Pakistan Oil and Gas Valuations Heavily Discounted

AKD Securities has reinitiate coverage on the Oil & Gas sector and strongly encourages portfolio realignment from a long term perspective where valuations are undemanding. While the brokerage house doesn’t overlook the potential of weakness in share price performance caused by negative oil headwinds, the upstream sector (E&P) is overly discounted.

In this regard, sharp decline in oil prices and consequent subdued earnings growth outlook (2%YoY in FY16 with an average oil price assumption of US$50/bbl) has opened up valuations.

Oil price simulation by the brokerage house suggests that the upstream sector is currently trading at an implied oil price of US$16-18/bbl, an unjustified steep discount of 58-63% to prevailing Arab Light price.

Catalysts spurring share price performance in the medium to long term emanate from swift tie ups of recent discoveries along with aggressive exploration as law & order condition improves in high impact areas.

The Oil & Gas sector (upstream and downstream) also offers one of the highest dividend yields (FY16 average 6.5%) amongst regional peers. From a 12-month investment horizon the attractive scrips are PPL, POL and OGDC in the upstream sector while PSO, HASCOL and APL make the cut in downstream (value enhancers include improving cash flow profile and unique inventory management).

Pakistan Petroleum Limited (PPL) offers an upside of 43% from current price level. Similar to its peers, PPL underperformed the broader market by 30.5% during FY15 on the back of steep 30% decline in the international oil prices in FY15. Backed by incremental production (from Gambat South block), the company is estimated to post earnings growth of 9%YoY in FY16.

Pakistan Oilfields Limited (POL) provides an upside of 25% from current price level. Going forward, the Brokerage house estimate POL’s earnings to post a 3-year CAGR (FY15-18) of 14% backed by incremental production coming from non-operated JVs (predominantly Tal block) and aided by additional flows from Mardan Khel and Makori East 04.

Oil & Gas Development Company Limited (OGDC) offers 28% upside from current market price. Though the Brokerage house estimate a subdued 3-year forward earnings CAGR of 4% during FY15-18, a sharp fall in market capitalization (down 33.4%CY15TD) has deviated valuations relative to fundamentals that imply stable earnings.

Pakistan State Oil (PSO) offers a potential upside of 36% from current price level. With oil prices likely to move in a band of US$40-50/bbl, analysts believe the worse is over for PSO and forecast the stock to post a 3-year forward (FY16-19) earnings CAGR growth of 13%, backed by an average 3% per annum increase in the company’s volumes coupled with relatively lower inventory losses, supporting a stronger core earnings base.

HASCOL provides an upside of 27% from current price. The bullish outlook on HASCOL is underpinned by a 3-year earnings CAGR of 26% during CY15-18. Proactive inventory management model that HASCOL has adopted is likely to reap further benefits for the company going forward.

Attock Petroleum Limited (APL) offers an upside potential of 17% based on currently quoted price. The scrip remains one of the highest yielding companies at the KSE-100 Index. Being a major asphalt player in the industry, the company is poised to benefit from the construction of highways/motorways earmarked under the Chinese Pakistan Economic Corridor (CPEC).

Oil and gas production in Pakistan, OGDC, PPL, POL, Hascol, PSO



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