Energy: Oil price sensitivity to earnings

Rising uncertainty of global economic health has forced the international crude oil benchmark prices to currently stand around US$85 per barrel, down from recent high of US$113 per barrel (May 02, 2011). On the other hand, Arab Light prices (relevant to Pakistan ) has also eased to recent high of US$126 per barrel (April 29, 2011), but are still hovering above US$100 per barrel which is still above our base case oil assumption of US$96 per barrel in FY12.

Therefore, we have kept our oil price assumption intact but have conduct earning/Target price sensitivity assuming various price levels with worst case scenario at US$80 per barrel (Arab Light). Even in a worst case scenario, we continue to maintain a positive outlook on our preferred plays in the oil chain i.e. Pakistan Oilfields Limited (POL) and Pakistan Petroleum Limited (PPL), which are trading at implied oil prices of US$69 and US$54 per barrel.

Within our Topline Universe, we estimate PPL to be the least affected on account of higher proportion of gas in its revenue mix as gas prices are set bi-annually. Thus, any change in oil prices will be immaterial for 1HFY12 and that is why PPL earnings would likely to grow by 26% even if oil prices fell to US$80 per barrel.

On the other hand, Pakistan Oilfields (POL) will be the most effected on account of revenue mix skewed towards oil. Thus in worst case scenario, POL will be able to maintain its FY11 earnings of Rs45 per share on account of higher production from Tal and Ikhlas block. As far as OGDC is concerned, it worst case earnings would be around Rs15.6 (earnings growth of 5%).

The decline in the international oil prices would render into reduce deemed duty on HSD in absolute terms, which in turn would have an adverse earning impact on the refinery sector profitability going forward. Within Topline refinery universe, we estimate Attock Refinery Limited (ATRL) to have major impact on account of higher proportion of HSD in its product mix while National Refinery Limited (NRL) would be least effected.

Assuming constant middle distillate crack spreads, US$10 per barrel change in international crude oil prices, would reduce ATRL’s and NRL’s annualize earning by Rs2 (6%) and Rs3 per share (3%). However, on account of strong cash flow position and auxiliary source of income, we maintain positive stance on the both NRL and ATRL at current levels.

We expect decline in the international crude oil prices would have minimal impact on OMCs’ topline with higher share of regulated products in their overall sales mix (like Shell and APL) while would adversely impact margins of PSO that have higher exposure to un-regulated, Furnace oil, market (78% market share). Besides this, OMCs may also incur inventory losses especially on HSD and furnace oil depending upon their storage levels.

On the other hand, the decline in oil prices, would improve cash generation capability (particularly for PSO) as this would reduce accumulation of circular debt.