OilandGas:Exploration&Production

Pricedeclineabsorbed;volumetricgainstounlockupside
FridayDecember26,2014
Oil&GasSectorPerformance

Absolute%
RelativetoKSE%

1M

3M

12M

9%

16%

17%

10%

23%

43%

RelativeChartKSE100vsOil&Gas
40%

OilandGas

KSE100Index

30%
20%
10%
0%
10%

30%
40%

Dec13
Jan14
Feb14
Mar14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Aug14
Sep14
Oct14
Nov14
Dec14

20%

Source:KSE,BMAResearch

WerevisitourinvestmentcaseonPakistanE&Psbyslightlytweakingourcrudeoilprice
assumption for remaining FY15F and FY16F to USD60/bbl and USD70/bbl, respectively
whilekeepinglongtermoilpriceassumptionintactatUSD75/bbl.Weforeseenosigns
of recovery in the prices of benchmark Arab Light Crude (currently hovering around
USD58/bbl)onaccountofi)abundantsuppliesacrosstheglobeandii)dimchancesof
demand recovery amid continued global economic slowdown. Consequently, our
earningsestimatesofBMAE&PUniverseforFY15FandFY16Faredownwardrevisedby
1%3%. In near term, the lackluster trend in 2QFY15F results (expected to decline by
~13%QoQ) and sustained downward pressure on oil prices will continue to cap the
upsideinE&Psector.Thebearishtrendinoilpriceswillalsotakeatollonwellheadgas
pricesofE&Ps(particularlyPPL)innextsemiannualrevisionof2HFY15period,expected
to decline by 7%8%. The only respite to the sector will be in the form of i) notable
productionadditionsduein3QFY15andii)monetizationofnewexplorationfindspriced
at USD4.0/mmbtu (1.3x2.0x than current realized gas prices). Given attractive FY15F
P/E multiple of 7.9x, we believe the market has overpriced the negative impact of
weakenedoilprices.Basedonlongtermpotentialofthesectorbackedbyi)increased
developmentactivity(3yearoilproductionCAGRof9%),ii)continuedreserveaccretion
on active exploration in high impact areas and iii) strengthening cash position, we
believe any further downside in the sector will provide an attractive entry point. We
also roll forward our valuations to Dec15 as we maintain our preference for POL (TP:
PKR551/sh)andOGDC(TP:PKR261/sh).PPLfollowswithaTPofPKR228/sh.
Oilpricescontinuetoheadsouthwards:Thecrudeoilmarketcontinuedtoremainunder
immense pressure as both Nymex and Brent witnessed a decline of 26% and 23% to
USD55.8/bblandUSD60.2/bbl,respectivelyduringlastonemonth.Consequently,FYTDoil
pricedeclinenowstandsat46%primarilyonaccountofabundantsuppliesandweakening
demand.Goingforward,OPECslatestdecisiontomaintaintheproductionatcurrentlevel
coupledwithcontinuedweaknessinglobaleconomy(EUandChina)willcontinuetokeep
oilpricesunderpressure.AsperEIAforecastfor2015,theglobalsupplybeingestimated
at92.8mnbpdwilloutpacetheforecasteddemandof92.3mnbpdthusleadingtofurther
buildupinstockpiles.
We downward revise our oil price assumption for remaining FY15F and FY16F to
USD60/bbl (previous USD65/bbl) and USD70/bbl (previous USD72.5/bbl), respectively,
leading to 1%3% decline in the earnings estimates of BMA E&P Universe. We maintain
longtermoilpriceassumptionatUSD75/bbl.

MuhammadAffanIsmail,CFA
muhammad.affan@bmacapital.com

Long term prospects heavily dependent on volumetric growth: Given i) an aggressive

drillingprograminhighimpactareas(FY15Ftargetof104wells)andii)exposuretolargely
untapped area, we believe Pakistan E&Ps have the potential to withstand the bearish
trendinoilpricesinthelongterm.Goingforward,weexpectcompletionofdevelopment
projects and drilling in KPDTAY, Sinjhoro, UchII, Nashpa, Adhi and TAL block to
potentially add ~10.5k bpd of oil and ~250mmcfd of gas in next 68 months. Moreover,
the monetization of new finds in GambatSouth,Hala and Naushahro Firoz in FY16Fwill
potentiallyleadtoproductiongrowthof~11kbpdofoiland~370mmcfdofgasintheBMA
E&P Universe. Given the strong cash generation and strong profitability margins, we
believethedwindlingoilpriceswillnothampertheexplorationanddevelopmentprogram
ofthePakistanE&Psector.

+92111262111Ext:2059
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.11

Investment Perspective: The bearish trend in oil prices is expected to continue thus
keepingthesectorunderpressureinnearterm.ThesectoriscurrentlytradingatP/Eof
7.9x,adiscountof37%and11%overregionalpeersandBMAUniverse,respectively.On
account of notable volumetric additions, continued growth in reserves on aggressive
explorationandstrongcashgeneration,wemaintainourstanceofanattractivelongterm
investmentcaseonPakistanE&Ps.POLandOGDCremainourpreferredplayswithTPof
PKR551/shandPKR261/sh,respectively.

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.22