KARACHI – The Exploration and Production sector in Pakistan is currently trading at a 23 percent discount in comparison to a historic discount of 28 percent.
Though this convergence is mainly due to the Oil and Gas Development Company, now trading at a mere five percent discount, Pakistan Petroleum Limited (PPL) and Pakistan Oil Fields Limited (POL) are also trading close to their respective historic discounts of 32 percent and 34 percent respectively.
In terms of dividend yield, OGDC is offering an FY11E yield of 4.1 percent, while PPL is offering 5.9 percent. POL, largely immune to the circular debt, still offers an attractive FY11E dividend yield of 10 percent.
With a strong earning outlook (FY11E earning per share growth estimate of 33 percent) led by new production flows, POL has rallied 34.7 percent since November 2010.
However, a higher than expected rise in crude oil prices and any major discovery in coming months could be a key upside trigger for the stock. Additionally, anticipation of a strong cash payout with December quarter results could keep the interest alive in short to medium term. Aggressive and continuous foreigners’ buying in oil stocks could push market prices of PPL and POL beyond target prices of Rs 237 and Rs 353. OGDC is a prime example where the stock is trading at a huge premium of 38 percent compared to the market’s FY11E PE multiple of 8.4x, said Umer Ayaz at JS. Better results, payout expectations and sustained foreign interest in Pakistan energy stocks could keep the current rally alive in the short and medium term, potentially enabling PPL and POL to meet their respective price targets.
