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Pakistan Oil & Gas - With changes abound, valuations could soon be on the move, (AKD Detailed Report, October 10' 2023)

AKD Detailed Report | Pakistan Oil & Gas

With changes abound, valuations could soon be on the move

 

We update our coverage on the E&P sector and strongly encourage portfolio realignment towards this space from a long term perspective where valuations remain undemanding. While we are not overlooking the potential of weakness in price performances on account of consistently weak reserve replacement, gas-based liquidity stress and overall country risk factor, the upstream oil and gas sector still remains overly discounted, in our view. The current stability in oil prices and continuous depreciation of the domestic currency (relative to previous years, despite recent appreciation) are anticipated to support our earnings outlook, helping to mitigate the impact of declining production levels over the medium term. In terms of replacement values, domestic E&P companies are presently trading at unwarranted discounts of 70-75% to their values of recoverable reserves, with the exception of POL. Historically, they have typically traded in the mid-50s% range. Furthermore, dividend yield has remained a key valuation metric in the domestic equities space, where POL continues to offer the one of the highest DY% (FY24/25: 23%/22%) in the index, while OGDC and MARI both consistently provide yields of over 10% with relatively greater certainty (as opposed to PPL). In addition to our pitch on valuations, ongoing fundamental gas distribution reforms (on the persistence by the IMF) and diversification efforts by the SOEs alongside possible Reko Diq stake sale continue to align as positive triggers for our thesis aswell.

Oil establishing a new base: The recent significant uptrend in oil prices has worried many lately, but the domestic E&P companies are not complaining. Global crude prices have surged since the beginning of the fiscal year, with Brent futures up 18%FYTD to presently stand at US$88.5/bbl. Overall, in light of the expected demand recovery in 2024 and renewed supply/geopolitics uncertainties, we revise our oil price upwards forecasts for FY24/25 to be US$85/80 bbl, respectively.

OGDC — BUY: We reiterate our ‘BUY’ stance on Oil & Gas Development Company Limited (OGDC) with a NAV based Jun’24 target price of PkR140/share, offering a 47% upside from LDCP. Our investment case is based on diversified asset base across all four provinces, and the largest (and most aggressive) exploration program within the domestic E&Ps space. OGDCL is trading at an unprecedented EV/EBITDA and P/E(x) of 1.62 and 2.34, coupled with a forward dividend yield of 11.5% for FY24. 

MARI — BUY: We reiterate our stance on Mari Petroleum Company Limited (MARI) with a Jun’24 Target Price of PkR2,750/sh, implying a capital upside of 80% over the latest close (PkR1,524/sh) and dividend yield of 12% in FY24 — warranting a Buy stance on the stock. Our investment thesis includes the following key drivers for growth; i) Strong 2P reserve position and substantial recoverable reserve life, ii) strong financial performance, and iii) relatively cleaner balance sheet.

POL — BUY: We have a ‘Buy’ call on POL due to company’s limited association to the gas distribution chain, ensuring stability towards dividend yields amidst a volatile crude and currency scenario. In addition to the robust dividend yield of 23%/22% for FY24/25, we have a Jun’24 TP of PkR560/sh on the stock, depicting an upside potential of 43% over the current prices

PPL — BUY: We reiterate our ‘Buy’ stance on Pakistan Petroleum Limited (PPL) with a Jun’24 target price of PkR125/sh, offering an upside of 70% from current price level. The company is presently trading at an implied oil price of US$35/bbl, an unjustified 61% discount to the prevailing crude oil (Arab Light) price. Overall, PPL also has investments in Reko Diq project and PIOL (Adnoc), however, these are long-term catalysts that are not factored into our projections.

 

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