Energy update

Oil & gas producers – Pakistan

13 November, 2009
Raising estimates and price objectives on higher oil prices
We raise our FY10-FY12 earnings estimates for Pakistan’s E&P companies by 2-7% following the latest revision in oil prices by the BofAML commodity team (see sidebar). We raise our price objectives on Pakistan Petroleum Ltd (PPL) to PRs213.24/share (up 13%, PO data extended), Pakistan Oilfields (POL) to PRs270.67/share (up 5.1%) and Oil & Gas Develop. (OGDC) to PRs107.57/share (up 2.3%). We also take this opportunity to fine-tune our volume estimates. We reiterate our preference for Pakistan’s E&Ps based on strong fundamentals, low regulatory risks and steep undervaluation. We reiterate our Buy ratings on PPL (our preferred pick in the E&P space) and POL, and our Neutral rating on OGDC.
Expect strong 2HFY10 earnings
We believe 2HFY10 earnings for Pakistan’s E&Ps would be stronger than in 1HFY10. E&Ps are set to benefit from higher oil gas prices and stronger volumes post commissioning of key projects. For POL, new production will yield robust earnings as the new plant on Manzalai field will double its gas volumes. Interestingly, 1QFY10A earnings now constitute 19%, 19% and 23% of new FY10 earnings estimates for PPL, POL and OGDC, respectively.

POL stock is most sensitive to oil prices
For PPL, POL and OGDC, we estimate FY11E EPS sensitivity of 3.7%, 4.2% and 3.2%, respectively, for every US$5/bbl change in oil price. The earnings sensitivity of Pakistan’s E&Ps has gradually declined given increasing portion of defensive gas revenues. As PPL’s revenue profile is moving against the industry trend (oil revenue share is growing), we dare say that this historically most oil-price-defensive stock has come close to replace POL as the most oil-price-sensitive stock in our coverage. This is an important observation for investors looking for leveraged exposure to oil prices.

17-19% jump in gas prices likely in 2HFY10
Following a 30-35% drop in gas prices effective July 2009, we expect gas prices will jump 17-19% in 2HFY10 with oil prices averaging US$69/bbl in May-November 2009 (44% higher) and stable exchange rate. Wellhead gas prices in Pakistan are reviewed semiannually with the last six months’ oil price average benchmarked for the next six months’ gas price.

Adjusting production from Qadirpur/Tal block
Post our discussion with OGDC’s management, we lower our FY10 production on Qadirpur field from 620mmcfd to 500mmcfd. Delay in installation of compressor has temporarily derailed OGDC’s plans to upgrade volumes from the field while causing natural decline in production to set in. Similarly, we have pushed back likely commercial flows from Makori field (Tal block) by six months into 2012 given the current progress on the field’s development plan.
KASB Securities and Economics Research Bank of America Merrill Lynch

PSO: Volumes, margins spur upgrade
19th November 2009

We upgrade our FY10-13E earnings for Pakistan State Oil (PSO) by 3-7% on the back of stronger margins and volume growth. We also lift our PO to PRs359.85/sh (up 3%) and reiterate our Buy rating on the stock.

We think the market has overplayed the liquidity risk from energy sector receivables. Strong 2QFY10E earnings and volume growth may surprise the market.

Our channel checks with different companies confirm fresh receivables build-up is under control and well below the numbers generally quoted.

QoQ higher oil pries and strong volume have set the stage for another quarter of strong core earnings for PSO, in our view. Our initial estimates suggest 2QFY10 earnings of PRs12.5-13.0/sh (1HFY10 PRs23.61/sh).
KASB Securities and Economics Research