LAHORE
The equity markets opened the week on a positive note over Pakistan and IMF agreeing to club fourth and fifth reviews, with a possible disbursement of US$1.1bn by Dec-end. However, plunging commodity prices and sell-off in the regional markets (down 1.9% WoW) wiped off early gains. As a result index heavy-weight oil sector dragged down the benchmark KSE-100 index by 0.9% WoW to close at 29,883 level while, average volumes increased by 24% WoW to 216mn shares/day. On the other hand, auto sector extended its bull run in anticipation of favorable auto policy. The week also saw the start of the corporate result season, with Pakistan Telecom (PTC) announcing lower than expected earnings. Other key highlights of the week were: (1) trade deficit rising by 45% YoY in 1QFY15, (2) sept-2014 remittances clocking in at 34% YoY higher, (3) tax collection falling short by Rs20bn in 1QFY15 and (4) government mopping up Rs117bn in T-Bills auction.
To highlight, oil sales of E&P companies in Pakistan are influenced by international crude prices while gas sales vary depending on various petroleum policies. Most wellhead gas prices in Pakistan are capped and fall under Petroleum Policy 2001, which offers average realized gas price of $15.6 per barrel of oil equivalent (BOE). Hence, most gas prices (in $-terms) will not change unless international crude prices drop below $36/bbl.
With more than 75% of its revenues linked to benchmark Arab Light prices, Pakistan Oilfields (POL) remains most affected amongst E&P sector. Incorporating new estimates for Arab Light crude, experts have downward revised FY15E EPS to Rs62.0, while FY16F and FY17F EPS for POL have been revised down by 2-3% to Rs70.4 and Rs73.9, respectively.
Amongst other sector companies, 50% revenues of Oil & Gas Development Company (OGDC) and 49% revenues of Pakistan Petroleum (PPL) are directly linked to Arab Light prices. Therefore, experts have downward revised FY15-FY17 earnings estimate by 1-2% for OGDC and PPL.
With 7% growth in oil and gas production expected in FY15, OGDC remains top pick in E&P sector.
With recent weakness in international oil prices, energy analysts across the globe made downward revision to their oil price forecasts. Experts suggest Brent crude oil would average $106.1/bbl in 2014, $103.3/bbl in 2015 and $101.4/bbl in 2016. They also suggest that WTI crude would average US$98.9/bbl in 2014, US$96.1/bbl in 2015 and US$95.4/bbl in 2016. Following historical parity with Brent crude, Arab Light crude (reference crude basket for E&Ps in Pakistan) would average US$104.5/bbl in 2014, US$101.7 in 2015 and US$99.9/bbl in 2016.
During the week, the PTCL posted loss of Rs407m (LPS: Rs0.08) in 3Q2014 as compared to earnings of Rs0.67/share in the corresponding period last year.
The loss is attributed to rise in financial charges, unexpected damages due to fire amounting to Rs776m and 12%YoY decline in revenues due to dwindling LDI business. Meanwhile on a standalone basis, PTCL registered an EPS of Rs0.34 in 3Q2014, down 42%YoY. The decline in earnings is largely due to 4%YoY dip in revenues on the back of lower international incoming minutes and lower LDI margins.
In tandem with earnings cuts, experts revise down target price for PTCL to Rs23. Presently the stock trades at a demanding 2015F P/E of 10.4x versus market’s P/E of 8.3x.
Meanwhile, as per the State Bank of Pakistan (SBP) latest data, Pakistan’s foreign exchange reserves increased by $35m to stand at $13.436b versus $13.401bn in the past week. During the week, the SBP’s liquid forex reserves increased by $25m to $8.882b compared to $8.857b last week.