Oil Outlook FY15

January 2015

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
Research Team:
Abdul Azeem
Waqas Ahmed
Laraib Khan
research@spectrumonline.com.pk
+ 92 (21) 32467598

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

January 09. The crude oil prices nosedived from its historical highs to lows from mid-September.00 20. which took investors and governments by surprise. 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.00 60.00 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 - Page 1 of 10 .00 100. 2015 What upcoming for oil Sector The topic of plunging global oil price is widely and most debated issue among various circles. and also hit hard many economies whose revenues slid.00 120. For many it is point of concern.00 40. USD/bb Arab Light Oil Prices Trend 140. while on the other hand it has benefited net oil importing countries Balance of Payments and their consumers.00 80.Oil Outlook FY15 Friday.

53 8. upsurge in US oil production. Brent crude oil fell considerably by circa of 50% in 1HFY15 and by hefty 48%YoY.23 3. where benchmark WTI fell from $106.36 8.23 3.08 4. whereas on Year-on-Year basis prices fell by 46%. the West can politically influence Russia to change its foreign policies as its revenues and reserves faces downfall.22/barrel.00 10. 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.69 9. On the other hand. Page 2 of 10 .69/barrel.84 9. 2015 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.23 3.08 10.10 10.06 per barrel (01’Jul 2014) to $47.52 Saudia Arabia 9. The situation is further exacerbated by Saudi's decision not to reduce its oil production. Spectrum Research Political rift between West and Russia Russia. closing at $53.33 3.53 0.23 Lib ya 0.26 4.74 9. one of the largest oil producers.18 4.18 R us si a 10. the hypothesis is with the fall in oil price and imposition of sanctions. W ORLD C RUDE O IL P RODUCTION (MN / BBL ) Countries APRIL'14 US 8. is under extreme economic pressure as the oil prices move southward and the West imposed economic sanctions on Russia due to Ukraine crisis. and growing oil production from Libya and Iraq. January 09.54 8.32 3.69 9.44 0.64 Source: EIA.08 Iran 3.23 0.09 10.86 Ch in a 4.21 0.Oil Outlook FY15 Friday.38 MAY'14 JUNE'14 JUL'14 AUG'14 SEP'14 8.30 3.17 3.23 3. showing a significant fall of 55% in 1HFY15. The foremost delinquent to significant downfall in oil prices are linked to political rift between the West and Russia. Since the country generates major share of its budgetary revenue from oil exports. lower oil demand from EU and China.12 4.23 3.06 10.79 Iraq 3.13 4.69 9.24 0.65 8.21 3.

86 GDP (%) (2. indicating US taking benefit from lower oil prices while building up its strategic reserves.38 7. According to EIA.75%QoQ. US imports during 2QFY15 declined by meager of 1.9mn bpd. depicting a jump by 4.41 6.40mn bpd as compared 1QFY15. However. However.33 7. Also.63 9.13 8.30 3. while on Yearly basis it gained significantly by 13. on account of EIA figures.63mn bpd. January 09.13 Im ports 7.4% and will decline to 6.000 barrels to 386.40 7.52 7.60 5.COST OF Regions PRODUCTION $/bbl On-Shore Middle East 27 Off-Shore Shelf 41 Heavy O il 47 Onshore Russia 50 Onshore ROW 51 Deepw ater 52 Underwater 56 North America Shale 65 O i ls an ds 70 Arc tic 75 Source: Morgan Stanely Growth in US production With the rise in US crude oil production. CRUDE OIL .10) 4. in coming quarter (3QFY15) average daily production will grow by 1%.39 8. on January 2. on account of shale oil.86%. 2015 Bloomberg reported the increase in US stockpiles by 700.00 N/A 2.2mn barrels.04mn barrels per day in 2QFY15 against 8.04 8. US imports for 3QFY15 will remain suppressed by 7. The falling imports suggest US less dependency on crude oil import due to rise in local production.Oil Outlook FY15 Friday.10 Source: EIA & US BEA Page 3 of 10 . 2015 CRUDE OIL .60% to 7.55 9.US PRODUCTION & IMPORTS (mn bbl/day)3QFY14 4QFY14 1QFY15 2QFY15 2014 2015 (E) Production 8. US quarterly average daily oil production soared to 9.

2015 Sluggish Demand from China & EU Due to sluggish global economic activity specifically in China and EU.6 5 0 .5% QoQ (2QFY15 vs. The crude oil production from Iraq and Libya surged 24.1%YoY respectively whereas on month-on-month basis Iraq's production jumped by 10% approximately. 1QFY15) and stood at 50. according to OPEC the average demand of crude oil from china hovered above 10 mn b/d during 1HFY15 and EU showed similar pattern.6% from July to December. i.Oil Outlook FY15 Friday.6 on Dec. manufacturing activities figures from both major economic zones. According to National Bureau of Statistics of China. revealed lackluster economic activities. indicated lowering oil demand. CHINA & EU MANUFACTURING PMI Countries APRIL'14 MAY'14 JUNE'14 JUL'14 AUG'14 SEP'14 China PMI (%) 5 1 . All in all. Furthermore.52mn bpd.6 Source: Markit Economics & NBS China Middle East crisis Despite news floating from the Middle East on the violence and turbulent law and order situation. January 09.3mn bpd.1 5 0 .7 5 1 . thus leading to reduced oil demand. Eurozone Manufcturing PMI.1 EU PMI (%) 5 1 . where Libya oil production stood at 0. Page 4 of 10 . as reported by EIA.3 5 0 .8 5 0 . Resultantly due to sharp rise in oil supply from these OPEC members the oil prices felt pressure and freefall to $47. 2015. where its oil demand remained stable at 13mn b/d.7 5 0 .79mn bpd and Iraq oil production jumped to 3. witnessed decline by 0.2% in December 2014 similarly it declined by 1. EU and China.69/barrel. On the contrary.e. the input of crude oil from Libya and Iraq soared to 4. pointing towards sluggishness or contraction in manufacturing activity.3 5 0 . Manufacturing PMI declined 0. issued by Markit Economics.1 5 0 .1 5 1 . and Libyas followed the similar trend showing increase by 48%.8 5 0 .4%YoY and 118.

74 3.79 Source: EIA & OPEC Saudi Arabia and OPEC decision Recently KSA. January 09. announced that it can tolerate prices as low as $10-$20 per barrel. Page 5 of 10 .49 0. Despite the supply glut it also declared no production cuts and maintained its production around 10mn barrels per day. 2015 C RUDE O IL P RODUCTION mn bbl/d 2009 2010 2011 2012 2013 Sep'14 Iran 3.98 3. further escalating the pressure on oil prices leading to wane in oil prices.54 3. KSA and OPEC showed flexibility to adjust production but recently it has not lived up to expectations.65 2.52 Lib ya 1. Historically.58 3. KSA has lowered the prices for crude export to Asia to lowest in past five years.99 0.36 2. Also.45 0.Oil Outlook FY15 Friday.34 2.47 1.94 2.49 1.56 3.32 Iraq 2.58 3. with reserves of lingering around $900bn.

41 2. Spectrum Research Page 6 of 10 .37 44.22 Lib ya 1. the major decline was witnessed in the exports of Iran which significantly declined by ~42% to 1.52 2.79 4.3%YoY to 5.42 3..46 3.66 Ind ia 3. I MPORTS (mn bbl/d) OF CRUDE OIL BY MAJOR COUNTRIES 2009 2010 2011 2012 2013 US 9.71%.22mn b/d in 2013.42 5.78 Japan 3.2%YoY.41 South Korea Wo rl d 2.54 2. where the major exporters of crude oil cover the ~26% of world exports.56 7.5 1 6 4 . though US crude oil imports dropped by ~20% to 7.58 2.18 42.0 2 6 3 .64 7.12 0.32 2. according to OPEC.71 in 2012 as compared to 2009.17 1.56 3.45 43.36 3.08 43.59 6 2 .91 8.49 7. The Big five importers of crude oil contributed 53.22 7. As per the given data US remains major importer of oil in last four years. where its exports during 2013 stands at 7.56 2. also suggest increment in China's imports by 4.91 1.82% of total world's oil imports. Saudi Arabia.21%YoY.66mn b/d in 2013.73 8.57mn b/d.39 Iran 2.27 6.71mn b/d in 2013.22 3. Russia's exports decline slight by ~1%YoY to 4. January 09. world crude oil exports during 2013 stood at ~64mn b/d.76 4.63 9.57 R us si a 4. top the list.38 2. Among the selected countries.66 44.11 4.Oil Outlook FY15 Friday.98 4.17 2.2 8 6 3 .2 6 63.89 2.97 4.76 Source: OPEC. OPEC data.71 Ch in a 4.96 0.98 Wo rl d Source: OPEC.44 3.42 2.10 1. its production declined by 9. Spectrum Research During 2013 crude oil imports witnessed downfall by 3. that rose marginally by 0.07 5. while on year-on-year basis.71 Iraq 1.16 3. 2015 Countries and their oil dependence As reported by OPEC. E XPORTS (mn bbl/d) OF CRUDE OIL BY MAJOR COUNTRIES 2009 2010 2011 2012 2013 Saudia Arabia 6.30 0.56 3.81 5.

0mn barrels/day.7 7. According to Morgan Stanley estimates.5 Source: IMF & OPEC Page 7 of 10 .3%YoY.8 European Area -0 .8 1.2 2.1 6.2 0. pointing a meager improvement in demand by 1. and North America Shale oil production cost is $65/barrel.2 2.5 Ch in a 7.40 per barrel. It can be noticed from OPEC projections that the world crude oil average demand is expected to rise slightly in 3Q15 to 93. historically the falling prices push china to start building up its crude oil reserves to improve its oil reserves.4 6. it is evident that increasing demand coupled with companies reaching their breakeven prices will push oil to recover.7 Iran -1 .1 3.5 1. 2015 The sharp decline in the prices of oil has left its bad impact on the economies that are heavily reliant on oil export's revenues and their revenues will remain suppressed. January 09.4 0.9 1. It is observed that when oil prices move southwards EU increase its inventories of crude oil. The price of the commodity will recover on account of historical pattern observed between oil imports of the European region and oil prices.0 R us si a 1. miles driven are inversely correlated with the crude oil prices i.5 2. when oil prices drop average miles driven increases. on the contrary major beneficiaries of crude oil will be net oil importers.2 Ind ia 5.3 1. 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. Furthermore. Middle East has comparative advantage over its competitors as its cost of production is lowest and stood at $27 per barrel. If the oil further follows the same trend exporters will incur heavy losses. GDP GROWTH RATE % Country 2013 2014 2015E 2016F US 2.e. Also.4 7.6 6. whereas it major counterparts like Russia incur cost around $50 per barrel.2 3.3 0. Thus. cost of production for major oil producer on average stood at $53.Oil Outlook FY15 Friday.0 5.

Declining oil prices dampen the profitability of the E&P companies which has bigger share in oil revenue. January 09. Page 8 of 10 . 2015 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. 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.Oil Outlook FY15 Friday. The major companies including POL. OGDC and PPL prices registered a decline of 35%.

88 207. Spectrum Research 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. Spectrum Research Page 9 of 10 . 2015 Pakistan Oil Fields (POL) earns its ~60% revenue from oil hence it is more sensitive with oil movement.39 24.69 1 8 5 .28 as compared to EPS of Rs54.8 9 196.45 25.73 23.81 44. 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. OGDC S ENSITITY A NALYSIS Oil Prices (USD/bbl) EPS FY15 (Rs) Target Price (Rs) 45 55 65 75 90 2 1 .07 while with the recovery in oil prices towards USD75/bbl EPS comes at Rs25.00 357 388 418 448 494 Source: Company Reports.37 188 193 199 205 213 Source: Company Reports. POL SENSITITY A NALYSIS Oil Prices (USD/bbl) EPS FY15 (Rs) Target Price (Rs) 45 55 65 75 90 3 7 .48 for FY14. Spectrum Research 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.4 3 22.01 47.34 Source: Company Reports.08 22.16 24.87 218.21 52.Oil Outlook FY15 Friday.85 235.8 7 23. PPL S ENSITITY ANALYSIS Oil Prices (USD/bbl) EPS FY15 (Rs) Target Price (Rs) 45 55 65 75 90 2 1 .75 27. January 09. In the worst scenario the company's EPS for FY15 is estimated to touch Rs23.6 1 40.

Oil Outlook FY15 Friday. 2015 Notes: Page 10 of 10 . January 09.

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