By: Elixir Securities Private Limited
We reinitiate coverage on PPL with a BUY stance with Dec-16 PT of PKR162/sh based on reserve based DCF offering an upside of 36%. Our liking for the stock emanates from constrained market valuations where 1) the stock is trading at an implied oil price of ~USD25/sh (i.e. 19% discount to current oil prices and 33% to FYTD average), 2) EPS sensitivity of ~PKR0.4-1.3/sh (i.e. 3-9% for FY16/17) for every USD5/bbl (i.e. ~16%) decline in oil prices keep it relatively insulated, 3) volumetric triggers in the offing (i.e. 5% on average growth in FY16/17 primarily emanating from Gambat south, 4) favorable pricing (i.e. PP2012) for new exploratory efforts with pricing premium of 8-32% on offer and 5) policy migration offers a potential ~PKR3.5/sh one-off gain, while recurring impact is estimated at ~PKR0.9/sh. Going forward we expect exploratory activity to pick up post execution of supplemental agreements, which would augur production going forward.
Volumetric triggers amidst comfy valuation to restrict downside: PPL is currently trading at an implied oil price of ~USD25/bbl, a 19% discount to prevailing oil prices and 33% to average oil prices in FYTD, which in our view keeps down side limited. We estimate that even at average oil price of USD25 and USD35 per bbl in 2HFY16 and FY17, respectively, PPL still trades at an un-stretched PE of 10.1x and 10.4x discounting the impact of policy migration. Moreover, volumetric triggers lined up in the medium-term from Gambat south would partially mitigate earning erosion due to depressed oil prices. We expect volumes for PPL to increase by 5% on BOE basis on average in FY16-17 from the block. With the recently announced discovery at Hatam x1 (i.e. 56mmcfd), the cumulative flows from Gambat south are expected at ~160mmcfd (i.e. 20% of current flows) which is expected to come online from FY17. We have accounted for flows from Hatim X1 from FY18. Moreover Mardankhel on a stake adjusted basis is estimated to add 18mmcfd along with 1000bpd of oil.