Oil and gas sector stocks in the spotlight

Prices surge as OGDC converts receivables into investments.

KARACHI:

Stocks in the oil and gas sector have been the focus of investors’ attention in the last week: they gained 3% on average in the Wednesday and Thursday sessions alone.

While the interest in the oil and gas sector can be attributed to a number of recent developments – like a rally in global crude oil prices and the promise of an early clearance of circular debt – analysts seem to agree that the surge in prices of the sector’s leading stocks is likely to continue in the future.

Settlement of receivables

According to a notice sent to the Karachi Stock Exchange (KSE) on Friday, the Oil and Gas Development Company (OGDC) has subscribed to Pakistan Investment Bonds (PIB) worth Rs50.7 billion, which the government has issued to partially settle the overdue receivables of oil and gas companies. OGDC will earn an annual coupon rate of 11.5% on the investment.



According to Global Securities, a brokerage house based in Karachi, OGDC’s investment in PIB will lead to a positive earnings impact of Rs1.2 per share in fiscal year 2014, as the company’s receivables will be converted into earning assets.

“The conversion of overdue receivables into investments is positive for the bottom line of the company, but it has reduced cash earnings of the state-owned company which, we believe, could hamper its exploration activities in the future,” it said in an email to its clients.

The price target for June 2014 for OGDC, according to Global Securities, is Rs255 per share. The rate at which OGDC closed trading on Friday was Rs230 per share.

Outperformance to continue

According to analyst Sibtain Mustafa of Elixir Securities, while the recent surge on the Karachi Stock Exchange may lead to a correction, any dips should be welcomed as an opportunity to buy. He named OGDC, Pakistan Petroleum (PPL), Pakistan Oilfields (POL) and Hubco as his top picks.

Hub Power Company (Hubco), for example, has posted a return of 48% since December against the KSE-100 Index return of 32% over the same period, according to a separate research note issued by Elixir Securities. The brokerage firm now estimates that the share price of Hubco will reach Rs74 by June 2014.

“At current levels, the stock offers an upside of 14% to our price target, along with a dividend yield of 12%. Due to an attractive return profile, we believe Hubco would continue its strong performance in fiscal year 2014,” it said.

Moreover, recent payments released by the government to Hubco are expected to free up the company’s cash flows by Rs1.8 billion.

Rupee depreciation of about 5-6% against the dollar, following the successful conclusion of the government’s negotiation with the International Monetary Fund, also presents an upside to the estimates, Elixir Securities’ research note added.

In an email on Friday, KASB Securities also recommended to its clients that they accumulate oil and gas stocks given the expected returns. It called on its clients to buy stocks of OGDC, PSO, POL and PPL “on weakness”.

Published in The Express Tribune, July 7^th, 2013.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.