Updated Sep 03, 2005

The introduction of Continuous Funding System (CFS) provided a breather to market and the KSE-100 index recorded significant gains in the initial days. The cap was fixed at Rs 25 billion as against Rs 12 billion and the number of eligible securities was raised from seven to fourteen compared to the limits available under repealed Badla system. The level of investment under CFS almost touched the maximum in less than a fortnight. Now it is being said that the market needs twice the limit fixed under the CFS.

International prices of crude oil are touching the inflation-adjusted level of US$ 80 per barrel compared to seventies. While the companies belonging to oil and gas sector continue to enjoy the bonanza, the persistent rise in oil prices is perturbing the economies globally and Pakistan cannot be an exception. However, Muzzammil Aslam of KASB Securities believes that a couple of factors have provided some cushion to Pakistan, at least for this year. These are high inflows pertaining to privatisation and workers' remittances. The current account deficit is expected to touch a maximum of US$ 3 billion, which should be manageable. This will put pressure on the exchange rate, which may depreciate by 3 percent. The cost pushed inflation will erode the purchasing power of people. The other growing concern is that there has been constant decline in foreign exchange reserves of the country and increase in exports is highly inadequate for financing growing imports. The efforts for diversification of export goods mix and exploration of new markets have to be intensified.

Import of fertilizer, sugar and cement in large quantities will put extra pressure on the depleting foreign exchange reserves. The government has already decided to import 300,000 tons refined sugar to overcome the looming shortage. The Economic Coordination Committee has also decided to allow import of cement also to overcome its shortage. However, many analysts are of the opinion that import of cement will certainly put the pressure on forex reserves but may not help in bringing down its prices in the domestic market. Cement producing countries in the region are also witnessing gradual decline in exportable quantities as well as hike in cost of production. Surpluses are available in certain countries but import from these countries can only be done at a very high freight cost, which could not help in brining down cement price. Therefore, it is the right time to undertake massive expansion in cement production capacity on war footings to overcome the domestic shortage as well as maintain pace of cement export. Curb on cement export is not the solution to improve its availability in the domestic market.

Quarterly financial results have started pouring in. The two sectors being watched very closely are oil and gas and banking. Increase in indigenous production of oil and gas has increased the top line of exploration and production companies. Persistent higher oil prices have boosted earnings as well as margins of the companies belonging to this sector. Similarly hike in lending rates, without corresponding increase in return on deposits, has improved spread of commercial banks. Robust demand for credit and enhanced international trade is proving fresh impetus to core income as well as fee-based income. In oil and gas exploration sector the three companies attracting the attention of investors are Oil and Gas Development Company (OGDC), Pakistan Oilfields (POL) and Pakistan Petroleum (PPL).

OGDC is the largest exploration company of Pakistan and it is benefiting from hike in international prices of crude oil. The company has been following aggressive exploration plan, which has been helping in achieving double-digit growth in production. Higher oil prices make s significant impact on top as well as bottom line of the company. Oil sales contributing around 30 percent to the top line are adding to the profit, both due to higher price as well as enhanced production. However, given the fact that gas prices are caped at US$ 36 barrel benchmark of Arab light oil, the benefits are limited. The domestic gas wellhead prices are expected to remain at the current level. Saying that it must be kept in mind that aggressive exploration activity, enhanced production and higher oil prices in the near future will have appositive impact on the bottom line.

POL is often termed as the biggest beneficiary of rising oil prices. It has also made new discoveries, adding to production of oil and gas. Both the factors are having appositive impact on the bottom line. Oil is POL's primary product and any upward move in international oil prices has a direct impact on the bottom line. Many analysts are of the view that further hike in global oil prices will inflate the already burgeoning bottom line of the company. In the past POL was suffering from declining production trend. However, lately the management claimed that production has increased by 40 percent. Whatever may be increase, the reversal in the declining production will have a significant impact on the earnings.

PPL is unlikely to benefit from hike in oil prices because 97 percent of its revenue comes from sale of gas, which price is capped. However, the company has an in-built growth component till 2007, which will allow it to post strong bottom line growth for the next couple of years. The growth is based on an agreement with the government, which allows a systematic increase in wellhead price of its two fields (Sui and Kandhkot). PPL extracts 96 percent of its gas from these two fields and as per agreement wellhead prices for these fields are to be raised to 50 percent of the market price by 2007. Presently, wellhead prices for both the fields are at 36.6 percent of the market price. Therefore, the company is expected to achieve a CAGR growth of 16 percent in sales and 17 percent in profit after tax over the nest three years.