JS Securities Limited – Morning Briefing

Karachi, June 29, 2018 (PPI-OT): OMCs outperformed during YTD 2018 – but E and Ps and refineries disappointed

Pakistan listed E and Ps underperformed the benchmark KSE-100 index by 2% during YTD 2018 mainly due to muted performance of the national giant Oil and Gas Development Company (OGDC).

Private sector listed E and Ps such as Pakistan Oilfields Limited (POL) and Pakistan Petroleum (PPL) posted outperformance of 8% and 2% respectively during the same period.

We believe that investors will likely favour E and Ps going forward amidst tricky macroeconomic imbalances with the next leg of rally being driven by recent underperformers such as OGDC and Mari Petroleum (MARI).

Performance of refineries remained volatile throughout YTD 2018 and remained down by 3%; an underperformance of 6% against the benchmark.

On the other hand, OMCs sector performance remained impressive, clocking-in at 10%, an outperformance of 7% against the benchmark.

Despite stellar performance of the OMCs sector, we believe that overall macro level risks may haunt volumetric growth prospects in the short to medium term. We advise investors to weigh choices accordingly.

Ex-OGDC, E and Ps performed well

Pakistan listed E and Ps underperformed the benchmark KSE-100 index by 2% during YTD 2018 mainly due to muted performance of the national giant Oil and Gas Development Company (OGDC). During YTD 2018, OGDC (down 4%) and MARI Petroleum (MARI, up 2%) underperformed the benchmark KSE-100 index by 7% and 1%, respectively, during the same period. However, private sector listed E and Ps such as Pak Oilfields Limited (POL) and Pakistan Petroleum Limited (PPL) posted respective outperformance of 8% and 2% during the same period. Performance of the sector seems counterintuitive, given that Pak Rupee has depreciated by 10% against the Greenback since Jan-2018, while at the same time benchmark Arab Light crude oil prices have also increased by 12%, benefitting all E and Ps which enjoy the benefits of international crude oil and US$ linked revenues.

This can be attributed to weaker-than-expected production growth during Jan-May 2018 period among other stock specific concerns in our view as oil production remained flat at 91,312bpd (Jan-May 2017: 91,352bpd) whereas gas production marginally declined to 3,977mmcfd (Jan-May 2017: 4,028mmcfd). For JS Universe, OGDC was the largest hit with ~7% YoY decline in oil production and 2% YoY decline in gas production followed by PPL with oil production decline of 5% YoY and gas production decline of 2% YoY.

Investors however, clearly favoured PPL for its improving exploration outlook and recent conversion of Sui Gas fields to Petroleum Policy 2012 (PP12). Finally, POL, albeit with some hitches, enjoyed the ride as both its oil and gas production increased by 10% YoY and 14% YoY respectively (courtesy Jhandial well at Ikhlas block). That said, we believe that investors will likely favour E and Ps going forward amidst tricky macroeconomic imbalances with the next leg of rally being driven by stocks such as OGDC and MARI who have remained laggards of late.

OMCs kept the overall downstream sector positive

Performance of refineries remained volatile throughout YTD 2018 and remained down by 3%; an underperformance of 6% against the benchmark. On the other hand, performance of OMCs sector remained impressive, clocking-in at 10% (outperformance of 7% against the benchmark). Weak performance of refineries is mainly due to transition of power sector towards greener and cheaper fuels, rendering Furnace Oil (FO) sales outlook a bit hazy for refineries, especially the ones in the northern parts of the country. As refineries scuffled to change production slates towards more profitable segments, refinery stocks continued to plummet. OMCs on the other hand, saved the day for the downstream sector with major contribution coming from two heavyweights namely Pakistan State Oil (PSO) and Attock Petroleum (APL).

We attribute PSO’s performance to cheap valuation multiples and outgoing PML-N government’s last minute efforts such as funds injection in the power sector and OMCs margin revision for key products such as Motor Spirit (MS), High Speed Diesel (HSD) and Liquefied Natural Gas (LNG). APL also remained investors’ favourite as apart from overall margin revision benefits, its favourable risk-return profile (decent dividend yield and upside potential) remained ideal for current volatile market conditions. Apart from these majors, other OMCs such as Hascol Petroleum (HASCOL) and Hi-Tech Lubricants (HTL) performed exceptionally well during the period mainly on the back of exponential sales growth and market share increases.

HASCOL during Jan-May 2018 period outperformed benchmark KSE-100 index by 19% whereas HTL outperformed by 31% during the period. Despite stellar performance of the OMCs sector, we believe that overall macro level risks may haunt volumetric growth prospects in the short to medium term. As oil prices continue to rise, PKR continues to depreciate and government’s fiscal deficit continues to go out of control, the brunt may fall on the consumers, denting demand side of the equation for local OMCs. Competition will likely intensify with major focus on market share grab in now relatively slow growing pie size. Moreover, the catch-22 of Pakistan’s energy chain i.e. circular debt will also keep things tricky for heavyweights such as PSO. We advise investors to weigh choices accordingly.

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JS Securities Limited – Morning Briefing

Karachi, June 29, 2018 (PPI-OT): OMCs outperformed during YTD 2018 – but E and Ps and refineries disappointed

Pakistan listed E and Ps underperformed the benchmark KSE-100 index by 2% during YTD 2018 mainly due to muted performance of the national giant Oil and Gas Development Company (OGDC).

Private sector listed E and Ps such as Pakistan Oilfields Limited (POL) and Pakistan Petroleum (PPL) posted outperformance of 8% and 2% respectively during the same period.

We believe that investors will likely favour E and Ps going forward amidst tricky macroeconomic imbalances with the next leg of rally being driven by recent underperformers such as OGDC and Mari Petroleum (MARI).

Performance of refineries remained volatile throughout YTD 2018 and remained down by 3%; an underperformance of 6% against the benchmark.

On the other hand, OMCs sector performance remained impressive, clocking-in at 10%, an outperformance of 7% against the benchmark.

Despite stellar performance of the OMCs sector, we believe that overall macro level risks may haunt volumetric growth prospects in the short to medium term. We advise investors to weigh choices accordingly.

Ex-OGDC, E and Ps performed well

Pakistan listed E and Ps underperformed the benchmark KSE-100 index by 2% during YTD 2018 mainly due to muted performance of the national giant Oil and Gas Development Company (OGDC). During YTD 2018, OGDC (down 4%) and MARI Petroleum (MARI, up 2%) underperformed the benchmark KSE-100 index by 7% and 1%, respectively, during the same period. However, private sector listed E and Ps such as Pak Oilfields Limited (POL) and Pakistan Petroleum Limited (PPL) posted respective outperformance of 8% and 2% during the same period. Performance of the sector seems counterintuitive, given that Pak Rupee has depreciated by 10% against the Greenback since Jan-2018, while at the same time benchmark Arab Light crude oil prices have also increased by 12%, benefitting all E and Ps which enjoy the benefits of international crude oil and US$ linked revenues.

This can be attributed to weaker-than-expected production growth during Jan-May 2018 period among other stock specific concerns in our view as oil production remained flat at 91,312bpd (Jan-May 2017: 91,352bpd) whereas gas production marginally declined to 3,977mmcfd (Jan-May 2017: 4,028mmcfd). For JS Universe, OGDC was the largest hit with ~7% YoY decline in oil production and 2% YoY decline in gas production followed by PPL with oil production decline of 5% YoY and gas production decline of 2% YoY.

Investors however, clearly favoured PPL for its improving exploration outlook and recent conversion of Sui Gas fields to Petroleum Policy 2012 (PP12). Finally, POL, albeit with some hitches, enjoyed the ride as both its oil and gas production increased by 10% YoY and 14% YoY respectively (courtesy Jhandial well at Ikhlas block). That said, we believe that investors will likely favour E and Ps going forward amidst tricky macroeconomic imbalances with the next leg of rally being driven by stocks such as OGDC and MARI who have remained laggards of late.

OMCs kept the overall downstream sector positive

Performance of refineries remained volatile throughout YTD 2018 and remained down by 3%; an underperformance of 6% against the benchmark. On the other hand, performance of OMCs sector remained impressive, clocking-in at 10% (outperformance of 7% against the benchmark). Weak performance of refineries is mainly due to transition of power sector towards greener and cheaper fuels, rendering Furnace Oil (FO) sales outlook a bit hazy for refineries, especially the ones in the northern parts of the country. As refineries scuffled to change production slates towards more profitable segments, refinery stocks continued to plummet. OMCs on the other hand, saved the day for the downstream sector with major contribution coming from two heavyweights namely Pakistan State Oil (PSO) and Attock Petroleum (APL).

We attribute PSO’s performance to cheap valuation multiples and outgoing PML-N government’s last minute efforts such as funds injection in the power sector and OMCs margin revision for key products such as Motor Spirit (MS), High Speed Diesel (HSD) and Liquefied Natural Gas (LNG). APL also remained investors’ favourite as apart from overall margin revision benefits, its favourable risk-return profile (decent dividend yield and upside potential) remained ideal for current volatile market conditions. Apart from these majors, other OMCs such as Hascol Petroleum (HASCOL) and Hi-Tech Lubricants (HTL) performed exceptionally well during the period mainly on the back of exponential sales growth and market share increases.

HASCOL during Jan-May 2018 period outperformed benchmark KSE-100 index by 19% whereas HTL outperformed by 31% during the period. Despite stellar performance of the OMCs sector, we believe that overall macro level risks may haunt volumetric growth prospects in the short to medium term. As oil prices continue to rise, PKR continues to depreciate and government’s fiscal deficit continues to go out of control, the brunt may fall on the consumers, denting demand side of the equation for local OMCs. Competition will likely intensify with major focus on market share grab in now relatively slow growing pie size. Moreover, the catch-22 of Pakistan’s energy chain i.e. circular debt will also keep things tricky for heavyweights such as PSO. We advise investors to weigh choices accordingly.

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