Pakistan Petroleum Ltd – Tweaking estimates; maintain BUY

Tweaking estimates for oil prices and revised flows: We have fine tuned our FY11E EPS based on our revised FY11 Arab Light assumption at USD75/bbl (down USD10/bbl), coupled with higher expected flows from Tal and Nashpa, leading to 9%-11% reduction in FY11-13 EPS. Our Price Target reduces by 1% to PKR200/share.

Modest volume growth; earnings to jump 32% YoY in FY11: Full year impact of Tal expansion and commencement of Hala and Mela shall lead to 4.8% YoY growth in FY11 volumes for PPL, despite an expected 5% YoY decline in Sui. Earnings, however, will outshine volumes, likely up 31% YoY in FY11 due to higher gas prices.

Aggressive exploration plans remain a key upside: Having recently geared up its exploration program, PPL acquired fourteen blocks in last year’s auction, while it holds stakes in two active exploratory and five development drillings.

Maintain our BUY stance: PPL trades at FY11E PER of 7.0x, FY11E dividend yield of 7.3% and offers 12% upside to our June-2011 PT of PKR200/share. BUY!

Tweaking estimates for oil prices; and revised volumes

We have revised up our FY11 volume forecast from Tal block by 6% and that from Nashpa by 26%. We now expect cumulative production from Tal block to average 320mmcfd gas and 8,150bpd oil during FY11, while we expect Nashpa to average 5500bpd oil and 18mmcfd gas. We also factor in FY11 Arab Light price at USD75/bbl, down USD10/bbl from our previous assumption. As a result we lower our FY11-13 EPS by 10-11% and lower our PT by 1% to PKR200/share.

Volume growth modest; earnings to jump 32% YoY in FY11

With full year impact of Tal ramp up coming in FY11 (oil production from Tal block +127% YoY, gas production +79% YoY in FY11), coupled with Hala, along with commencement of Nashpa

and subsequent ramp up (Nashpa to reach 26mmcfd gas and 6,500bpd oil in Jan-2011), FY11 volumes for PPL shall rise by 4.8% YoY. Earnings growth for FY11 shall however be much stronger at 31% YoY due to higher realized prices, as PPL’s gas revenues shall embrace full impact of recovery in oil prices in FY11. FY10 gas revenues reflected Arab Light price of USD61/bbl due to bi annual revision in gas wellhead pricing.

Aggressive exploration plans remain a key upside

PPL has recently geared up its exploration plans, acquiring fourteen exploration blocks in Sep-09, taking total exploration portfolio to thirty two blocks (nineteen own operated and thirteen partner operated blocks). Furthermore, PPL holds stakes in two exploratory wells (both in Tal) and five development wells currently being drilled. Aggressive exploration stance is a new face for PPL, a result of the declining profile of major producing assets, and remains the key upside to our valuations.

Maintain our BUY stance

PPL trades at FY11 PER of 7.0x, FY11 dividend yield of 7.3% and offers 12% upside to our June-2011 PT of PKR200/share. BUY!

Economic & Political News

Major trade boost: USD1.3bn goods allowed into EU duty-free

Jeans, slippers and truffles will be among Euro 900mn (USD1.3bn) in Pakistani goods allowed into the European Union duty-free from next year under EU plans for trade assistance to the flood-hit country. The scheme, unveiled on Thursday, will suspend tariffs on 75 types of Pakistani-made goods which account for about 27% of exports to the EU, boosting sales by about Euro100mn. Most of the trade concessions will be on textile exports, though there will be no tariff cuts on Pakistan’s main product – bed linen – because of EU industry opposition. Products affected by the tariff suspension include cotton yarn, woven fabrics, cotton jackets, trousers, baby clothes, socks, gloves, sandals and mushrooms. The tariff break also allows for 100,000 tonnes of ethanol per year. Among companies that could gain from the plan are Pakistan’s largest listed textile company, Nishat Mills Ltd and Sapphire Textile Mills

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