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Pakistan Oil& Gas_Projections incorporating macro-developments, (AKD Daily, Jun 06, 2022)

AKD Daily

Pakistan Oil& Gas: Projections incorporating macro-developments

• We have revised our oil price and PkR/US$ estimates to build in current macro outlook in our models. Consequently, we have revised our oil assumptions for FY23 and FY24 to US$95/bbl and US$90/bbl while we have also revised our estimates for PkR/US$ exchange parity to 198/US$ for FY23 and 210/US$ in FY24. We have assumed an annualized depreciation of 6% thereon. At the same time we have also increased the RF rate to 15.5%.
• International crude oil prices have remained volatile throughout FY22. Having rallied by 48.6% since the turn of the year as the global pent up demand started to materialize while the major suppliers were unable to increase the production in tandem. Russia-Ukraine conflict made the situation even worse as the western sanctions on Russia puts around 20% of global oil & gas production at risk.
• Jump in international oil prices and rapid PKR depreciation (11.8% during CY22), have resulted in a robust jump in sector’s profitability, despite falling production levels. Consequently, the sector’s profitability has jumped by 60% during 9MFY22. However, the persistent threat of circular debt has kept the valuations from reflecting improved profitability outlook.
• The production outlook for the local E&Ps has remained bleak, however,  where oil reserves of PPL, OGDC and POL plunged by 24%YoY, 14%YoY and 28%YoY, respectively. Whereas, MARI’s oil reserves showed a growth of 7% YoY. As for gas reserves, OGDC, MARI and POL’s reserves went down by 4%YoY, 4%YoY and 5%YoY, respectively. While that of PPL reflected an uptick of 1% YoY. As a result, the reserve life of OGDC, MARI, POL and PPL is estimated at 19yrs, 18yrs, 15yrs and 12yrs, respectively and the country’s total hydrocarbon reserves have a reserve life of 15yrs.
• We have revised our earnings estimates for E&P universe by 17% - 22% however, on the back of higher cost of capital assumptions, we are downward revising our target price assumptions by 4% - 5%. Our top pick from the E&P universe is POL with a TP of PkR490/sh given its relative isolation from circular debt. Also, though not in our active coverage, we also like MARI (reserve life of 19yrs). The sector currently trades at a forward multiple of only 2.5x.

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