erratic devaluation, have increased the risk exposure that companies with dollar-based structures must incur. It’s not viable for these companies. Multinationals have these dollar-based structures because the Shell Group, like others, has central costs that it must incur globally. You cannot change that for any country.” 

“The incompetence of past governments has led to this problem while current incompetence has merely expedited the process as a whole.”

Yousuf Farooq, ex-Director of Research at Topline Securities and independent analyst, explains that “Historically, Shell has encountered impediments due to turnover tax and has never been able to generate as much revenue as they could have. Their profitability has always been problematic.”

“Look Shell has been wanting to leave for years but this is the first time they have issued a notice. So what could be behind that,” explains Khan. “They are already in the electricity distribution business and have been withdrawing from that market. In the retail business, they have been present for over a century, so they are exiting their core business of fuel delivery after essentially 100 years.”

“Whether this is a strategic decision or not: There are two factors here – A significant amount of debt means that a lot of money in the energy sector is stuck with the government. “Yes there are some strategic decisions, but largely it is driven by economic conditions in Pakistan. They can’t smuggle; other small informal oil marketing companies have been smuggling Iranian fuel – they generate revenue through the informal market – Shell has also recently suffered a substantial loss.” 

So who will buy it? 

And this is where the next problem lies. If Shell itself is unable and unwilling to maintain its stakes in Pakistan, who will come in and buy its shares in an already devastated market? With a book value of almost Rs 46, Pasha tells us that their asset valuation alone could be Rs 8-9 billion. 

“It’s not as though it’s a prodigious transaction; any local OMC or some company like Taj Energy has also expressed interest in acquiring shares of Hascol or Attock Petroleum if they find a new sponsor. Domestic oil marketing companies with available liquidity will be able to execute this without much difficulty. Perhaps someone decides to expand from a smaller to a larger percentage of the market – branch networks, synergy, etc., a plethora of different factors are playing into this,” Pasha adds. 

Meanwhile, Farooq says that deal flows have been in a lull due to the lack of clarity. “Until conditions improve, it will be exceedingly difficult for any major transactions to transpire. At present, no small transactions are occurring. When clarity emerges, then someone will invest. Currently, the conditions are such that if someone possesses cash, they will endeavour to conserve it so that if conditions deteriorate, they have cash on hand. That’s what companies are striving to do. Very few individuals will have the audacity to undertake new projects until there is clarity on what will transpire next.”

Even if there is a buyer, how will the transaction go through? 

And this is where our final question comes in. The real question. Will the transaction even materialise? Shell will obviously desire dollar-denominated sales proceeds, but can they obtain them during Pakistan’s current forex crunch? 

“It will become problematic for any domestic buyers to even evince interest – if someone is bidding domestically, either they arrange dollars from outside or the transaction won’t be approved,” explains Pasha.

“With a market cap of 19 billion rupees, the 77.6% share would be worth approximately $50 million at a spot rate of 287 rupees against the dollar. The transaction could ascend much higher or descend much lower, but yes, at present we cannot proffer money. It’s not as though a transaction of this magnitude cannot materialise. The question is whether the State Bank of Pakistan will permit $50 million to exit the country in the current situation,” states Farooq. “I don’t foresee any foreign exchange exiting the country right now.”

A bad omen 

“At the end of the day, it shows that international investors don’t have a good view of the economy. It’s just a very big market signal,” explains Khan. 

“The IMF agreement is of paramount importance,” Farooq explains. “Clarity on the external account is critical so that there is lucidity on what will transpire next in Pakistan. If that clarity is absent, companies will continue to depart and no one else will arrive.”

“If you desire debt restructuring, for example,” Farooq continues, “then all the appendages of the state finance apparatus must be in unison in terms of communication, not the current disparate points. What businesses in Pakistan require is clarity.”

Daniyal Ahmad
Daniyal Ahmad
The author is a member of the staff, and covers the automobile, energy and advertising insdusties as a sector analyst. He can be reached at [email protected]

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