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

Oil Outlook FY15

Friday, January 09, 2015

What upcoming for oil Sector

The topic of plunging global oil price is widely and most debated issue
among 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.

USD/bb

Arab Light Oil Prices Trend

140.00
120.00
100.00
80.00
60.00
40.00
20.00
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

Oil Outlook FY15

Friday, January 09, 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, 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 to
reduce its oil production.

W ORLD C RUDE O IL P RODUCTION (MN / BBL )

Countries APRIL'14
US

8.38

MAY'14

JUNE'14

JUL'14

AUG'14

SEP'14

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

Iran

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

Iraq

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

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, the
hypothesis 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.

Page 2 of 10

Oil Outlook FY15

Friday, January 09, 2015

CRUDE OIL - 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, 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 - US PRODUCTION & IMPORTS

(mn bbl/day)3QFY14

4QFY14

1QFY15

2QFY15

2014 2015 (E)

Production

8.13

8.39

8.63

9.04

8.55

9.13

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

Page 3 of 10

Oil Outlook FY15

Friday, January 09, 2015

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, according
to 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.

CHINA & EU MANUFACTURING PMI

Countries APRIL'14

MAY'14

JUNE'14

JUL'14

AUG'14

SEP'14

China PMI (%)

5 1 .7

5 1 .1

5 1 .1

5 0 .8

5 0 .3

5 0 .1

EU PMI (%)

5 1 .8

5 0 .7

5 0 .3

5 0 .6

5 0 .1

5 0 .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, 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.

Page 4 of 10

Oil Outlook FY15

Friday, January 09, 2015

C RUDE O IL P RODUCTION
mn bbl/d

2009

2010

2011

2012

2013

Sep'14

Iran

3.56

3.54

3.58

3.74

3.58

3.32

Iraq

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

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.

Page 5 of 10

Oil Outlook FY15

Friday, January 09, 2015

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.

E XPORTS
(mn bbl/d)

OF CRUDE OIL BY MAJOR COUNTRIES

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

Iraq

1.91

1.89

2.17

2.42

2.39

Iran

2.41

2.58

2.54

2.10

1.22

Lib ya

1.17

1.12

0.30

0.96

0.59

6 2 .2 8

6 3 .0 2

6 3 .5 1

6 4 .2 6

63.98

Wo rl d

Source: OPEC, Spectrum Research

During 2013 crude oil imports witnessed downfall by 3.21%YoY, according

to 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.

I MPORTS
(mn bbl/d)

OF CRUDE OIL BY MAJOR COUNTRIES

2009

2010

2011

2012

2013

US

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

Japan

3.42

3.44

3.56

3.46

3.41

South Korea
Wo rl d

2.32

2.38

2.52

2.56

2.45

43.37

44.08

43.66

44.18

42.76

Source: OPEC, Spectrum Research

Page 6 of 10

Oil Outlook FY15

Friday, January 09, 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. 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 imports
of 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

US

2.2

2.2

3.1

3.0

R us si 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

Iran

-1 .9

1.5

2.2

2.2

Ind ia

5.0

5.6

6.4

6.5

Source: IMF & OPEC

Page 7 of 10

Oil Outlook FY15

Friday, January 09, 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. 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 dampen
the profitability of the E&P companies which has bigger share in oil
revenue.

Page 8 of 10

Oil Outlook FY15

Friday, January 09, 2015

Pakistan Oil Fields (POL) earns its ~60% revenue from oil hence it is
more 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.

POL SENSITITY A NALYSIS

Oil Prices (USD/bbl)
EPS FY15 (Rs)
Target Price (Rs)

45

55

65

75

90

3 7 .6 1

40.81

44.01

47.21

52.00

357

388

418

448

494

Source: Company Reports, 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.

OGDC S ENSITITY A NALYSIS

Oil Prices (USD/bbl)
EPS FY15 (Rs)
Target Price (Rs)

45

55

65

75

90

2 1 .8 7

23.16

24.45

25.75

27.69

1 8 5 .8 9

196.88

207.87

218.85

235.34

Source: Company Reports, 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. 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.

PPL S ENSITITY ANALYSIS

Oil Prices (USD/bbl)
EPS FY15 (Rs)
Target Price (Rs)

45

55

65

75

90

2 1 .4 3

22.08

22.73

23.39

24.37

188

193

199

205

213

Source: Company Reports, Spectrum Research

Page 9 of 10

Oil Outlook FY15

Friday, January 09, 2015

Notes:

Page 10 of 10

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