The benchmark WTI crude oil prices have tumbled by 22 per cent since June 1, 2011 on rising concerns over another global recession, following the S&P downgrade of the US debt rating and fears of a possible default by Greece on its debt. This has fueled speculation over possible downgrade in earnings for local E&P companies.
Interestingly, the Arab Light crude (benchmark for Pakistan’s oil producers) is down by only 10 per cent at $101/bbl. We have run sensitivity for lower oil prices and believe, if Arab Light crude oil prices average at US$85/bbl compared to our base case assumption of $90/bbl in FY12, the sector’s profitability is likely to dip by 2-4 per cent, said Atif Zafar at JS. Salman Vidhani, Senior Analyst at HMFS, said we maintain our liking for PPL is offering upside potential of 25 per cent and dividend yield of 7.3 per cent. OGDC with June ‘12 target price of Rs149/share offering upside of 8 per cent, and the company is expected to post Earning per Share of Rs18.3 for FY12.
At current levels POL is trading at a discount of 16 per cent. The benchmark WTI crude oil prices have fallen to $80/bbl from the level of $103/bbl on June 1, 2011 (down 22 per cent). However, the Arab Light crude oil prices, benchmark for Pakistan oil producers is down by only 10 per cent to $101/bbl from $112/bbl, during the same period. Our assumption of $90/bbl for FY12 is still lower than the Bloomberg consensus of $95/bbl, he added. Nevertheless, if oil prices averages at $85/bbl in FY12, our earnings forecast for OGDC, PPL and POL face a downside risk of 2 per cent, 1 per cent and 4 per cent, respectively. The economists expect a 50bps cut in the discount rate in the upcoming monetary policy review. The reduction in the DR will compel us to lower our risk-free rate to 13 per cent from 13.5 per cent presently. This is likely to boost valuations for OGDC, PPL and POL by 2.8 per cent, 1.5 per cent and 2.2 per cent, respectively. PPL and POL stocks are trading at FY12F PE multiples of 6.4x and 7.1x, respectively.
