E&P Fiscal Year 2012 profit revised up by 3 per cent on oil rally

ISLAMABAD: Woes of oil supplies arising from Iran-west standoff have created a bull run in the oil market with benchmark crude oil prices -WTI and Brent- rallying 11% and 18% in 2012YTD to currently hover around US$109 and US$127 per barrel, respectively.

The bull sentiment has eclipsed the previously held demand worries, while majority of the international oil analyst also expect the oil prices to remain elevated in 2012. Following the similar trend, Arab Light price (benchmark for Pakistan) has also surged by 16% in 2012YTD to stand around US$126 per barrel, currently.

Given this scenario, we are revising our FY12 oil price assumption to US$110 per barrel, previously from US$100 per barrel, which has subsequently increased our E&P universe earnings by an average 3% for FY12.

We maintain ‘Over-weight’ stance on the sector with our liking towards POL and PPL, which are currently trading at implied oil prices of US$85 and US$75 per barrel, with FY12 PE of 6.7x and 5.6x, respectively.

Geopolitical tension arising from West possible sanctions against Iran and its impact on the oil supply scenario has created frenzy in the oil markets, which has also turned majority of the international research houses bullish on the crude prices at least for 2012. Pakistan relevant, Arab Light prices are currently trading above the level of US$125 per barrel, which have averaged US$110 per barrel in FY12 so far.

With 4-months remaining in FY12, we believe our previously oil assumption of US$100 per barrel has turned out to be on the lower side and we are revising our FY12 oil assumption to US$110 per barrel. However, given the prevalent uncertainty on the economic front, we have kept our long-term oil price assumption unchanged at US$95 per barrel.

Increase in the oil prices assumption would positively impact the E&P sector profitability. Amongst the Topline Universe, POL would be the chief beneficiary on account major contribution to company’s revenues attributed to crude oil, while impact on the PPL’s earnings is subdued with oil contributing approx. 25% to company’s top-line in FY12. We have revised POL’s FY12 earnings by 4% to Rs56.9 per share, while PPL’s earnings have been increased by 1% to Rs30.9 per share. Similarly, OGDC earnings would increase by 3% on account oil price change. However, tweaking our production estimates in the light of recent analyst briefing our new EPS for OGDC is at Rs20.5 per share compared to our old estimate of Rs19.1 per share.

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