oil outlook fy15

7/26/2019 Oil Outlook FY15

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Research Team:

Abdul Azeem

Waqas Ahmed

Laraib Khan

[email protected]

+ 92 (21) 32467598

January 2015

Oil Outlook FY15

Oil between devil and deep blue sea

What upcoming for Oil Sector

Crude oil: Reasons for fall from power

Political rift between West and Russia

Growth in US production

Sluggish Demand from China & EU

Middle East crisis

Saudi Arabia and OPEC decision

Countries and their oil dependence

Why oil prices can gain strength?

Local E&P companies sensitivity analysis

www.spectrumonline.com


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Friday, January 09, 2015

Oil Outlook FY15

What upcoming for oil Sector

The topic of plunging global oil price is widely and most debated issueamong various circles. The crude oil prices nosedived from its historical

highs to lows from mid-September, which took investors and

governments by surprise, and also hit hard many economies whose

revenues slid. For many it is point of concern, while on the other hand

it has benefited net oil importing countries Balance of Payments and

their consumers. The oil prices are browbeaten by the various factors

and in this report we will discuss current oil prices scenario along its

impact on local exploration sector.

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Arab Light Oil Prices TrendUSD/bb

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Oil Outlook FY15

Page 2 of 10

Crude oil: Reasons for fall from power

The crude oil price saw decline from the start of this fiscal year but

decline sharply from mid of September, where benchmark WTI fell from

$106.06 per barrel (01Jul 2014) to $47.69/barrel, showing a significant

fall of 55% in 1HFY15, whereas on Year-on-Year basis prices fell by 46%.

On the other hand, Brent crude oil fell considerably by circa of 50% in

1HFY15 and by hefty 48%YoY, closing at $53.22/barrel. The foremost

delinquent to significant downfall in oil prices are linked to political rift

between the West and Russia, upsurge in US oil production, lower oil

demand from EU and China, and growing oil production from Libya and

Iraq. The situation is further exacerbated by Saudi's decision not toreduce its oil production.

Political rift between West and Russia

Russia, one of the largest oil producers, is under extreme economic

pressure as the oil prices move southward and the West imposed

economic sanctions on Russia due to Ukraine crisis. Since the country

generates major share of its budgetary revenue from oil exports, thehypothesis is with the fall in oil price and imposition of sanctions, the

West can politically influence Russia to change its foreign policies as its

revenues and reserves faces downfall. Now amidst of global oil glut

Russia could either reduce production as its cost of production stood at

$50/b or ready to incur losses.

WORLD CRUDE OIL PRODUCTION(MN/BBL)

Countries APRIL'14 MAY'14 JUNE'14 JUL'14 AUG'14 SEP'14

U S 8. 38 8.36 8.53 8.54 8.65 8.86

Ch in a 4.13 4.18 4.26 4.08 4.12 4.18

R us si a 10.08 10.09 10.10 10.00 10.06 10.08

Ir an 3. 23 3.23 3.23 3.32 3.23 3.23

Lib ya 0.21 0.23 0.24 0.44 0.53 0.79

Ir aq 3. 30 3.33 3.23 3.17 3.21 3.52

Saudia Arabia 9.69 9.69 9.69 9.84 9.74 9.64

Source: EIA, Spectrum Research


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Oil Outlook FY15

Page 3 of 10

Growth in US production

With the rise in US crude oil production, on account of shale oil, US

quarterly average daily oil production soared to 9.04mn barrels per day

in 2QFY15 against 8.63mn bpd, depicting a jump by 4.75%QoQ, while on

Yearly basis it gained significantly by 13.86%. According to EIA, in coming

quarter (3QFY15) average daily production will grow by 1%. However,

US imports during 2QFY15 declined by meager of 1.60% to 7.40mn bpd

as compared 1QFY15. The falling imports suggest US less dependency

on crude oil import due to rise in local production. Also, on account of

EIA figures, US imports for 3QFY15 will remain suppressed by 7.4% and

will decline to 6.9mn bpd. However, on January 2, 2015 Bloomberg

reported the increase in US stockpiles by 700,000 barrels to 386.2mn

barrels, indicating US taking benefit from lower oil prices while building

up its strategic reserves.

CRUDE OIL - COST OF PRODUCTION

Regions $/bbl

On-Shore Middle East 2 7

Off-Shore Shelf 4 1

Heavy O il 4 7

Onshore Russia 5 0

Onshore ROW 5 1

Deepw ater 5 2

U nderwater 5 6

North America Shale 6 5

O i ls an ds 7 0Ar c tic 7 5

Source: Morgan Stanely

CRUDE OIL - US PRODUCTION & IMPORTS

(mn bbl/day)3QFY14 4QFY14 1QFY15 2QFY15 2014 2015 (E)

Production 8.13 8.39 8.63 9.04 8. 55 9. 1 3

Im ports 7.38 7.33 7.52 7.40 7.41 6.86

GDP (%) (2.10) 4.60 5.00 N/A 2.30 3.10

Source: EIA & US BEA


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Oil Outlook FY15

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Sluggish Demand from China & EU

Due to sluggish global economic activity specifically in China and EU,

indicated lowering oil demand. According to National Bureau of

Statistics of China, Manufacturing PMI declined 0.2% in December 2014

similarly it declined by 1.6% from July to December, pointing towards

sluggishness or contraction in manufacturing activity. On the contrary,

Eurozone Manufcturing PMI, issued by Markit Economics, witnessed

decline by 0.5% QoQ (2QFY15 vs. 1QFY15) and stood at 50.6 on Dec,

2015. All in all, manufacturing activities figures from both major

economic zones, i.e. EU and China, revealed lackluster economic

activities, thus leading to reduced oil demand. Furthermore, accordingto OPEC the average demand of crude oil from china hovered above 10

mn b/d during 1HFY15 and EU showed similar pattern, where its oil

demand remained stable at 13mn b/d.

Middle East crisis

Despite news floating from the Middle East on the violence and

turbulent law and order situation, the input of crude oil from Libya and

Iraq soared to 4.3mn bpd, where Libya oil production stood at 0.79mn

bpd and Iraq oil production jumped to 3.52mn bpd, as reported by EIA.

The crude oil production from Iraq and Libya surged 24.4%YoY and

118.1%YoY respectively whereas on month-on-month basis Iraq's

production jumped by 10% approximately, and Libyas followed the

similar trend showing increase by 48%. Resultantly due to sharp rise in

oil supply from these OPEC members the oil prices felt pressure and

freefall to $47.69/barrel.

CHINA & EU MANUFACTURING PMI

Countries APRIL'14 MAY'14 JUNE'14 JUL'14 AUG'14 SEP'14

China PMI (%) 51 .7 5 1 . 1 5 1 . 1 5 0 . 8 50 .3 50 .1

EU PMI (%) 51 .8 5 0 . 7 5 0 . 3 5 0 . 6 50 .1 50 .6

Source: Markit Economics & NBS China


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Oil Outlook FY15

Page 5 of 10

Saudi Arabia and OPEC decision

Recently KSA, with reserves of lingering around $900bn, announced

that it can tolerate prices as low as $10-$20 per barrel. Despite the supply

glut it also declared no production cuts and maintained its production

around 10mn barrels per day. Historically, KSA and OPEC showed

flexibility to adjust production but recently it has not lived up to

expectations. Also, KSA has lowered the prices for crude export to Asia

to lowest in past five years, further escalating the pressure on oil prices

leading to wane in oil prices.

CRUDE OIL PRODUCTION

mn bbl/d 2009 2010 2011 2012 2013 Sep'14

I r an 3. 56 3.54 3.58 3.74 3.58 3.32

Ir aq 2. 34 2.36 2.65 2.94 2.98 3.52

Lib ya 1.47 1.49 0.49 1.45 0.99 0.79

Source: EIA & OPEC


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Oil Outlook FY15

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Countries and their oil dependence

As reported by OPEC, world crude oil exports during 2013 stood at ~64mn

b/d., where the major exporters of crude oil cover the ~26% of world

exports. Saudi Arabia, top the list, where its exports during 2013 stands

at 7.57mn b/d, that rose marginally by 0.2%YoY. Russia's exports decline

slight by ~1%YoY to 4.71mn b/d in 2013. Among the selected countries,

the major decline was witnessed in the exports of Iran which

significantly declined by ~42% to 1.22mn b/d in 2013.

During 2013 crude oil imports witnessed downfall by 3.21%YoY, accordingto OPEC. The Big five importers of crude oil contributed 53.82% of total

world's oil imports. As per the given data US remains major importer of

oil in last four years, though US crude oil imports dropped by ~20% to

7.71 in 2012 as compared to 2009, while on year-on-year basis, its

production declined by 9.71%. OPEC data, also suggest increment in

China's imports by 4.3%YoY to 5.66mn b/d in 2013.

EXPORTS OF CRUDE OIL BY MAJOR COUNTRIES

(mn bbl/d) 2009 2010 2011 2012 2013

Saudia Arabia 6.27 6.64 7.22 7.56 7.57

R us si a 4.97 4.98 4.79 4.76 4.71

Ir aq 1. 91 1.89 2.17 2.42 2.39

Ir an 2. 41 2.58 2.54 2.10 1.22

Lib ya 1.17 1.12 0.30 0.96 0.59

Wo r l d 6 2. 28 63 .0 2 63 .5 1 64 .2 6 63.98

Source: OPEC, Spectrum Research

IMPORTS OF CRUDE OIL BY MAJOR COUNTRIES

(mn bbl/d) 2009 2010 2011 2012 2013

U S 9. 63 9.73 8.91 8.49 7.71

Ch in a 4.11 4.81 5.07 5.42 5.66

Ind ia 3.22 3.16 3.36 3.56 3.78

J a p a n 3.42 3.44 3.56 3.46 3.41

South Korea 2.32 2.38 2.52 2.56 2.45

Wo r l d 43.37 44.08 43.66 44.18 42.76

Source: OPEC, Spectrum Research


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Oil Outlook FY15

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The sharp decline in the prices of oil has left its bad impact on theeconomies that are heavily reliant on oil export's revenues and their

revenues will remain suppressed. If the oil further follows the same

trend exporters will incur heavy losses, on the contrary major

beneficiaries of crude oil will be net oil importers.

Why oil prices can gain strength

Though the price of crude oil is under tremendous pressure and was

heavily battered during first-half of the current year but it is highly

anticipated that the price will rebound. The price of the commodity will

recover on account of historical pattern observed between oil importsof the European region and oil prices. It is observed that when oil prices

move southwards EU increase its inventories of crude oil. Also, miles

driven are inversely correlated with the crude oil prices i.e. when oil

prices drop average miles driven increases.

Furthermore, historically the falling prices push china to start building

up its crude oil reserves to improve its oil reserves.

It can be noticed from OPEC projections that the world crude oil average

demand is expected to rise slightly in 3Q15 to 93.0mn barrels/day,

pointing a meager improvement in demand by 1.3%YoY.

According to Morgan Stanley estimates, cost of production for major oil

producer on average stood at $53.40 per barrel. Middle East has

comparative advantage over its competitors as its cost of production is

lowest and stood at $27 per barrel, whereas it major counterparts like

Russia incur cost around $50 per barrel, and North America Shale oil

production cost is $65/barrel. Thus, it is evident that increasing demand

coupled with companies reaching their breakeven prices will push oil

to recover.

GDP GROWTH RATE %

Country 2013 2014 2015E 2016F

U S 2 . 2 2. 2 3. 1 3. 0

R us s i a 1 . 3 0. 2 0. 5 1. 5

Ch in a 7 . 7 7. 4 7. 1 6. 8

European Area -0 .4 0. 8 1. 3 1. 7

I r an -1 .9 1. 5 2. 2 2. 2

I nd ia 5 . 0 5. 6 6. 4 6. 5

Source: IMF & OPEC


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Oil Outlook FY15

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Sensitivity Analysis

Although exploration sector's prospects are bright as far as exploration

activities and production are concerned but the recent decline in

international oil prices are forcing the local E&P sector's profitability to

move in opposite direction which is reflected during the 1HFY15 where

exploration companies' share prices in the local bourses posted the

phenomenal decline. The major companies including POL, OGDC and

PPL prices registered a decline of 35%, 22% and 21% respectively during

1HFY15 while Arab lights prices declined by 51% during the same period.

The study revel that prices of local E & P companies' scrip reduced

drastically in comparison with oil prices. Declining oil prices dampenthe profitability of the E&P companies which has bigger share in oil

revenue.


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Oil Outlook FY15

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OGDC SENSITITY ANALYSIS

Oil Prices (USD/bbl) 4 5 5 5 6 5 7 5 9 0

EPS FY15 (Rs) 21 .8 7 23.16 24.45 25.75 27.69

Target Price (Rs) 1 85 .8 9 196.88 207.87 218.85 235.34

Source: Company Reports, Spectrum Research

PPL SENSITITY ANALYSIS


EPS FY15 (Rs) 21 .4 3 22.08 22.73 23.39 24.37

Target Price (Rs) 1 8 8 193 199 205 213


POL SENSITITY ANALYSIS


EPS FY15 (Rs) 37 . 61 40.81 44.01 47.21 52.00

Target Price (Rs) 3 5 7 388 418 448 494


Pakistan Oil Fields (POL)earns its ~60% revenue from oil hence it ismore sensitive with oil movement. In the worst scenario the company's

EPS for FY15 is estimated to touch Rs23.07 while with the recovery in oil

prices towards USD75/bbl EPS comes at Rs25.28 as compared to EPS of

Rs54.48 for FY14.

Oil and Gas Company Limited (OGDC)Oil revenue contribute ~47% in

total revenue of OGDC therefore due to less dependency on oil revenue

and continue growth in production of oil and gas make it attractive at

current levels as the company lost 22% since the start of plunging oil

prices.

Pakistan Petroleum Limited (PPL) less reliances on oil revenue and

aggressive exploration activities provides healthy support to bottomline

of the company as ~26% of revenue comes from oil sales. Although

reversal in oil prices would not provide strong backing to profitability

but a modest recovery is likely to witness in the share prices of the

scrip.


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Oil Outlook FY15

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Notes:


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oil outlook fy15

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