By: Muhammad Affan Ismail,
BMA Capital Management Ltd.
We revisit our investment case on Pakistan E&Ps by slightly tweaking our crude oil price assumption for remaining FY15F and FY16F to USD60/bbl and USD70/bbl, respectively while keeping long term oil price assumption intact at USD75/bbl. We foresee no signs of recovery in the prices of benchmark Arab Light Crude (currently hovering around USD58/bbl) on account of i) abundant supplies across the globe and ii) dim chances of demand recovery amid continued global economic slowdown. Consequently, our earnings estimates of BMA E&P Universe for FY15F and FY16F are downward revised by 1%-3%. In near term, the lackluster trend in 2QFY15F results (expected to decline by ~13%QoQ) and sustained downward pressure on oil prices will continue to cap the upside in E&P sector. The bearish trend in oil prices will also take a toll on wellhead gas prices of E&Ps (particularly PPL) in next semi-annual revision of 2HFY15 period, expected to decline by 7%-8%. The only respite to the sector will be in the form of i) notable production additions due in 3QFY15 and ii) monetization of new exploration finds priced at USD4.0/mmbtu (1.3x-2.0x than current realized gas prices). Given attractive FY15F P/E multiple of 7.9x, we believe the market has overpriced the negative impact of weakened oil prices. Based on long term potential of the sector backed by i) increased development activity (3 year oil production CAGR of 9%), ii) continued reserve accretion on active exploration in high impact areas and iii) strengthening cash position, we believe any further downside in the sector will provide an attractive entry point. We also roll forward our valuations to Dec’15 as we maintain our preference for POL (TP: PKR551/sh) and OGDC (TP: PKR261/sh). PPL follows with a TP of PKR228/sh.