Pakistan Report: (October-2-2013) Pakistan Oil & Gas: More oil, more profit Change in dynamics of Pakistan oil and gas exploration sector was evident in FY13. Though, the country historically has been rated as gas heavy but off-late oil production has been making all the noise. Pakistan’s oil production that was stagnant for last 10 years rose 13.6% to reach 76kbopd while gas production declined by 4.3% to 4.1bcfd in FY13. We expect oil production to reach 97kbopd by FY16. In barrel of oil equivalent (boe) terms, gas still has 90% share of Pakistan’s total hydrocarbon production pie but in terms of revenue and profits it is losing ground. Share of gas revenues of three leading listed companies fell from 61% in FY09 to around 50% in FY13. And this will soon be overtaken by oil after net addition of 15kbopd in FY14 from different development projects. Hedge against currency depreciation Despite government’s efforts to help stabilize forex reserves through another IMF program, we believe the local currency will depreciate by average 10% in FY14 and 5% going forward. Since revenues of oil & gas companies in Pakistan are determined in US dollars, E&Ps have always benefited from PKR depreciation. Thus, exposure in E&P stocks provides an inherent hedge against currency risk. Based on Reuters poll, we have assumed Arab Light oil at US$107.1/bbl for FY14 and US$104.8/bbl for FY15. POL best pick, followed by OGDC Pakistan Oilfields Limited (POL) remains our preferred play as 60% of its revenues are oil-driven. We believe POL will benefit most from 19% oil production growth of the sector in FY14. Currently, the stock trades at FY14E PE of 6.2x and offers dividend yield of 14%, amongst highest in Topline Universe. We also look favorably towards Oil & Gas Development Company (OGDC) on the back of expected growth in country’s oil production which will further augment OGDC’s oil revenues that stood at 53% of total revenues of Rs223bn in FY13. The company will also benefit from 4% gas production growth in FY14 as it has 35% market share in gas. In the absence of circular debt, we expect the company’s payout to also increase. At current levels, this scrip trades at FY14E PE of 7.4x and offers a dividend yield of 6%. Deviation from our oil price assumption and PKR devaluation against US dollar will remain key risks to our valuations. However, we believe delays in expected tie-ins of different fields will be the biggest threat to our forecasted earnings as our valuations are based on 19% jump in oil production in FY14. Regards, Vahaj Ahmed
Posted on: Wed, 02 Oct 2013 09:35:13 +0000
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