Shell Plc SHEL announced its decision to exit Pakistan amid an economic crisis prevailing across the country. The company’s intention to sell its stake in Shell Pakistan Ltd., which amounts to 77.42%, as well as its 26% interest in Pak-Arab Pipeline Co., has sent shockwaves throughout the nation. SHEL’s statement revealed that there is considerable interest from international buyers, adding to the gravity of the situation.
Below, we will discuss the reasons behind the exit, the impact on Pakistan’s economy, and the implications for both SHEL and the country.
Shell’s Presence in Pakistan
Shell has a rich history in Pakistan, having operated in the country for 75 years. The company established a significant presence with more than 600 fuel stations across the nation. Its exit marks the end of an era for the multinational company in Pakistan and raises questions about the future of the country’s energy sector.
SHEL’s exit from Pakistan is part of a broader strategy implemented by the company’s new chief executive officer, Wael Sawan. Under his leadership, the company aims to increase shareholders’ returns by divesting from businesses that are not generating sufficient profits. This strategic move also includes selling its stake in a gas project in Australia and withdrawing from its home energy retail unit in Europe. These measures reflect Shell’s commitment to prioritizing profitability and optimizing its global portfolio.
Pakistan’s Economic Turmoil
The timing of Shell’s exit aggravated Pakistan’s already precarious economic situation. The country has been grappling with severe economic turmoil, which has resulted in a significant devaluation of its currency.
Over the past year, the Pakistani rupee has witnessed a substantial decline, losing about one-third of its value. Such a sharp depreciation has placed enormous strain on the economy, impacting various sectors and intensifying inflationary pressures.
Furthermore, Pakistan is facing concerns regarding its possibility of becoming the next emerging market to default. The country’s hopes of securing a bailout from the International Monetary Fund (“IMF”) are fading, as stated by Moody’s Investors Service. The combination of a deteriorating economy, declining currency and the looming possibility of default has created an atmosphere of uncertainty and anxiety in Pakistan.
Multinational Companies’ Exit
Shell’s decision to exit Pakistan follows a trend of multinational companies choosing to discontinue their operations in the country. While fuel retailer Puma Energy made a similar exit in 2021, the trucking startup Trella decided to wind down its business in April, 2023.
These departures can be attributed to various factors, including a highly uncertain political environment, regulated markets, capital controls, import restrictions, policy inconsistency and higher taxes. The departure of multinational companies like Shell highlights the challenges they face in navigating Pakistan’s business landscape.
The impact of SHEL’s exit on Pakistan’s energy sector and the broader investment climate is yet to be seen. Nevertheless, by addressing the underlying issues and restoring the confidence of foreign investors, it’s possible to navigate a path toward economic stability and growth.
Zacks Rank and Key Picks
Currently SHEL carries a Zacks Rank #3 (Hold).
Some better-ranked stocks for investors interested in the energy sector are Evolution Petroleum EPM, sporting a Zacks Rank #1 (Strong Buy), and Eni E and Archrock AROC, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Evolution Petroleum: EPM is worth approximately $265.82 million. EPM currently pays a dividend of 48 cents per share, or 6.01% on an annual basis.
The company currently has a forward P/E ratio of 7.23. In comparison, its industry has an average forward P/E of 18.10, which means EPM is trading at a discount to the group.
Eni: E is valued at around $49.97 billion. In the past year, its shares have risen 7.7%.
E currently pays dividends of $1.29 per share, or 4.60% on an annual basis. E’s payout ratio currently sits at 21% of earnings.
Archrock: AROC is valued at around $1.56 billion. It delivered an average earnings surprise of 8.34% for the last four quarters and its current dividend yield is 6.02%.
Archrock is a provider of natural gas contract compression services and aftermarket services of compression equipment.
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