E&Ps: Oil price and FY12 earnings outlook

Oil continues to top USD110/bbl: Opec basket price ended last week at USD110.27/bbl, 13% above our base case of USD90/bbl (Arab Light) for FY12. While higher oil price present an upside, we prefer sticking to our base case assumption in view of a high “risk premium” that current oil price reflects, due to the Middle East unrest.

POL would be the key beneficiary of upside in oil price: For every USD10/bbl increase in Arab Light price from our base case, FY12E EPS for POL rises by 6.4% followed by 5.7% for OGDC and 5.4% for PPL. If current oil prices sustain (USD110/bbl) FY12E earnings would imply PER of 5.9x for POL, 6.0x for PPL and 7.4x for OGDCL.

PPL tops our FY12 earnings growth list; POL tops our liking: Our base case estimates (Arab Light price: USD90/bbl) yield FY12 earnings growth of 18%, 15% and 12% for PPL, OGDC and POL, respectively.  However, we prefer POL (Jun-12 PT: PKR410, upside: 23%) over OGDCL (Jun-12 PT: PKR150, upside: 0%) and PPL (Jun-12 PT: PKR230, upside: 7%) due to POL’s cheaper multiples, and higher earnings growth sustainability due to recent high impact discoveries.

Oil continues to top USD110/bbl

While oil price remained under USD80/bbl for most part of 1HFY11, averaging USD79/bbl for the period, it has been trending higher since end of Nov-10, propelled largely by the Middle East unrest, which attached a risk premium to the price of oil. The risk premium factor is evident from the behavior of oil price post elimination of Osama bin laden, when the following week witnessed oil price tumbling by 13% on closing basis. The fact that Osama’s elimination led to reduction in a risk factor (terrorism) unrelated to the major reason behind CY11 oil price run up (Middle East unrest) only enhance the instability engendered in the current oil price levels. Hence, while Opec basket price ended last week at USD110.27/bbl, 13% above our base case of USD90/bbl (Arab Light) for FY12, we prefer sticking to our base case assumption – Arab Light price of USD90/bbl for FY12.

POL would be the key beneficiary of upside in oil price

For every USD10/bbl increase in Arab Light price from our base case, FY12E EPS for POL rises by 6.4% followed by 5.7% for OGDC and 5.4% for PPL. POL still remains the most sensitive to oil prices, despite a significant increase in revenues from capped gas fields after Tal expansion, whereas recent oil heavy discoveries at Tal block shall only increase its oil correlation going forward. If current oil prices sustain, FY12 earnings for PPL, OGDC and POL shall rise by 30%, 28% and 26% respectively on YoY basis, and would imply PER of  6.0x, 5.9x, and 7.4x respectively.

PPL tops our FY12 earnings growth list; POL tops our liking

Our base case estimates incorporate FY12 average Arab Light price of USD90/bbl and yield FY12 earnings growth of 18%, 15% and 12% for PPL, OGDC and POL, respectively. However, we prefer POL (Jun-12 PT: PKR410, upside: 23%) over its peers due to POL’s cheapest multiples, high earnings contribution from recently discovered and yet to be fully developed fields and higher earnings growth sustainability due to recent high impact discoveries. While FY12 PER for PPL (Jun-12 PT: PKR230, upside: 7%) at 6.7x is only a notch higher than POL’s 6.6x, the former has a mature field portfolio and offers a 3 year EPS CAGR of 9% as opposed to 12% for POL. Though OGDCL (Jun-12 PT: PKR150, upside: 0%) offers an attractive FY12-14 EPS CAGR of 10%, earnings growth is contingent upon timely completion of development plans, which have recently been subject to delays due to litigation issues.

Economic & Political News

Pakistan to set GDP growth target at 4.2%

Pakistan has planned to set real GDP growth target at 4.2% with contribution of agriculture, manufacturing and services sectors envisaged at 3.8%, 3.1% and 5%, respectively, in 2011-12. The Annual Plan 2011-12 approved by the government states that the economy is still fragile and next year’s growth will depend on economic reforms and introduction of “New Growth Strategy” recently devised by the Planning Commission.

All gas tariffs to be hiked by 13-50% from July 1

The Ministry of Petroleum and Natural Resources is aiming for the implementation of revised gas tariffs for every sector of the economy by July 1 under the gas tariff rationalization mechanism, it has been learnt. Under the new gas rates, 50% gas tariff, the source said, will be increased for the fertilizer sector whose existing rates are the lowest amongst all other sectors of the economy. For the textile sector, the ministry is working on a special gas tariff, which will be two percent less than the tariff of the general industry as the tariff increase for the industrial sector would stand at 15%. The gas tariff for commercial consumers and and domestic consumers will also be increased by 15%.
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