Crude oil prices have continued their slide,
falling to a three-month low after touching highs of US$58/barrel.
Strong US inventory data, assurance of continued supplies by OPEC
and decline in oil demand have all forced a decline in oil prices.
Oil prices are likely to hover within the US$40-50/barrel range in
the near to medium term. As highlighted earlier, the greatest threat
to oil demand remains a slowdown in the Chinese economy, which has
begun to materialize. Coupled with this, US stockpiles are at their
year highs, which also subsides fears on the supply side.
According to a KASB report, Pakistan Oilfields
remains top pick of investors in the upstream oil and gas sector.
Production growth coming through increased production from Pariwali
Well No. 5 is likely to more than compensate for a decline in oil
prices. POL's oil production is expected to touch 6,500 barrels/day
in FY06 as compared to this year's average of 5,400 barrels/day.
Pariwali Well No. 5 will also contribute 5.3mmcfd gas to POL.
According to the company, Pariwali Well No. 5 has
the potential to produce up to 2,500bbls/day and 20-mmcfd of gas.
The well is still undergoing testing and final sustainable
production figures could well be higher than the estimates.
Regular readers of InvestCap reports should be
able to recall its detailed report on KAPCO at the time of its IPO
in which it had stated a fair value of Rs51/share for the stock.
However, a lot has changed since then, most importantly secondary
market PIB yields. The 10-year PIB yield in the secondary market is
up 250-260bps ever since the release of this report on KAPCO dated
February 15, 2005. KAPCO's stock has also been a laggard during this
spell of rising interest rates, with a decline of 17.8% ever since
the 150bps increase in discount rates, against a KSE-100 Index
decline of 3.7%. Yet again, using a risk free rate of 10.75% and an
equity risk premium of 5%, one can arrive at a fair value of
Rs41/share for KAPCO.
The decline in fair value seems drastic because
the stock has gone ex-dividend on May 6, 2005 for its interim
dividend of Rs3.5/share. Rising interest rates, theoretically, are
always considered a bad omen for asset prices. This is a simple
financial theory, which cannot be denied. Whenever interest rates
move about, asset (including stock) valuations will be affected, and
the quicker the interest rates move, the quicker the asset prices
would react in an efficient market. The Pakistani stock market, in
the last one year, has remained relatively unaffected by rising
interest rates due to other factors such as higher corporate
profits, economic growth, and privatization expectations. However,
the most interest rate sensitive items listed on the local bourses
(other than banks of course) are the listed IPPs. These listed IPPs
have been in a lull ever since the increase in discount rate became
affective from April 11, 2005.
Third quarter results of Shell Pakistan depict a
growth of 180% YoY, taking 9MFY05 profits to Rs1,600 million.
According to Elixir Securities, the key reasons for growth in
profitability during 3QFY05 were 1) higher domestic oil prices, 2)
better product mix and 3) strong aviation business. During this
period, the company aggressively expanded its product portfolio and
retail network. The brokerage house has revised its full-year
earnings forecast for the company to Rs2,016 million (EPS: Rs57.5),
following higher than anticipated inventory gains during the
quarter. It also revised full year dividend forecast to Rs43/share.
The Government of Pakistan altogether made 4 upward revisions to
domestic oil prices during the period, resulting in sizeable
inventory gains for the company. Gross margins for Shell improved by
290bps YoY during the quarter, resulted in 70% YoY increase in gross
profits. Higher prices also aided 19% revenue growth YoY.
Aviation business for the company continued to
grow with demand increasing by 20% YoY for the quarter fuelled by
strong exports. Overall, motor fuels volumes during the quarter
declined following extended period of rains in the country. However,
9MFY05 demand has been strong for both white oil and black oil
products, resulting in top line growth of 27% for the 9-months.
Apart from sizeable inventory gains, a quality product mix allowed
the company to improve its margins. Shell's product mix comprises of
deregulated products such as Jet fuel and Lubricants, which
significantly contributes to revenues and earn higher margins. The
New Shell Petrol was launched during the quarter with a better
mileage formula. Start of CY05 also saw the launch of the
"Sunrise Project" for Shell Lubricants, which is expected
to deliver significant savings through various cost cutting and
efficiency measures. Twelve new sites were added to the Shell retail
network leading to a total of 823 sites throughout the country while
6 stations were added to CNG network.