We raise estimates for our E&P Universe, on the back of higher oil prices, which we now assume at US$50/60/60 per barrel for FY21/22/23f. Our EPS estimates have thus risen by 7-8% on average for these years. We reiterate our Overweight stance on E&Ps.
In our view, the market has underappreciated the sector, since the rally in oil prices began in Nov’20, where stock prices have underperformed oil prices by nearly 20%. Other positives such as recent developments in the Energy chain have also been discounted, in our view.
We think this is an opportune time to invest in the sector, where a lot of past issues have been mitigated, while the sector remains undervalued compared to the broad market.
Raise estimates on higher oil prices
International oil prices (Brent) have recently touched US$60/bbl, while most global oil analysts had expected the level around mid to end of 2021. Even though global economic rebound and the vaccine rollout have both remained slow, crude oil is now expected to see tighter supplies by the end of 2021. We therefore lift our oil price assumption for FY21/22/LT from US$50/55/55 per barrel to US$55/60/60 per barrel (average during the year). As a result, we upgrade FY21-23f EPS by 7-8% and target prices by 6% on average, for our E&P Universe. We continue to prefer Pakistan Oilfields (POL, Buy, new TP PKR500/sh) and Oil & Gas Development (OGDC, Buy, new TP PKR159/sh) in the space. The key attribute to like about these two are greater certainty on dividends because of less exposure to circular debt than in case of PPL.
Two key positives have been underappreciated by the market
We opine that the market has not fully priced in the recent rally in global crude oil prices. For instance, Brent and Arab Light are up c.40% and 50% since 9 November 2020 (when the first successful Covid-19 vaccine was announced) while stock prices of Pakistan E&Ps are up c.20% on average. We think this can be explained partly by moderate confidence on dividends (especially in case of PPL and OGDC) and overall unexciting prospects for production and earnings growth. With the new estimates, we expect FY21f dividends yields of 13% and 8% for POL and OGDC respectively. The market has also discounted the potential positives from recent government measures in the Energy sector (settlement of past circular debt with the IPPs and power tariff hikes), which can materially improve cash generation and payouts in the overall Energy chain, in our view.
Why invest now?
Besides bullish oil prices, we highlight that a lot of past issues with the sector have weakened considerably of late. A growing economy and burgeoning energy needs (amid gas shortages) could mean adequate crude oil offtake by refineries, as furnace oil demand can continue to rise. Rising oil prices (near pre-pandemic levels at present) and a stable PKR will overshadow lackluster production growth. Higher oil prices may also reignite high-risk drilling activity, such as offshore and in onshore frontier blocks in Baluchistan. Recall that the drilling of Kekra well (offfshore, cost over US$100mn) was initated around similar levels of oil prices as presently. Given the issues around indigenous gas supply and inefficient procurement of LNG, we think it is an opportune time for the government to work on a new Petroleum Policy, where natural gas prices can be linked with international LNG prices.
Courtesy – Intermarket Securities Limited.