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Pakistan Oil & Gas: We like OGDC (vs PPL) even if oil drops to US$40/barrel

    Vahaj Ahmed
    Vahaj Ahmed

    Head of Industrials Equity Research

    Tellimer Research
    26 September 2019
    Published by

    Last month, Pakistan's Ministry of Privatisation officially announced the partial divestment of the government's holdings in the country's main upstream oil and gas producers, Oil & Gas Development Company (OGDC PA) and Pakistan Petroleum (PPL PA). OGDC and PPL closed 8-9% lower in the two sessions following the announcement on 29 August 2019. However, both stocks have since bounced back and are currently higher than at the time of the announcement (OGDC +5%, PPL +15%). This is due in no small part to the 4% higher benchmark crude oil prices following the 14 September attacks on Saudi Aramco's largest oil facility and its second-largest oil field.

    We see more value in OGDC (than PPL) even if oil drops to US$40/bbl today...

    Based on its reserve life of 9.4 years and a US$40/bbl oil price assumption, we estimate OGDC’s present value of net sales at US$7.0bn versus its current market cap of US$3.3bn. In other words, the stock is trading at a 53% discount to the value of its proven reserves. If the discount reverts to its 5-year midpoint of 35%, OGDC’s market cap could be US$4.5bn (or 39% higher). The stock trades at an estimated FY20 price-to-sales (P/S) multiple of 2.2x (36% discount to its 5-year midpoint of 3.4x) and price-to-earnings (P/E) multiple of 5.5x (41% discount to its 5-year midpoint of 9.4x). 

    In contrast, PPL is trading at a 44% discount to the value of its proven reserves. If the discount reverts to its 5-year midpoint of 36%, PPL’s market cap could be US$2.1bn (or 15% higher). The stock trades at an estimated FY20 P/S of 2.4x (21% discount to its 5-year midpoint of 3.0x) and P/E of 7.6x (19% discount to its 5-year midpoint of 9.4x).

    ...but we may find these stocks at least 10% cheaper in the next 2-3 months

    Looking at PPL's divestment in June 2014 (see the timeline below), we can expect the share prices of OGDC and PPL to correct 12-22% from current levels. Despite stable exchange rate and benchmark crude oil prices, PPL's share price dropped c13% in the three months (since the announcement) to the book building on 26 June 2014. The book building, which used the Dutch auction method, yielded a strike price of PKR219/share, or 11% lower since the divestment announcement on 12 March 2014. The floor price for the book building was set 9% below the trailing 105-day average price of PKR225/share (although the Privatisation Commission did not share the formula to determine this price).

    Timeline: PPL’s divestment in June 2014

    • 11 March 2014: PPL’s closing price PKR246/share
    • 12 March 2014: Divestment of 5% of government’s holding (or 3.6% of paid-up capital) announced
    • 25 June 2014: Privatisation Commission approved the floor price at PKR205/share, a 4% discount to the closing price of PKR214/share
    • 26 June 2014: Book building commenced under the Dutch auction method
    • 27 June 2014: Book building ended at a strike price of PKR219/share versus the closing price of PKR218/share

    Our partners Intermarket Securities have a Buy recommendation on both stocks, but they too prefer OGDC to PPL

    OGDC PA: Sensitivity to benchmark crude oil prices


    US$63/bbl (today)US$40/bbl

    5-year
    median
    Mkt cap
    (US$mn)
    Upside
    (%)
    Mkt cap
    (US$mn)
    Upside
    (%)
    Discount to PV of reserves (%)-35%6,11387%4,54439%
    P/S (x)3.46,916112%5,14157%
    P/E (x)9.47,508130%5,58271%
    Source: Bloomberg, Tellimer Research



    PPL PA: Sensitivity to benchmark crude oil prices


    US$63/bbl
    (today)
    US$40/bbl

    5-year
    median
    Mkt cap
    (US$mn)
    Upside
    (%)
    Mkt cap
    (US$mn)
    Upside
    (%)
    Discount to PV of reserves (%)-36%2,71645%2,14515%
    P/S (x)3.03,01761%2,38327%
    P/E (x)9.42,92756%2,31123%
    Source: Bloomberg, Tellimer Research