Pakistan Oilfields Ltd – Estimates revised; reiterate BUY

Estimates revised on higher oil price: With upheavals in Middle East / Africa fueling oil prices, we have revised our 2HFY11 and long term oil price assumption to USD95/bbl and USD90/bbl respectively. We raise our FY11-13 EPS by 4-7% and our Dec-11 Price Target for POL by 3% to PKR370/share.

1H EPS forms 49% of FY11 forecast as we remain conservative on 2H exploration cost: While 1HFY11 EPS came largely in line with expectations, we expect a mere 2% HoH earnings growth for POL for the second half owing to 1) an expected 42% HoH decline in other income as bulk of the dividend income for POL is realized in the first half, and 2) our conservative 2H exploration cost estimate of PKR1.46bn (83% of FY11E).

Recent discoveries shall sustain earnings growth in FY12: POL shall benefit from production addition from Makori East-01 and Maramzai-01 in FY12, as well as full year impact of higher oil prices. We expect FY12 growth of 12% to follow an astounding 42% in FY11.

Valuations highly attractive: Recent correction has lowered POL’s multiples to highly attractive levels, as POL now offers FY11/12E dividend yield of 12.1%/13.5%, FY11/12E PER of 6.3x/5.6x. The scrip offers an upside of 31% to our Dec-11 Price Target of PKR370/share. BUY

Estimates revised on higher oil price

With upheavals in the Middle East / Africa, oil prices have surged, with OPEC basket rallying by 25% CYTD. With OPEC basket price averaging USD96/bbl during 3QFY11 to date we have increased our 2HFY11 Arab Light price assumption to USD95/bbl, and long term oil price assumption to USD90/bbl. Our revised oil price assumptions, when compared with current consensus forecast for Brent compiled by Bloomberg, and the implied Arab Light forecast, still remain on the conservative side.  We raise our FY11-13 EPS by 4-7% and our Dec-11 Price Target for POL by 3% to PKR370/share.

1H EPS forms 49% of FY11 forecast due to lower dividend income during 2H…

While 1HFY11 EPS came largely in line with expectations, we expect a mere 2% HoH earnings growth for POL for 2HFY11 due to lower dividend income and our conservative full year exploration cost estimates. Bulk of dividend income for POL, comprising of the final payouts from NRL and APL, is booked in 1H (mainly during 2Q). While 1HFY11 dividend income clocked in at PKR481mn (after tax EPS impact of PKR1.83), a mere PKR56mn of interim dividend from APL (after tax EPS impact of PKR0.2) shall be booked in 2HFY11. We thus expect 2HFY11 other income to fall 42% HoH.

…and our conservative exploration cost estimates

While 1HFY11 exploration cost at PKR300mn, down 48% YoY, comprise a mere 83% of our full year forecast, we remain conservative and maintain our full year estimate at PKR1.76bn, given POL’s exploration assets were a hefty PKR3.7bn at Dec-10.

Recent discoveries shall sustain earnings growth in FY12

POL shall benefit from production addition from Makori East-01 and Maramzai-01 in FY12 along with impact of higher oil price. We have assumed recommencement of Maramzai-01 from April-11 as the well is currently awaiting security clearance. We expect Makori East -01 to add 3200bpd oil and 10 mmcfd gas from Oct-11. Higher oil price and commencement of production from recent discoveries shall enable POL to achieve FY12 EPS growth of 12%, which shall be commendable, given that 88% earnings growth during FY10 and FY11 combined has significantly inflated the base.

Valuations highly attractive

Recent correction has lowered POL’s multiples to highly attractive levels, as POL now offers FY11/12E dividend yield of 12.1%/13.5%, FY11/12E PER of 6.3x/5.6x. The scrip offers an upside of 31% to our Dec-11 Price Target of PKR370/share. BUY

Economic & Political News

Petroleum Product Prices set to Increase by 10-13%.

Ogra has advised 10-13% increase in prices of petroleum products. According to sources, the finance ministry has endorsed recommendations made by Ogra, and the decision will be announced tomorrow. GoP last increased fuel prices in Nov-10, which reflected Arab Light price of USD80/bbl. Though prices were increased in Jan-11, the decision was reversed following immence public and political pressure. Arab Light is estimated to have averaged USD99/bbl during Feb-10.
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