PPL: Time to play defensive

PPL Capitalize’s on the gas hedge

Given the uncertainty over the direction oil prices, we highlight PPL’s gas skewed production mix as a key advantage should oil prices correct any further. Gas contributed ~95% to PPL’s total production of 15.79mnboe during FY11 and limits the company’s exposure to volatile oil prices. Gas pricing incorporates the average oil price over the last six months and as such smooths out the impact of volatile prices.

Our base case oil assumption incorporate Arab light at an average of USD 101/bbl for FY12 while the YTD average stands at USD 110/bbl. Assuming a 5% decline in oil prices leads to a 2% and 5% fall in gas and oil revenues respectively, translating into earnings sensitivity of 4% from our base case EPS of PKR 31.63 to PKR 30.47. In our worst case scenario, we have depicted a 15% fall in oil prices which will result in our estimated earnings to lower by 20% to PKR 25.27/share.

Tie ins a little too far ahead

PPL’s prospecting activity has picked up with 326 sq km of 3D seismic activity being conducted during 4Q FY11. However, exploratory activities are likely to be initiated by FY13 once prospective zones are identified during the ongoing year. Resultantly, PPL will likely incur higher field expenditure due to increased seismic activity (4Q FY11 case in point, field expenditure up by 25% QoQ) while production upticks will likely materialize post FY13.

Time to play defensive

PPL is trading at a forward PE multiple of 6.3x and offers 11% upside to our Dec11 Target Price of PKR 221/share. Moreover, the company offers a forward dividend yield of 7% based on our FY12E DPS of PKR 13.00 and we recommend BUY. We like PPL because of limited exposure to oil price volatility while highlighting that absence of triggers in the form of discoveries/tie ins that may dampen investor sentiment in PPL.

 Global Securities Pakistan

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