Iraq tensions opening upside for Pak E&Ps

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  • International oil prices have surged sharply (Arab Light crude oil price up 5% over the last 10 days to US$112/bbl) over increased tensions in Iraq as Islamic State of Iraq and the Levant (ISIS), a rebel organization looks to seize control in Northern Iraq .
  • We flag that higher crude oil price can provide earnings upside for Pak E&Ps. We estimate that every US$5/bbl movement in oil prices holds an average 4% earnings risk to our JS E&P Universe FY15F earnings forecasts.
  • Despite the unrest in Iraq , PPL’s management sees no immediate concern over PPL’s investment in Iraq as no on-ground activities have commenced as yet.
  • Our favored plays in the Pak E&P space remain Pakistan Oilfields Limited (POL – TP: Rs598) and Pakistan Petroleum Limited (PPL – TP: Rs270).

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Oil spikes as Iraq tensions rise

International oil prices have surged sharply (Arab Light crude oil price up 5% over the last 10 days to US$112/bbl) over increased tensions in Iraq as Islamic State of Iraq and the Levant (ISIS), a rebel organization looks to seize control in Northern Iraq. Although ISIS forces remain well away from Iraq’s main oilfields in the South, however perceived market risk has gone up a notch, in our view. Market fears that region’s oil supply can be dramatically reduced as some foreign firms pull workers out of the country. Meanwhile, rebels also gained partial control over Iraq’s biggest oil refinery yesterday in Northern Iraq; however the capture is unlikely to have a major impact on global oil supply as exports from Iraq are mostly from the southern part of Iraq.

 

 

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Pak E&Ps to benefit from Iraq crisis

We flag that higher crude oil prices can provide earnings upside for Pak E&Ps as their revenues are benchmarked to the Arab Light crude oil prices. We estimate that every US$5/bbl movement in oil prices holds an avg. 4% earnings risk to our JS E&P Universe FY15F earnings forecasts. Incorporating US$105/bbl oil prices (vs. our base case assumption of US$100/bbl), OGDC, PPL & POL earnings can rise by 3.4%, 3.2% & 4.9% respectively. Our favored plays in the Pak E&P space remain Pakistan Oilfields Ltd. (TP: Rs598) & Pakistan Petroleum Ltd. (TP: Rs270).

6,000 square kilometers in the Diyala and Wasit governorates. Our discussion with PPL’s management point to no immediate concern, as no on-ground activities in Iraq had commenced as yet. However ~Rs7.8bn (US$78mn) is in the form of work commitment has been capitalized as of March 2014. In a worst case scenario, a force majeure can possibly be enforced.

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