External broker reports(aggregated public sources), Topline Securities

Topline Securities

External broker reports(aggregated public sources)

Topline Securities is one of the fastest growing brokerage houses in Pakistan. It has strong equity brokerage, economic / equity research, mutual fund distribution, commodity trading and corporate finance & advisory functions. Content available is external broker reports authored by a third party outside the Smartkarma network and has been aggregated by an online aggregator through publicly available sources and is displayed by Smartkarma in this format for user's convenience and general informational purposes only. Content does not constitute investment or financial advice and Smartkarma makes no representation or warranty regarding its accuracy or contents. Original third party author retains all copyright and other proprietary rights in the content. Access or use of third party links not controlled by Smartkarma are at the user's own risk.

Equity Bottom-Up

Investment Thesis: We initiate coverage on <a href="https://www.smartkarma.com/entities/4654" target="_blank" data-smartkarma-citation="entities:4654:1">Mari Petroleum Co Ltd (MARI PA)</a>, Pakistan’s fourth largest Exploration &amp; Production (E&amp;P) company and third largest gas producer, with a ‘Buy’ recommendation and DCF based target price of Rs2,134/share. Our thesis is based on MARI’s 1) dismantling of GPA (Gas Price Agreement) and its replacement with an international crude oil price-linked market oriented formula, based on Petroleum Policy (PP) 2001, 2) incremental production (over a set benchmark) to be priced under high yielding PP2012, 3) significant revision in 2P (Proved &amp; Probable) gas reserves and 4) new discoveries (Tipu-1, Shaheen-1 and Shahbaz-1 finds), falling under PP2012 and farm-in opportunities. These will serve to boost MARI’s revenues and earnings at 3-Year (FY17-20) CAGR of 30% and 44%. On EV/BOE basis, MARI trades at attractive US$42/BOE vs. Topline E&amp;P Universe avg. of US$71/BOE.From regulated returns to market based price regime: In 2014, the Govt. dismantled MARI’s pricing mechanism for wellhead gas prices (that limited the company's growth) which was replaced with a crude price linked formula, in-line with the industry practice. Under the new pricing mechanism (effective from FY15), Mari gas field prices (Mari field is ~95% of the company's total gas production and ~93% of total revenue) are now linked to Arab Light Crude price (providing higher price than previous cost plus formula that was effective till FY14) with gradual unwinding of wellhead gas price discount, on semiannual basis. This entitles company for higher prices every 6 months till Jan 2019.Incremental production to fetch higher pricing: The Govt. also approved higher price for Mari gas field for incremental production; exceeding by 10% from benchmark 525mmcfd. This higher price (unlike the crude oil price regime approved in place of cost plus formula for Mari gas field) is based on PP2012 without any discount (providing ~3.6x higher wellhead gas price vs. current price). In FY18, we expect MARI to achieve incremental production of 136mmcfd from Mari gas field, boosting revenues by a considerable 31% and adding 61% to MARI’s bottom-line.Reserves revised up 61%: Another catalyst for MARI is significant revision in its gas reserves, as reported by the company in its latest annual filing. According to the data, gas reserves of MARI fields were revised up by 61% to 5,308 Billion Cubic Feet (BCF) vs. reserves level in Jun 2016. As a result, MARI fields’ 2P reserves life were substantially increased from 14 years to 22 years, implying that the company can sustain its current gas production level for the next 22 years.Investment in power plant: As per our channel checks, the company is eying an investment in a gas fired power plant (with expected capacity of 400-500MW), which would result in fixed returns for the company. The project as of last information was under feasibility status and the company is most likely awaiting regulatory approvals. Any development on this project will be positive as it will help diversify the company’s bottom line going forward, we believe.Risk: We flag 1) inability to meet set benchmark of incremental production (levels exceeding by 10% from benchmark 525mmcfd gas) to avail higher pricing, 2) slowdown in demand from Fertilizer sector (~80% of fertilizer production depends on gas supplied by MARI) and 3) lower than anticipated international oil prices and 4) delay in settlement of the company’s dues by its customers, due to circular debt issue (power sector) thereby affecting the company’s liquidity as key risks for MARI.

Investment Thesis: We initiate coverage on Mari Petroleum Co Ltd (MARI PA), Pakistan’s fourth largest Exploration &amp; Production (E&amp;P) company and third largest gas producer, with a ‘Buy’ recommendation and DCF based target price of Rs2,134/share. Our thesis is based on MARI’s 1) dismantling of GPA (Gas Price Agreement) and its replacement with an international crude oil price-linked market oriented formula, based on Petroleum Policy (PP) 2001, 2) incremental production (over a set benchmark) to be priced under high yielding PP2012, 3) significant revision in 2P (Proved &amp; Probable) gas reserves and 4) new discoveries (Tipu-1, Shaheen-1 and Shahbaz-1 finds), falling under PP2012 and farm-in opportunities. These will serve to boost MARI’s revenues and earnings at 3-Year (FY17-20) CAGR of 30% and 44%. On EV/BOE basis, MARI trades at attractive US$42/BOE vs. Topline E&amp;P Universe avg. of US$71/BOE.From regulated returns to market based price regime: In 2014, the Govt. dismantled MARI’s pricing mechanism for wellhead gas prices (that limited the company's growth) which was replaced with a crude price linked formula, in-line with the industry practice. Under the new pricing mechanism (effective from FY15), Mari gas field prices (Mari field is ~95% of the company's total gas production and ~93% of total revenue) are now linked to Arab Light Crude price (providing higher price than previous cost plus formula that was effective till FY14) with gradual unwinding of wellhead gas price discount, on semiannual basis. This entitles company for higher prices every 6 months till Jan 2019.Incremental production to fetch higher pricing: The Govt. also approved higher price for Mari gas field for incremental production; exceeding by 10% from benchmark 525mmcfd. This higher price (unlike the crude oil price regime approved in place of cost plus formula for Mari gas field) is based on PP2012 without any discount (providing ~3.6x higher wellhead gas price vs. current price). In FY18, we expect MARI to achieve incremental production of 136mmcfd from Mari gas field, boosting revenues by a considerable 31% and adding 61% to MARI’s bottom-line.Reserves revised up 61%: Another catalyst for MARI is significant revision in its gas reserves, as reported by the company in its latest annual filing. According to the data, gas reserves of MARI fields were revised up by 61% to 5,308 Billion Cubic Feet (BCF) vs. reserves level in Jun 2016. As a result, MARI fields’ 2P reserves life were substantially increased from 14 years to 22 years, implying that the company can sustain its current gas production level for the next 22 years.Investment in power plant: As per our channel checks, the company is eying an investment in a gas fired power plant (with expected capacity of 400-500MW), which would result in fixed returns for the company. The project as of last information was under feasibility status and the company is most likely awaiting regulatory approvals. Any development on this project will be positive as it will help diversify the company’s bottom line going forward, we believe.Risk: We flag 1) inability to meet set benchmark of incremental production (levels exceeding by 10% from benchmark 525mmcfd gas) to avail higher pricing, 2) slowdown in demand from Fertilizer sector (~80% of fertilizer production depends on gas supplied by MARI) and 3) lower than anticipated international oil prices and 4) delay in settlement of the company’s dues by its customers, due to circular debt issue (power sector) thereby affecting the company’s liquidity as key risks for MARI.

Mari Petroleum (MARI): Dismantling of Gas Price Formula Unlocking Value

Thematic (Sector/Industry)

<ul><li>Investment Thesis: Oil marketing sector (OMCs) of Pakistan is set to benefit from strong sector dynamics and improving economic fundamentals. The sector outlook remains encouraging mainly led by: 1) strong demand driven by white oil products (Petrol &amp; Diesel) sales, 2) higher margins on white oil products compared to black oil (FO) &amp; margins linked with Consumer Price Index (CPI), 3) fixed margins in rupee terms for white oil products, 4) improvement in circular debt scenario and 5) expectations of stability and gradual rise in oil prices to contain inventory losses.  </li><li>Oil volumes to grow at a 3-year CAGR (FY17-19) of 9%: Oil sales of OMCs are anticipated to grow at a 3-year (FY17-19) CAGR of 9% as against last 3-year growth of 7% and last 5-year growth of 4%. Robust demand of white oil is anticipated to lead this strong growth.  Within white oil, petrol sales (MOGAS) is likely to grow at a 3-year (FY17-19) CAGR of 18% driven by rising car &amp; bike sales and affordable pump prices. Along with high petrol sales, high speed diesel sales (HSD) are also anticipated to grow at a 3-year (FY17-19) CAGR of 3% vs. last 10-year CAGR of 1%. Increased transportation activity led by China Pakistan Economic Corridor (CPEC) &amp; development of road infrastructure will drive diesel growth. Furnace oil (FO) sales are anticipated to grow at a 3-year (FY17-19) CAGR of 6% vs. last 3-year CAGR of 3%. The growth however is anticipated to slowdown gradually as the Govt. is focusing on installation of coal and LNG based power plants. We anticipate FO growth of 18% in FY17, 2% in FY18 and flat growth in FY19.</li><li>Relatively high &amp; fixed margins on white oil: Margins on white oil are regulated and fixed in absolute terms at Rs2.41/ltr (6% of ex-refinery prices). This compares favorably with deregulated margin of 3-3.5% on FO (black oil). Hence, margins on white oil is independent of oil prices and low oil prices do not mean lower margins. Thus, rising volume of white oil products will generate better profits for OMCs.</li><li>Margins on white oil also linked with CPI : has approved linkage of white oil margins with CPI from Jul 1, 2016. Thus, rising margins in absolute terms along with volumes will boost OMCs bottom-line. We expect inflation to average 5-6% during FY17-19. Previously, the Govt. used to revise margins on ad-hoc basis.</li><li>Circular debt issue to subside: Circular debt issue is anticipated to subside as FO growth is expected to relatively slowdown.  Circular debt is a commonly used term for OMCs which arises due to delay in payments to OMCs mainly by power sector on the sale of FO. With increasing white oil sales and slowdown in FO usage, circular debt or OMCs receivables would gradually come down as a percentage of total sales. Govt. has planned projects of more than 10,000MW which are expected to come online by 2018 and are mostly based on RLNG (Regassified Liquid Natural Gas) or Coal.</li><li>Expectations of higher oil prices to contain inventory losses: We anticipate average international oil prices to gradually rise from US$40/bbl in FY16 to US$44/bbl in FY17, US$51/bbl in FY18 and US$56/bbl in FY19. This is expected to contain inventory losses seen in last few years and may result in inventory gains.     </li><li>Outlook: We have a ‘Overweight’ stance on the sector as strong fundamentals and improving macros will drive OMCs bottom-line. Topline OMC sample is estimated to post  3-year (FY17-19) earnings CAGR of 25%. The sector is trading at a 2017 PE of 8.6x with ROE of 20%. Pakistan State Oil (PSO) and Hascol Petroleum (HASCOL) are our top picks in the sector.</li></ul>

Investment Thesis: Oil marketing sector (OMCs) of Pakistan is set to benefit from strong sector dynamics and improving economic fundamentals. The sector outlook remains encouraging mainly led by: 1) strong demand driven by white oil products (Petrol &amp; Diesel) sales, 2) higher margins on white oil products compared to black oil (FO) &amp; margins linked with Consumer Price Index (CPI), 3) fixed margins in rupee terms for white oil products, 4) improvement in circular debt scenario and 5) expectations of stability and gradual rise in oil prices to contain inventory losses.  Oil volumes to grow at a 3-year CAGR (FY17-19) of 9%: Oil sales of OMCs are anticipated to grow at a 3-year (FY17-19) CAGR of 9% as against last 3-year growth of 7% and last 5-year growth of 4%. Robust demand of white oil is anticipated to lead this strong growth.  Within white oil, petrol sales (MOGAS) is likely to grow at a 3-year (FY17-19) CAGR of 18% driven by rising car &amp; bike sales and affordable pump prices. Along with high petrol sales, high speed diesel sales (HSD) are also anticipated to grow at a 3-year (FY17-19) CAGR of 3% vs. last 10-year CAGR of 1%. Increased transportation activity led by China Pakistan Economic Corridor (CPEC) &amp; development of road infrastructure will drive diesel growth. Furnace oil (FO) sales are anticipated to grow at a 3-year (FY17-19) CAGR of 6% vs. last 3-year CAGR of 3%. The growth however is anticipated to slowdown gradually as the Govt. is focusing on installation of coal and LNG based power plants. We anticipate FO growth of 18% in FY17, 2% in FY18 and flat growth in FY19.Relatively high &amp; fixed margins on white oil: Margins on white oil are regulated and fixed in absolute terms at Rs2.41/ltr (6% of ex-refinery prices). This compares favorably with deregulated margin of 3-3.5% on FO (black oil). Hence, margins on white oil is independent of oil prices and low oil prices do not mean lower margins. Thus, rising volume of white oil products will generate better profits for OMCs.Margins on white oil also linked with CPI : has approved linkage of white oil margins with CPI from Jul 1, 2016. Thus, rising margins in absolute terms along with volumes will boost OMCs bottom-line. We expect inflation to average 5-6% during FY17-19. Previously, the Govt. used to revise margins on ad-hoc basis.Circular debt issue to subside: Circular debt issue is anticipated to subside as FO growth is expected to relatively slowdown.  Circular debt is a commonly used term for OMCs which arises due to delay in payments to OMCs mainly by power sector on the sale of FO. With increasing white oil sales and slowdown in FO usage, circular debt or OMCs receivables would gradually come down as a percentage of total sales. Govt. has planned projects of more than 10,000MW which are expected to come online by 2018 and are mostly based on RLNG (Regassified Liquid Natural Gas) or Coal.Expectations of higher oil prices to contain inventory losses: We anticipate average international oil prices to gradually rise from US$40/bbl in FY16 to US$44/bbl in FY17, US$51/bbl in FY18 and US$56/bbl in FY19. This is expected to contain inventory losses seen in last few years and may result in inventory gains.     Outlook: We have a ‘Overweight’ stance on the sector as strong fundamentals and improving macros will drive OMCs bottom-line. Topline OMC sample is estimated to post  3-year (FY17-19) earnings CAGR of 25%. The sector is trading at a 2017 PE of 8.6x with ROE of 20%. Pakistan State Oil (PSO) and Hascol Petroleum (HASCOL) are our top picks in the sector.

Oil Marketing Sector – Major Beneficiary of Improved Macros

Pakistan

Pakistan Petroleum Ltd. specializes in the exploration and production of crude oil and natural gas. The Company also sells liquefied petroleum gas and condensates.

Oil & Gas Development Co. Ltd. explores and develops oil and natural gas properties in Pakistan.

Pakistan Oil Fields Limited specializes in the exploration, drilling, production and transmission of petroleum.  The Company also markets Liquified Petroleum Gas (LPG).

Pakistan State Oil Company Limited specializes in the marketing and storage of petroleum and related products.  The Company also blends and markets lubricating oils.

Shell Pakistan Limited markets petroleum and petrochemical products. The Company also blends and markets different types of lubricating oils.

Par Pacific Holdings, Inc. operates as a holding company. The Company, through its subsidiaries, owns and operates oil and gas refineries. Par Pacific refines, markets, transports, and distributes crude oil in the United States and Canada.

SK Gas Ltd imports, stores, and distributes liquefied petroleum gas (LPG). The Company supplies its products mainly to domestic market for household, the transportation industry, and petrochemical products manufacturers.

United Energy Group, Ltd. is engaged in the exploration and production of oil and natural gas. The Company owns and operates a producing oilfield Liaohe Province of the P.R. of China and owns an interest in an exploration field in Madura PSC, Java, Indonesia.  UEG mainly engages in the upstream oil and natural gas business.

Delek US Holdings, Inc. operates as a holding company. The Company, through its subsidiaries, focuses on the petroleum refining, logistics, and convenience store retailing. Delek US Holdings gathers and transports crude oil, as well as markets, distributes, and stores refined production in the Southeast United States and West Texas.

Sinopec Kantons Holdings Limited trades crude oil, petroleum and petrochemical products.  The Company also operates a crude oil jetty and its ancillary facilities and petrol stations.

Shanghai Datun Energy Resources Co., Ltd. explores, washes, and produces a variety of coal products for sales to the manufacturers of steel, gas, and electric power. Shanghai Datun also produces alumina, owns, manages, and operates coal-fired power plants, and provides coal railway transportation services.

Geo-Jade Petroleum Corporation is a petroleum technology and investment company. The Company's business includes oil exploration, petrochemical technology development and investment, and oil refining.

Banpu Public Company Limited mines for coal and other minerals. The Company produces thermal coal and coking coal, and have expertise in open-pit and underground coal mining operations, as well as coal-fired power generation.  Banpu PCL has business bases in Thailand, Laos, Indonesia, China, Australia and Mongolia.

Green Plains Inc. owns and operates ethanol plants located in the Midwest U.S. The Company also markets and distributes fuel grade ethanol, livestock feed and industrial grade corn oil. Green Plains provides grain handling, storage and complementary agronomy services to local grain producers through grain elevators located in Iowa, Missouri, Nebraska and Tennessee.

Mari Petroleum Co Ltd specializes in the drilling, production and selling of natural gas.

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Mari Petroleum (MARI PA)

Mari Petroleum (MARI): Dismantling of Gas Price Formula Unlocking Value

Investment Thesis: We initiate coverage on Mari Petroleum Co Ltd (MARI PA), Pakistan’s fourth largest Exploration & Production (E&P)...

Topline Securities

Oil Marketing Sector – Major Beneficiary of Improved Macros

Investment Thesis: Oil marketing sector (OMCs) of Pakistan is set to benefit from strong sector dynamics and improving economic fundamentals. The...

Topline Securities

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)