Topline Pakistan Research has highlighted Pakistan Petroleum Limited (PPL) and its future growth prospects. The research firm reiterates its ‘BUY’ recommendation on PPL, setting a target price (TP) of Rs 222 per share for June 2026, which presents a potential total upside of 41%.
– Despite a 24% decline in earnings during FY25 and a further 19% decline in FY26, we maintain our ‘BUY’ stance on PPL. The stock has already lost 20% of its peak market capitalisation, despite the feasibility of the Reko Diq project, which is expected to add 28% to the company’s valuation. At our target price of Rs 222, PPL trades at an implied FY26 and FY27 price-to-earnings (P/E) ratio of 8.7x and 7.5x, compared to the historical P/E of 8.6x during periods when recovery rates exceeded 90%.
– Earnings are forecasted to decline by 19% in FY26, primarily due to a 8% and 14% drop in oil and gas production, respectively, compared to FY25. Our projections assume oil prices at US$65 per barrel for FY26 and beyond, with an average exchange rate of Rs294 for FY26.
– Potential upside to our earnings and valuation estimates could arise from: (1) a one-time resolution of the gas sector’s circular debt in line with the resolution of the power sector’s circular debt under the IMF program; (2) improved regular cash flows following a gas price hike; and (3) an increase in average oil prices in FY26 above our assumed level of US$65 per barrel. Recent escalations in conflicts in the Middle East have significantly driven oil prices above US$75 per barrel (Brent).
– The main risks to our valuation and earnings include: (1) oil prices falling below US$65 per barrel; (2) an increase in circular debt, as evidenced in recent reports; and (3) further declines in oil and gas production due to RLNG surplus.
– Regarding the likely resolution of the gas sector’s circular debt, a recently released IMF report has underscored the government’s commitment to clearing the backlog. Although the government is gradually addressing the old backlog by ensuring higher gas tariffs than costs, an RLNG surplus has hindered this effort, resulting in increased circular debt in Q3. A committee has been formed to propose plans addressing the issue of circular debt. If the government announces a plan to clear most of the gas sector’s circular debt, this will facilitate the receipt of previously blocked cash for exploration and production (E&P) companies, enabling them to invest further in their businesses or increase payouts to shareholders.
– Production is expected to decline in FY25 and FY26. Due to the availability of surplus RLNG and a gradual shift from gas-captive industries to alternatives such as grid and furnace oil (FO), Sui companies have curtailed their procurement of gas from local E&P companies. Consequently, PPL’s oil and gas production is projected to drop by 18% and 21%, respectively, in FY25, followed by further decreases of 8% and 14% in FY26.
– We forecast gas production from Sui to be 236 million cubic feet per day (mmcfd) in FY25 and 197 mmcfd in FY26, compared to FY22 levels of 334 mmcfd. Current flows, as of the week of June 8, 2025, are 172 mmcfd. Detailed field-wise production flow estimates are included in slide 6.
– The Reko Diq project is expected to add 28% to PPL’s value: According to the feasibility study of Reko Diq published in February 2025, total free cash flows from the field over 37 years will reach US$70 billion, with a net present value (NPV) of US$13 billion using an 8% discount rate. Adjusting the discount rate to 18% for Pakistan’s context results in a present value of PPL’s proportionate cash flows, amounting to Rs 62 per share, which comprises 28% of our target price of Rs 222 per share.
– Earnings per share (EPS) are projected to be Rs32, Rs26, and Rs30 for FY25, FY26, and FY27, respectively. Dividend expectations for these years are Rs8, Rs9, and Rs10.5, respectively.
– PPL’s fair value is estimated at Rs222 per share using a blended valuation methodology, giving equal weight to both reserve-based discounted methodology and the PE ratio. Reserve-based discounted valuation results in a target price of Rs224 per share, while the PE-based valuation arrives at Rs221 per share using a forward PE of 8.6x based on FY26 EPS of Rs25.7. This leads to a fair value of Rs222 per share, representing a total return of 41%.
– Key risks and potential upsides to our earnings estimates and valuation include: (1) higher or lower than expected production curtailments by Sui companies in the context of surplus RLNG; (2) fluctuations in oil prices beyond our projected level of US$65 per barrel; (3) delays or failures to materialize a resolution plan for the gas sector’s circular debt; and (4) higher than expected exploration and development costs.
Courtesy – Topline Pakistan Research
