Hydrocarbon: Reading between the lines

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Economy Overview (Pakistan News)
Economy Overview (Pakistan News)

The realization of higher production flows from key hydrocarbon basin has positively affected the country’s oil production during 7MFY14, while has also been a driving force to keep gas production profile at stable levels. During the period under review, the country’s oil production rose by an average  12% to 81.5k bpd (barrel per day), whereas gas flows has maintain the levels of 4.1bcfd (billion cubic feet per day). Furthermore, increase in the production number in Jan’14 (particularly oil up 8%YoY), reinforce our conviction in the sector’s potential to deliver an impressive earning growth of 40% in FY14. This compares favorably with last 5-years average profitability growth of 16%.

Economy Overview (Pakistan News)
Economy Overview (Pakistan News)

Other factors playing in the sector’s favour includes US$ denominated revenue stream, higher other income and relative uptick in the activity to find new reservoir. We hold a favorable outlook for the sector with PPL as our preferred play for the sector. The stock is currently trading at FY14E/FY15F PE of 8.0x/7.1x at an average 5% discount to industry average.

CA widened: perturb trade cycle likely played the hand

The low realization of CSF (coalition support fund) followed by higher trade deficit has forced the country’s CA deficit to widen to US$2.1bn (1.4% of GDP) in 7MFY14 versus US$441mn in 7MFY13. Investigating further, we believe the increased deficit also comes from perturb trade cycle of the country. In tandem reading of PBS and SBP trade statis reveals an emergence of divergent trend. Against a contraction of 3% in imports by PBS, the central bank numbers reveal a growth of 4% in import in 7MFY14. Similarlu, export numbers of SBP (up 3% YoY) has grown at a slower pace than reported by PBS (up 4% YoY). Not completely ignoring other reasons, we believe the fear of PkR weakness has caused forex loss mitigating behavior from the importer and vice versa for the exporter. This has caused normalized current account deficit (excluding CSF payments) to widened to approx. US$400mn/month in FY14 versus approx. US$320mn/month in the same period last year. Therefore, arresting the fear related to PkR outlook may cause the normalization of CA deficit and thus, diluting the pressure on the external account.

Economy Overview (Pakistan News)
Economy Overview (Pakistan News)

Financal account providing some respite

Financial account has started to show some respite during FY14 but this is largerly thanks to surplus of US$254mn in Jan’14. During 7MFY14, the financial account posted a surplus of US$251mn versus a deficit of US$384mn in the corresponding period last year. Though still in a peculiar position, but timely materialization of key inflow namely proceeds from 3G auction, residual amount from Etisalat, issuance of Eurobond/Sukuk is likely to be a major swing factor in days ahead.

Pressure of IMF debt repayment likely to ease off

The last reported numbers show a net retirement of US$544mn to the IMF during 7MFY14. Furthermore, the country has paid another US$292mn to the fund in Feb’14 taking the net retirement to US$836mn in FY14YTD. However, we expect the pressure related to IMF repayment to subside given scheduled outflow of US$792mn in the remaining FY14 against the expected EFF inflow of US$1.1bn.

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