Pakistan Energy Crisis Prompts Engro to Boost Power Business

  • Engro plans to add LNG power plant, consider another terminal
  • Company considering expansion in Africa, North America

Engro Corp., owner of Pakistan’s second-biggest fertilizer maker by value, plans to expand its power generation business and build a second liquefied natural gas terminal, betting a revival in economic growth will boost demand for electricity.

The Karachi-based company is looking at the possibility of constructing a 400 to 600 million cubic feet a day LNG terminal, through a partnership, for private sector companies, Chief Executive Officer Khalid Siraj Subhani, 62, said in an interview. It also plans to build a 450 megawatt LNG-fueled power plant for as much as $700 million, he said. Engro is also looking to invest overseas in energy and fertilizer after the firm sells stakes in existing businesses, he said.

“The idea is to keep expanding, there is a strong desire,” Subhani said in Karachi, Pakistan’s commercial capital. “There are so many elements we are working on, how they will materialize it depends, but the shift will happen toward energy.”

Engro is seeking to turn an energy crisis in South Asia’s second-largest economy into an opportunity as the government of Prime Minister Nawaz Sharif pushes to end shortages within two years. The nation is adding power plants with the help of Chinese investment and started importing gas last year with Engro building the nation’s first LNG terminal. Outages lasting 18 hours had led to street protests in Karachi as recently as June, while falling natural gas production at home forced companies to idle it’s plant.

The energy starved nation’s average electricity generation is 16,000 megawatts with deficit peaking to about 5,000 megawatts in the summer, according to Tahir Abbas, analyst at Arif Habib Ltd.

Engro is also part of a joint venture to produce 660 megawatts of electricity from plants that will be built and start around June 2019 that will use coal for the first time from deposits in the southern Pakistan region of Thar, which has one of the world’s largest lignite quality coal deposits. The company plans to double production and coal mining in the second phase of the project.

Construction has started with about 200 Chinese workers on site for the $2 billion project, said Subhani. The project, part of China-Pakistan Economic Corridor plan announced last year, includes about $820 million loans from Chinese banks.

Currently the company makes nearly half of its total revenues from the fertilizer business, less than a third from food and 7 percent from power, according to data compiled by Bloomberg.

Overseas Expansion

Engro is also considering investing in a fertilizer plant via a joint venture in North America or Africa, Subhani said. The target region will be identified by the year-end and the company wants to replicate a 72 megawatt power plant that it has already constructed and operate in Nigeria, with another facility planned in Africa’s largest economy and other possible projects in neighboring countries including Benin, he said.

“International projects will be less capital intensive, and rely more on our skills and expertise,” Subhani said. He would like to see its international businesses contribute about 20 percent of total revenue within 9 years.

Engro’s plan to expand abroad could be funded by selling stakes in its food, fertilizer and chemical businesses and the company may be able to raise $693 million at current prices, Danish Ali Kazmi, a senior research analyst at Alfalah Securities Ltd. in Karachi, said on May 23.

The company has also sought approval from the government to export as much as 1 million tons of fertilizer, with India being the most logical market after slowdown at home, according to Subhani.

Dutch dairy company Royal FrieslandCampina NV is conducting due diligence to buy 51 percent stake in Engro Foods Ltd. and ATS Synthetic Pvt. in Engro Polymer and Chemicals Ltd. It is also looking to sell up to 24 percent stake in Engro Fertilizers Ltd.

Engro’s shares rose 1.3 percent to 340.50 rupees, poised for their highest close since Aug. 11, at 10:48 a.m. in Karachi. This year Engro’s shares have risen 22 percent, outperforming the 12 percent gain of Pakistan’s benchmark index, the best performer in Asia after stake sale announcements. That’s despite the company’s 2015 annual 4.7 percent rise in revenue, the slowest rate in seven years.

“Fertilizer business is becoming increasingly more challenging,” said Muhammad Asim, chief investment officer at MCB-Arif Habib Savings & Investments Ltd. that manages 66 billion rupees in stocks and bonds. “Power will provide it that stability and potential to build up further.”

Before it's here, it's on the Bloomberg Terminal.