By: Sana Abdullah,
Global Securities Pakistan Ltd
The latest Shia-Sunni Conflict in Iraq, world’s 2nd and 6th largest oil producer and exporter respectively, has disturbed the international oil price equilibrium levels. Based on statistics released by British Petroleum (BP), Iraq holds 9% of the world’s total conventional oil reserves, and has proven oil reserves of 150bn bbls. 75% of these proven reserves are in the Shia controlled south (including Basra), 17% in the Kurdish North, and 9% in the central region, controlled by Sunnis. As most of the oil production is from the Shia controlled region, oil is one source of conflict between the Shias and the Kurdish and Sunni Minorities. Iraq’s oil production in FY14 remained 3.5mn bbl/day, highest levels achieved which were observed in 1979. Iraq is the second largest oil producer in OPEC, after Saudi Arabia.
Prices are reverting back to the USD 105-108/bbl range
Crude Oil prices measured by WTI, Brent and Arablight spiked by 4.7%/ 4.1% /4.4% respectively during Jun14. According to media reports, the ISIS fighters took control of Syria’s largest oilfield on the Iraqi border last week. The same group had taken over control of Iraq’s largest refinery in Baiji, during mid- Jun14. Arab Light oil prices reached their highest levels (USD112/bbl) since Sep13 during the last week of Jun14, however retreated back to settle at USD 108/bbl first week of Jul14. The price increase has been subdued, if compared to a similar crises in 2011, mainly due to the rising production from US shale gas reserves , which is close to 3mn bbl/day. This higher production in the US, has decreased US reliance on oil imports of Crude. In 2006, US imported 60% of its liquid fuel requirement, which is anticipated to go down to 22% by 2015 according to US Energy Information Association (EIA).
Impact of higher oil prices on Global Research’s E&P Universe companies
We are of the view, that any spike in the international oil prices is temporary, and prices are likely to revert back to USD 105-108/bbl range in the long term. Hence, we will stick to our base case assumption of USD 105/bbl for Brent and Arab Light in FY15. However, in the event that the middle-eastern crises exacerbates further, and oil prices trend higher in FY15, a sensitivity analysis in the table given below gives our earnings estimates for the three listed E&P companies for FY15:
|EPS (PKR /sh)||Arab Light Crude Price (USD/bbl)|
Pakistan’s Oil and Gas Exploration sector is anticipated to post earnings growth of ~20% YoY in FY14. Moving ahead in FY15, we expect further production additions in both oil and gas. The new gas discoveries of FY14, are likely to add further production as more development wells are drilled. Moreover, higher gas prices being offered under the 2013 petroleum policy to the new discoveries are also likely to boost gas revenues for these companies.
|Last||Target||Upside||EPS (PKR)||DPS (PKR)||P/E|