KASB Research Pakistan: Crude oil slumps-E&P estimates revised

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We are revising down our earnings estimates for the Oil & Gas Exploration Sector based on: 1) prevalent weakness in international crude oil; and 2) a monetary easing scenario. The recent PKR depreciation, however, may provide cushion to our sector’s estimates.

▪ Crude oil futures lost footing on March 30, 2020, on the back of renewed demand worries amidst the ongoing COVID-19 global pandemic, and the ensuing lockdown around the world. The fossil fuel’s demand is expected to falter by 20 MN BPD, or 20% Y/Y, while supply is expected to remain at current levels, leading to a supply glut and a possible shortage of storage.

▪ Resultantly, Arab light prices dipped to an intra-day low of USD 25.11/BBL on Monday, after which the commodity closed the session at USD 25.26/BBL, losing 11% D/D.

▪ In wake of weakness in crude oil prices (Arab Light trading between USD 25/BBL and USD 33/BBL for the last 10 days), and no apparent signs of any easing in the global supply glut, we lower our crude oil assumption by 50% to average USD 25/BBL during 4QFY20.

Incorporating updated assumptions, our estimates for FY20 for OGDC/PPL/POL/MARI fall 6%/9%/10%/7%, respectively.

▪ Furthermore, a reversal in the interest rate scenario (policy rate slashed by 225bps during Mar’20) is expected to lead to attrition in non-operational income of companies. For example, OGDC, has PKR 131 BN of investments in Term Deposit Receipts and Term Finance Certificates (16% of total assets), which have returns linked to the prevalent interest rates.

▪ A breather for the E&P sector comes in the form of weakness in the PKR. On March 26, 2020, the PKR lost 4.6% of its value against the USD, closing the day at PKR 166.125/USD. Currently, the exchange rate stands at PKR 166.25/USD, having depreciated ~7% over the course of Mar’20.

▪ However, our long-term assumption is kept unchanged at USD 50/BBL for the time being, as we expect a rebound in the commodity’s prices once the COVID-19-related shutdowns are rolled back. The US has estimated that it will be able to return to normalcy in Jun’20.

Attractive Valuations:

▪ Over the course of Mar’20, the E&P sector has lost 37% of its market cap, compared to KSE-100 index’s 26% decline during the same period. The sector is currently trading at an avg. trailing 12-month P/E of 3.22x, a 40% discount to its 1-yr. avg. of 5.41x. This is also illustrated by the implied oil price matrix on the next page.


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