Index movers sink the benchmark in 2011During CY11, Oil & Gas exploration and production (E&P) companies, a sub-segment of the oil and gas sector, underperformed relative to the KSE-100 index by 6.5 per cent, yielding a negative return of 12.1 per cent. KSE-100 contracted by 5.6 per cent during CY11 to end at 11,348. Inferior performance by E&P was led by retraction in PPL by 22.5 per cent followed by index heavy OGDC (11.2 per cent) during CY11.
Pakistan Oilfields Limited (POL) yet again outshined both its peers and the KSE-100, yielding a staggering 17.1 per cent return during CY11 albeit a lower market capitalization corresponding to the benchmark couldn’t saviour the overall sector’s performance. Underperformance of PPL during 2HCY12 subsequent to the news of divestment of 2.5 per cent stake by the government was one of the primary causes of gloomy sectoral performance.
Significant weight of E&P sector, 36.4 per cent at the beginning of the period, dragged down the overall sector and index’s performance whilst constricted the E&P weights down to 35 per cent. The oil and gas sector contributed -541 points to overall index’s retrenchment of 675 points during the year. OGDC hauled the E&P contribution by 331 points as thin float kept investor participation limited.
Dismal performance stems from retrenchment in multiples on account of heightened systematic risks as price action contradicted the expected earnings growth of 25 per cent (FY12F) for the sector and Arabian Gulf oil price jump of 21.3per cent to $108 per billion during the calendar year. Despite underperformance, the sector continues to trade at FY12F PER of 7.24x that is at a premium to the market multiple of 5.8x. OGDC with an index weight of 24 per cent bloated the overall sector multiple as it trades at a FY12F PER of 8.2x.
Overall oil and gas sector market capitalisation however, contracted by 10.1 per cent, underperforming by 4.5 per cent against KSE-100. Better return yielded by other oil and gas sector stocks especially APL curtailed the losses for the sector during CY11.
Salman Vidhani at HMFS said since our earnings forecast for the sector is based on a conservative long term oil price assumption of $95/b, we have performed a sensitivity analysis for earnings and fair value estimates at various oil price levels. It is pertinent to note that Arabian Gulf light oil has averaged $110/b while PKR has depreciated by 4.6 per cent during 1HFY12. Furthermore we estimate every $10/b movement in oil price to cause earnings estimates to change by 6-7 per cent, he added.
