Pakistan Petroleum Limited Review

Valuation premium is justified but sharp returns advocate peer trade

Event

Pakistan Petroleum Limited (PPL) has delivered the strongest returns among its listed peers with 39% performance in 12-mth (dividend adjusted). Resultantly, PPL is now trading at 10% premium to its peers on P/E multiple. While we foresee positive news flow in the stock over the next few months and believe PPL’s valuation premium over its peers is justified, we contend sharp relative out performance (27% vs peers) may warrant peer trade with Pakistan Oil Field Limited (POL) and Oil and Gas Development Company Limited (OGDC). 

Impact

Disparity in performance warrants change in pecking order: Last 12-months have proved to be very eventful for Pakistan Petroleum Limited (PPL) as the company made important strides on delivery of its strategy. This has translated into a very strong price performance for PPL with 37/39% returns in 6/12months. PPL has outperformed its peers by a wide margin on both absolute and relative basis. While we believe news flow on key operating activities will remain positive for PPL and current valuation premium vs its peers is justified, combination of sharp out performance and high D/Y in other stocks may warrant peer trade with Pakistan Oil Field Limited (POL) and Oil and Gas Development Company Limited (OGDC), in our view.

What to expect in next 12-months:

1. More focus on drilling vs 2D/3D survey: Spending on 2D/3D survey has dominated overall Pakistan Petroleum Limited (PPL) exploration expenses in the past three years. As a result, PPL has established a strong bank of leads many of which have been firmed up. PPL has unveiled an aggressive drilling plan for FY13/14 targeting over seven exploration wells (four wells in FY13), mostly concentrated in high prospect Sind province. Relatively, Oil and Gas Development Company Limited (OGDC) drilling plan targets seven wells which is unchanged from drilling program in FY13. For Pakistan Oil Field Limited (POL), the key highlights for FY14 remains drilling in Tal block where all three E&P companies are joint venture partners.

2.     PPL may deliver 5% production growth in FY14: On production growth matrix, we estimate PPL may deliver 5% YoY volume growth in FY14 vs 11% and 17% for POL and OGDC respectively. Comparison of revenue growth shows much lower disparity among PPL, POL and OGDC with YoY growth estimated at 20%, 29% and 33% respectively. This is mainly due to higher impact of oil production growth on PPL’s top line. On micro level, PPL’s production growth is less concentrated; implying potential delays in high profile project may have lower impact on PPL’s volume and sales growth.

3.   Unconventional areas: Following start of production from Pakistan’s first tight gas resource, PPL is likely to accelerate development of TGR in Miano and Sawan fields. This can provide upside to consensus estimates.

Earnings revision

We have revised down FY14/FY15/FY16 earnings by 7/6/4% to incorporate higher exploration and development expenses.

Action and recommendation

Our recommendation on the stock is currently restricted due to Foundation Securities’ involvement in the Secondary Public Offering of PPL’s shares by the Government of Pakistan.