JS Securities Limited – Morning Briefing

Karachi, December 08, 2017 (PPI-OT): OGDC: ‘Buy’ on increasing oil prices and PKR/US$ outlook

International crude oil prices (benchmark Arab Light up ~34% during FY18TD) and talks of potential PKR depreciation vis-a-vis the US$ have gained traction of late.

We align our estimates for OGDC with our macro assumptions and fine- tune our production estimates keeping recent data into consideration. All in all these changes result in downward earnings revision of 2% for FY18E and upward revision of 9-10% for FY19F-FY21F.

Accordingly, we revise our Jun-2018 Target Price for the company upwards by 2% to Rs195 (Rs191 previously). At last closing, the stock provides upside of 27%, making it one of our preferred picks.

The company is currently trading at FY18E/FY19F P/E of 8.6x/7.1x respectively and provides D/Y of 4.7%/5.5% during the same period.

Recent changes in macro outlook warrant revisit

International crude oil prices (benchmark Arab Light up ~34% during YTD FY18) and talks of potential PKR depreciation vis-a-vis the US$ have gained traction of late. We revisit our estimates for Oil and Gas Development Company (OGDC) to revise our estimates accordingly. We align our estimates for OGDC with our macro assumptions and fine-tune our production estimates keeping recent data into consideration. Our assumptions for Arab Light Crude now are US$58/bbl, US$60/bbl and US$65/bbl for FY18E, FY19F and FY20F/LT respectively, keeping recent production curbs by OPEC into consideration.

Given rising geopolitical tensions in the Middle East, risk of turmoil in the Middle East has increased with some murmurs of potential conflict between nations gaining traction. In an extreme event, we believe that oil prices may inch up temporarily but increase will likely be constrained by higher production from US explorers. We also fine-tune our production estimates keeping recent data into consideration. Overall, these changes result in downward earnings revision of 2% for FY18E and upward revision of 9-10% for FY19F-FY21F.

A key change in our estimate for FY18E also includes intact gas pricing regime for Uch gas field. Initially, we had assumed prices of US$5.0/mmbtu for the field in-line with management guidance. However, we believe that this issue will likely linger on for the rest of FY18. Being prudent, we assumed OGRA notified gas prices (US$3.9223/mmbtu) for Uch in our base case estimates to calculate gas revenues for the field, while we flag it as an upside risk to our earnings estimates going forward.

E and Ps are a safe-haven in current environment – ‘Buy’

Accordingly, we revise our Jun-2018 Target Price for the company upwards by 2% to Rs195 (Rs191 previously). At last closing, the stock provides upside of 27%, making it one of our preferred picks in the sector. The company is currently trading at FY18E/FY19F P/E of 8.6x/7.1x respectively and provides D/Y of 4.7%/5.5% during the same period. Key risks to our valuations include (1) sharp drop in international oil prices, (2) delays in key projects such as Nashpa/Mela and Soghri etc., (3) higher than expected dry wells cost and (4) less than expected PKR/US$ depreciation.

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JS Securities Limited – Morning Briefing

Karachi, December 08, 2017 (PPI-OT): OGDC: ‘Buy’ on increasing oil prices and PKR/US$ outlook

International crude oil prices (benchmark Arab Light up ~34% during FY18TD) and talks of potential PKR depreciation vis-a-vis the US$ have gained traction of late.

We align our estimates for OGDC with our macro assumptions and fine- tune our production estimates keeping recent data into consideration. All in all these changes result in downward earnings revision of 2% for FY18E and upward revision of 9-10% for FY19F-FY21F.

Accordingly, we revise our Jun-2018 Target Price for the company upwards by 2% to Rs195 (Rs191 previously). At last closing, the stock provides upside of 27%, making it one of our preferred picks.

The company is currently trading at FY18E/FY19F P/E of 8.6x/7.1x respectively and provides D/Y of 4.7%/5.5% during the same period.

Recent changes in macro outlook warrant revisit

International crude oil prices (benchmark Arab Light up ~34% during YTD FY18) and talks of potential PKR depreciation vis-a-vis the US$ have gained traction of late. We revisit our estimates for Oil and Gas Development Company (OGDC) to revise our estimates accordingly. We align our estimates for OGDC with our macro assumptions and fine-tune our production estimates keeping recent data into consideration. Our assumptions for Arab Light Crude now are US$58/bbl, US$60/bbl and US$65/bbl for FY18E, FY19F and FY20F/LT respectively, keeping recent production curbs by OPEC into consideration.

Given rising geopolitical tensions in the Middle East, risk of turmoil in the Middle East has increased with some murmurs of potential conflict between nations gaining traction. In an extreme event, we believe that oil prices may inch up temporarily but increase will likely be constrained by higher production from US explorers. We also fine-tune our production estimates keeping recent data into consideration. Overall, these changes result in downward earnings revision of 2% for FY18E and upward revision of 9-10% for FY19F-FY21F.

A key change in our estimate for FY18E also includes intact gas pricing regime for Uch gas field. Initially, we had assumed prices of US$5.0/mmbtu for the field in-line with management guidance. However, we believe that this issue will likely linger on for the rest of FY18. Being prudent, we assumed OGRA notified gas prices (US$3.9223/mmbtu) for Uch in our base case estimates to calculate gas revenues for the field, while we flag it as an upside risk to our earnings estimates going forward.

E and Ps are a safe-haven in current environment – ‘Buy’

Accordingly, we revise our Jun-2018 Target Price for the company upwards by 2% to Rs195 (Rs191 previously). At last closing, the stock provides upside of 27%, making it one of our preferred picks in the sector. The company is currently trading at FY18E/FY19F P/E of 8.6x/7.1x respectively and provides D/Y of 4.7%/5.5% during the same period. Key risks to our valuations include (1) sharp drop in international oil prices, (2) delays in key projects such as Nashpa/Mela and Soghri etc., (3) higher than expected dry wells cost and (4) less than expected PKR/US$ depreciation.

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