Pakistan Oil & Gas Exploration Sector: Deep discounts allay concerns on production decline – Overweight Maintained
Pakistan’s Oil and Gas Exploration & Production sector is primed to offer handsome gains. Our investment case is premised on i) accelerated exploration efforts, ii) a weak PKR against the dollar, and iii) healthy balance sheets. The recently announced divestments of OGDC and PPL by the government dampened market sentiments in these stocks. However, we are of the view that these transactions will likely take a while to materialize.
The recovery of oil prices and PKR devaluation in the past 2 years has churned up sector profitability registering 3-yr CAGR of 31% to PKR190bn for BMA E&P Universe that is now estimated to grow through the next three years at a CAGR of 9%. The uptick shall be a function of our assumption of a stable oil price environment, increased efforts on exploration that will counter ongoing reserve depletion and a weak PKR. However, the same has yet to transpire in terms of valuations where the sector trades at a weighted average implied oil price of USD29/bbl (current oil price of US$59/bbl) after the sector corrected by 14% in past 6-mths.
Despite the uptick in exploration activity since the past two years, depletion of reserves will need to be addressed by a substantial find. Current drilling targets are set at 92 wells (120 in FY19) of which 52 wells planned are exploratory. We expect oil production to reside at 88/85kbpd for FY20/21E compared to 91kbpd in FY19. Moreover, gas production is likely to register at 3,803mmcfd in FY20. The sector currently sits on cash heavy balance sheets where robust cash generation continues to remain the key strength given favourable USD/PKR parity and strong margins.
We are Overweight on Pakistan E&Ps with BUY ratings for OGDC, PPL and POL with price targets of PKR183/sh, PKR165/sh (adjusted for bonus), and PKR463/sh respectively. Our top picks are OGDC and PPL due to deep discounts on implied oil price.
Oil and Gas Development Company is a petroleum exploration and production (E&P) company in the Pakistan oil and gas sector. Co.'s principal activity is to explore, develop, produce and sell oil and gas resources and related activities. Co. also manufactures Gas, Liquefied Petroleum Gas, Crude Oil, and Sulphur. Co.'s major fields contributing in the aforesaid production of crude oil include Nashpa, Kunnar/KPD, Pasakhi, Sinjhoro and Rajian and for gas include Qadirpur, Uch, KPD, Nashpa and Dakhni. Co. carries out exploration and development activities on its own as well as in joint ventures with other oil companies.
Co. and its subsidiaries are principally engaged in the exploration, drilling, production and sale of crude oil and gas and other products.
Pakistan Petroleum Limited (PPL) is a supplier of natural gas. The Company is principally engaged in conducting exploration, prospecting, development and production of oil and natural gas resources. The Company operates nine producing fields, which include Sui, Kandhkot, Adhi, Mazarani, Chachar, Adam, Adam West, Shahdadpur and Shahdadpur West. It has working interests in approximately 20 partner-operated producing fields. Its partner-operated fields include Qadirpur Gas Field, Tal Block, Miano Gas Field and Sawan Gas Field. The Company, along with its subsidiaries, has a portfolio of approximately 40 exploration blocks, of which over 20 are operated by the Company, including Block-8 in Iraq, while approximately 20 blocks consisting of three offshore leases in Pakistan and two onshore concessions in Yemen are operated by joint venture partners. Its gas production from its operated and partner-operated fields is approximately one billion cubic feet of gas per day.
BMA is amongst the leading financial groups in Pakistan. BMA Capital’s core areas of business include Capital Markets, Corporate Finance & Advisory, Asset Management, and Financial Products Distribution. BMA Capital is the leader in privatisation advisory in Pakistan, having successfully advised on over 50% of all privatisations in Pakistan, by value, in transactions valued in excess of US$4 billion. Recent transactions include joint lead managing the $813 million GDR Offering of 10% of OGDCL on the London Stock Exchange in 2006-07, and advising Etisalat on their successful acquisition of a 26% strategic stake in Pakistan Telecommunications Company Limited (PTCL) for US$2.6 billion, the largest M&A transaction and foreign direct investment in Pakistan’s history. The firm is among the top brokers in the Pakistan equity and treasury markets, and is among a handful of firms that comprehensively cover all segments of the capital markets. This is supported by a very strong and independent research capability, which is quoted regularly in both local and international media. BMA Capital’s retail brokerage brand, BMA Trade, has launched a nationwide network of branches as well as a comprehensive online trading platform, enabling investors across Pakistan to take part in the capital markets.
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