Pakistan's Energy Stocks and the Circular Debt Problem

Look up OGDC and you will find one of the most profitable companies in Pakistan trading at a price-to-earnings ratio in the low single digits. A WhatsApp tip group reads that as free money. The market has watched it for two decades and never agreed, and it is not being slow. The discount exists because a large share of those profits has never arrived as cash — and to see why, you have to follow Pakistan's energy chain to the exact point where the money stops.

The chain, and where the money stops

The energy sector is a relay. Exploration and production companies — OGDC, PPL, MARI, POL — pull oil and gas out of the ground. Refineries turn crude into fuel. Oil marketing companies, PSO above all, move that fuel to petrol pumps and power stations. Gas goes through the state distribution companies to homes, factories and power plants. Independent power producers such as HUBC and KAPCO burn fuel to make electricity and sell it to the grid. At the very end, the distribution companies — the DISCOs — deliver electricity to consumers and collect the bills.

Every rupee in this system enters at the bottom, from a consumer paying a bill, and is supposed to travel all the way back up to the company that drilled the well.

It does not all make the journey. Some electricity is stolen. Some is lost in decrepit transmission lines. Some bills are simply never paid, and recovery rates vary wildly by region. Tariffs have spent long stretches held below the actual cost of generation for political reasons, with the difference booked as a subsidy the government budgets for and then releases late, partially, or not at all.

Circular debt, in plain terms

That shortfall does not vanish. It becomes unpaid invoices marching up the chain. The DISCOs cannot pay the power producers in full. The power producers then cannot fully pay PSO and the gas companies for fuel. PSO and the gas companies, in turn, short-pay OGDC and PPL for the oil and gas they already delivered. This is circular debt: the accumulated stock of receivables created by under-collection at the bottom of the chain.

Circular debt is what an unpaid electricity bill looks like after it has travelled up the supply chain and landed on someone else's balance sheet.

Nobody formally defaults, because the state stands somewhere behind almost every link — it owns the DISCOs, guarantees payments to the power producers, and is the majority shareholder of OGDC and PPL. So the invoices do not get written off. They age. The power-side stock crossed the two-trillion-rupee mark in the early 2020s, and the gas side of the ledger grew to a comparable size. As of mid-2026 the precise figures move with every settlement and every quarter of under-recovery, so treat any figure you read as a snapshot.

Note the dark comedy in the structure: the government, through its shareholding, is substantially owed money by itself.

Profit you cannot spend

Here is the part that matters for your portfolio. Accounting rules say revenue is recognised when the gas is delivered, not when the cash arrives. So OGDC and PPL book the sale, report the profit, and the unpaid portion piles up on the balance sheet as trade receivables. The income statement looks magnificent. The cash flow statement tells the truth.

This is the cleanest real-world example on the PSX of why you read financial statements beyond the headline EPS. The tell is simple: compare the growth in trade receivables with the growth in revenue, year after year. When receivables consistently outgrow sales, a rising share of each year's "profit" is an IOU from a customer who did not pay last year either.

The direct casualty is the dividend. A company cannot post you a receivable. Cash dividends can only be paid from cash, so payout ratios at OGDC and PPL have long sat far below what their earnings would support in a normal country. If you screen for cheap stocks with fat earnings and assume the dividend must follow, this sector will teach you the difference between yield you are promised and yield you are paid.

Why the P/E never re-rates

Newcomers read a persistently low P/E as an oversight — as if the market failed to notice the largest companies on the exchange. It is a verdict.

The market is not pricing the income statement. It is pricing the probability that booked earnings convert into distributable cash, and it has years of evidence on which to base that probability. Value OGDC on the dividends it actually pays, rather than the earnings it reports, and the valuation stops looking anomalous and starts looking roughly fair. The "cheapness" is the market charging a discount for earnings of low quality — compare the E&P sector's multiple against the rest of the market on the sectors page and you will see the discount has been structural, not cyclical.

This has a practical consequence: the stock will not re-rate because another strong quarter is announced. Strong quarters are not the doubted variable. Collection is.

MARI is the control experiment

If receivables risk explains the discount, then an E&P without the receivables problem should trade differently. Pakistan happens to run this experiment for you.

MARI's gas field feeds, above all, the fertiliser plants sitting on its network — largely private industrial buyers who pay their bills, because their own production stops if they do not. Its exposure to the state-owned distribution chain has historically been far smaller than OGDC's or PPL's. The result: better recovery, cleaner conversion of profit into cash, and a market that has historically awarded it a visibly richer multiple. Same country, same geology, same commodity — different customer.

Put OGDC and MARI side by side on the compare tool and the spread in multiples is the price the market puts on being paid. POL makes the same point from another angle: more of its revenue is oil, oil turns into cash faster than regulated gas, and the market prices it mostly as a dividend instrument.

The depletion clock

There is a second clock ticking under all of this. Pakistan's gas fields are old — Sui was discovered in 1952 — and national gas production has been in decline for years, which is why the country began importing LNG in 2015. An E&P company is a depleting asset with an exploration programme attached: if it does not replace the reserves it produces, it is quietly liquidating itself, whatever the income statement says.

Circular debt makes this worse in a way few tip-sheets mention. Exploration is funded from operating cash flow, and operating cash flow is exactly what the receivables build suppresses. Money trapped in the chain is money not drilling wells. So when you assess OGDC or PPL, the question is not only "will they get paid?" but "is what remains after non-payment enough to keep replacing reserves?" Look for reserve replacement and wells actually spudded, not announcements of promising acreage — acreage is a hope, a discovery is an asset.

Settlements, Sukuk and headline rallies

Every few years the government attempts a fix, and the sector trades on it. In June 2013 an incoming government cleared roughly Rs 480 billion of circular debt almost overnight; energy stocks rallied hard, and the debt rebuilt within a few years because the underlying leak — tariffs below cost, theft, line losses — was untouched. In 2019 and 2020 came the two Pakistan Energy Sukuks of Rs 200 billion each, which in substance swapped aged receivables for government paper. In 2024 and 2025 the government renegotiated or terminated a series of power-purchase contracts and announced plans to retire gas-side arrears; as of mid-2026, verify where those plans actually stand before treating them as done.

The pattern is consistent: settlement headlines produce sharp sector rallies, because genuine resolution really would transform these companies. But two honest observations follow. First, by the time a settlement is in the newspapers it is in the price — buying the announcement is the same trade everyone else is making that morning. Second, a payment addresses the stock of debt, not the flow; unless tariff reform and collection improve, the receivables start rebuilding the day after the cheque clears. Tariff rebasing and cost recovery are precisely the reforms successive IMF programmes have demanded, which is why energy stocks are unusually sensitive to the macro cycle for companies whose product never changes.

How to read an E&P result honestly

When the next quarterly result lands, resist the headline EPS and work through this order:

1. Production volumes. Barrels per day and mmcf per day, against last year. A profit rise on falling production is a price effect wearing a growth costume.
2. Realised prices and the rupee. E&Ps sell at dollar-linked prices, so devaluation inflates rupee revenue. Separate what came from volume, what from oil prices, and what from the currency.
3. The receivables build. Did trade receivables grow faster than revenue? That difference is the quarter's profit that exists on paper only.
4. Cash flow from operations. Compare it with reported profit. The gap between the two is the circular debt problem, measured for you, every quarter.
5. The dividend actually declared. Not the payout the earnings could support — the cash per share the board announced.
6. Exploration activity. Wells drilled, discoveries made, reserves replaced.

Do that and you will know more about the sector's real condition than most of the commentary written about it.

The honest framing is this: when you buy OGDC or PPL at these multiples, you are not really buying an oil and gas company cheaply. You are buying a claim on the Pakistani state's willingness to fix its power sector, with an oil and gas company attached. Priced on the cash actually paid out, you are paying a fair price and holding, almost for free, an option on genuine reform. That option has expired worthless many times — but it is the correct way to describe the position, and it is a decision about the state, not about geology, that you are actually making.