By: NEXT Research, NEXT Capital
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E&P stocks and crude decoupling- Pakistan E&P Sector:Since our initiation on Pakistan’s E&P sector a month ago, the price of Brent Crude has fallen by almost 25%. Curiously, however, E&P stocks have bucked the trend, and have hardly declined over the period. This has taken many investors by surprise, as the key pushback from our initiation report was that the key risk for E&P stocks was oil price decline.
…as re-rating has taken place- What explains the de-coupling? Although this has taken many investors by surprise, we attribute this to the expected re-rating of E&P stocks. Simply put, if oil is US$45/bbl, we expect investors to become comfortable with near double-digit P/E’s for the overall market in general, and oil stocks as well. This is because such a steep decline in oil price significantly changes the macro outlook, and specifically, the interest rate outlook. We expect the discount rate to fall to 8% by March 2015.
E&P vals versus KSE- PPL The KSE-100 (ex-consumer ex-oil) is already trading at 11.5x on the basis of trailing earnings, and if assume an ambitious 15% earnings growth, the forward multiple is 10.0x. Looking at the valuation of oil stocks, we find that in the case of PPL and OGDC, valuations remain more attractive than the market, even at a conservative US$45/bbl oil price.