PPL & OGDC: Mispricing of Circular Debt News?

 

On 4th August, Ministry of Finance (MoF) essentially confirmed the rumours that circular debt in the gas sector is being resolved (albeit after the market had closed). The rumours had started floating a week earlier on 27th July – again after the market closed.

The rumours had been slowly getting priced in over this past week. PPL share price is up 5% for the week. Meanwhile, OGDC finished the week 17% up. This is an anomaly.

Naturally, both companies should see equal gains. Why? Because although circular debt is getting resolved, the exact number of receivables being settled for both companies is unknown right now. Consequently, the expected FCF per shareholder from the circular debt settlement is unknown for each company.

As noted in the last blog, this exact scenario had played out six to seven months ago. Back then, PPL and OGDC share price peaked at the same time – 9th February 2023. Rumours of gas circular debt settlement had began circulating on 22nd December 2022, so the last trading day before the rumours made their way through the market was 21st December.

OGDC share price rose 52% from 21st December till its peak on 9th February. Similarly, PPL share price rose 62% over the same period. Note, there is a variance of 10% in returns. This is difficult to explain, since the expected rise in FCFs or dividends from that circular debt settlement plan was higher for OGDC. A possible reason can be that PPL has a higher beta than OGDC but that’s not a viable explanation, since news flow was driving the share price rather than an index-wide gain.

It's far more likely that the market was temporarily inefficient as is the case now. Usually this happens when certain stocks get pumped by certain ‘experts’ as well as technical analysts. Also, phenomena like price-to-price feedback come into play; that is, people buy a stock precisely because it is going up, so price goes up because price went up. That may partially explain why PPL had soared more earlier this year, while OGDC is outperforming PPL right now.

With MoF confirming the rumours of gas circular debt reduction, it is expected that the news will be further priced in next week. It is difficult to say whether returns on PPL will converge to that of OGDC. But on the odd chance that the market takes notice of this, PPL should see better gains than OGDC from here on. At least until the exact plan of circular debt settlement is revealed by MoF.