Elixir Securities Limited – Elixir Insight

Karachi, January 02, 2018 (PPI-OT): Pakistan E and P Sector – Altering Oil Price Assumption Leading to FY18F Earnings Growth of 37%YoY

International Oil Prices surged 39% to USD65/bbl in 2H2017 on the back of OPEC/Non-OPEC’s production cuts. We believe oil prices to likely to stay firm amidst extended production cuts deal in 2018.

With continued resilience seen in oil prices, we have revised our oil price assumption from USD50/bbl to USD60/bbl from FY18F and onwards. As such, our E and P universe’s FY18F/FY19F earnings are revised up by 11%/13%, whereas our rolled forward Dec-18 PT’s are increased by 9%.

We have an Overweight stance on E and Ps where valuations are expected to be driven by 37%YoY earnings growth in FY18F on the back of stronger oil prices and PKR depreciation. Our top picks in E and P Universe include OGDC and MARI, led by additional hydrocarbon flows development projects and unwinding of discounts on Mari field‘s gas pricing and incentive pricing over benchmark production, respectively.

OPEC/Non-OPEC’s Extended Production Cuts Deal Drive Oil Prices: The international oil prices have witnessed a strong rally in 2H2017 where they increased by 39% to USD65/bbl. Rising oil prices were mainly led by OPEC/Non-OPEC’s production cut s an d rising global demand. With regards to the latter, Energy Information Administration (EIA) expects oil demand to grow by 1.6%YoY to 100.0mn bpd in 2018 which would rebalance supply and demand as indicated by the enclosed table. While there are risks to oil prices arising from rising US shale production, which is expected to increase US crude production by 8.3%YoY to 10.0mn bpd, OPEC/Non-OPEC’s joint production cuts would likely restore supply/demand equilibrium in 2018. The outlook for withdrawing production cuts by the Greater OPEC is contingent on stability of oil prices, and that too gradually.

FY18F/FY19F Earnings Estimates and PT Revised Up by 11%/13% and 9%: Given the stable oil price outlook we have revised our oil price assumptions from USD50/bbl to USD60/bbl from FY18F and onwards. As such, our E and P universe’s FY18F/FY19F earnings are revised up by 11%/13%, whereas our rolled forward Dec-18 PT’s are increased by 9%.

Individually, we revise up our OGDC/PPL/POL/MARI’s FY18F EPS by 12%/10%/13%/5% to PKR18.3/PKR24.4/PKR67.1/PKR175.2, FY19F EPS by 13%/14%/17%/10% to PKR18.1/PKR22.6/PKR71.2/PKR220.7, and our rolled forward PT’s by 10%/12%/6%/5% to PKR193/PKR216/PKR573/PKR2,177 per share. The relatively greater revision in POL and OGDC’s earnings are a result of greater share of revenues from oil, while greater revision in OGDC and PPL’s valuations is attributable to relatively longer reserve life.

E and Ps FY18F Earnings to Grow 37%YoY led by Stronger Oil Price: We have an Overweight stance on E and Ps where valuations are expected to be driven by 37%YoY earnings growth in FY18F on the back of stronger oil prices and PKR depreciation. Our top picks in E and P Universe include OGDC and MARI with Dec-18 PT of PKR193/share and PKR2,282/share offering upside of 19% and 59% respectively, led by additional hydrocarbon flows development projects and unwinding of discounts on Mari field’s gas pricing and incentive pricing over benchmark production, respectively.

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