(E&P) sector with an OVERWEIGHT stance. The sector’s main
attractions are growth generated through increased E&P activity and
stable cash flow ensured by gas-dominated revenues.
■ At current production levels, the continued energy demand growth of
6.2% should widen the oil and gas deficit to 75% and 13% by FY11,
respectively. In order to attract investment and bridge the existing
demand-supply gap, Pakistan has opted for an attractive pricing
mechanism, providing benefits like windfall and currency gains.
■ More than 50% of Pakistan’s oil and gas potential remains unexplored.
There has been a recent boom in oil and gas exploration and
development, which has yet to impact the bottom line. The E&P sector
has maintained a reserve replacement ratio of above 1.0, ensuring
consistent cash flows and high exploration success rates of 30%.
■ The main earning drivers for the E&P sector are the exceptionally high
net and operating margins of 40% and 68%, respectively. We expect
PPL’s net earnings to receive a strong boost during FY08-11, growing
at a CAGR of 14%, on increased gas production and revenues. POL
should be able to regain the exceptional profitability level of FY08, on
account of the boost in gas production.
■ We initiate coverage of PPL and POL with OUTPERFORM ratings and
target prices of PRs249 and PRs218, respectively. Trading at FY10E P/E
of 5.6x and 5.1x, respectively, the stocks are trading at a steep discount
to the local market and regional peers, and are ripe for a rerating.