Gaslight at the end of PSX tunnel

There is cause to believe good news is around the corner for those willing to drill inside the oil and gas sector

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The week ending on October 14 had been precarious for the PSX and investors as political tensions gave the market a good old hammering. The bears took over during the week, clawing the index below the 40,000 level – for the first time in a year. The market closed at 39,847 points on Friday, recording a 1,466-point decline – losing 17% of its value.

As PSX dillydallies, the oil and gas sector seems to be lighting a glimmer of hope for investors. During the outgoing week, O&G marketing companies contributed to the index decline as it lost 164 points. The O&G exploration companies, meanwhile, fared better – gaining 71 points on the back of improved oil prices in the international market. Arab Light oil witnessed a 2% hike over the week, contributing to positive investor sentiments around O&G exploration, hence the bullish performance of these stocks. The sector has all bits of red, green and yellow, with some companies equipped to do better going forward.

Foreign investors have actively been participating in oil and gas stocks. In September, foreigners bought oil marketing company stocks worth $9.5 million but sold O&G exploration and production company stocks, offloading shares worth $13.7 million. It was primarily the improvements in international oil prices during September that encouraged investors to opt for value buying – particularly in oil marketing.

Pakistan’s oil and gas sector has witnessed an improvement in developmental efforts in the past four years. 103 discoveries in O&G have been made and 850 million cubic feet of gas have been added to the production system in this period.

The Pakistan Oilfields (POL) seems to be making headlines owing to its major oil and gas discovery in Punjab. The discovery has the potential to ramp up the company’s hydrocarbon production by a staggering 25%. Tests have revealed that the latest discovery has a flow of about 2,250 barrels of oil and 21 million standard cubic feet of gas per day. Considering the POL’s holding of 80% of the newly discovered site, the company’s O&G production has the potential to increase by 26% and 23%, according to a Topline Securities report. Investor optimism was reflected in the company’s share price which witnessed a 0.74% improvement following the announcement of this news. Topline Securities has also estimated that oil production could clock in at 1,600-1,800 barrels per day, while gas production could be within the range of 16 to 18 mmcfd. Its impact on the annualized EPS is estimated at Rs7.5-8.5 for FY18 considering that the POL owns a major share in this field discovery. POL was also the major gainer in the oil and gas sector during the outgoing week with a 1.24% improvement in prices.

As oil prices have begun to pick up, it is expected that the OGDC will also spark investor interest going forward. Crude oil prices seem to be inching closer to $60 a barrel, as global prices increased for three consecutive days in the outgoing week. As international oil prices are expected to record improvements, oil exploration and production firms generally have something to be hopeful about. The dampened oil market has caused OGDC’s earnings to remain low in the recent past. But FY17 reported improvements on the back of oil prices posting recoveries. Besides that, the company has also been able to perform better during FY17, as it has contributed 51% and 28% to the countries oil and gas production respectively. The company’s crude oil production level traced new heights in FY17 at 50,345 barrels per day. For FY18, 100 new wells are expected to come online, with 100 kbpd of oil in sight. Considering that PPGDC boasts the largest oil portfolio in the country, and has the highest acreage, it is highly likely that it will benefit from these new wells. Moreover, the company is also leading initiatives in Baluchistan and KPK which could pan out well in terms of financials for the oil and gas giant. OGDC was also a major gainer in the O&G sector last week, with price improvements of 0.55%.

A two-pronged positive news surfaced for oil marketing company following the recent ECC meeting. First, the commission for dealers and oil marketing companies on the sale of petroleum has increased by 33 paisa per litre. Oil marketing companies will see their commission increase by 14 paisa, while that of dealers will increase by 19 paisa. Second, the commission on diesel sales is no longer regulated, hence private oil marketing companies and dealers have now been given the freedom to charge commission on diesel sales as per their requirements. The latter prong is despite heavy opposition from FBR and OGRA.

These are good omens for oil marketing companies who will benefit from improved commission rates in the near future. The decision to deregulate diesel commission will be subject to review after three months to gauge the impact, but it does mark the first instance where private entities have been given the freedom to decide commission rates without government intervention.

In light of these developments in the oil and gas sector and improvements that are taking place on an international level, there is cause to believe good news is around the corner for those willing to drill inside the oil and gas sector.

Following the commission announcements, oil marketing companies will be able to secure better commission rates, which will impact financials favourably. As the international oil prices record improvements, oil exploration and production companies will generally benefit from it. However, it is expected that POL and OGDC will remain in the limelight in the E&P sector owing to new discoveries for the former and favourable portfolio positions for the latter. Shell’s quarterly results are also just around the corner and investors are advised to keep an eye out for the announcement as well.

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