Oil and Gas: After peaking to USD62/bbl (Brent) and USD54/bbl (Nymex) in Feb’15, oil prices have retreated by 4%-5% as weak fundamentals continue to depress oil market sentiments. Last two weeks remained volatile as oil prices witnessed swings of +/-5% on re-emergence of political uncertainty in the Middle East given i) armed conflict in Yemen and ii) Iran Nuclear deal negotiations. During the last one month, average oil prices stood lower by 7%MoM where the bearish sentiment in oil prices was driven by i) hefty build-up in US inventory, ii) 2.0xYoY increase in Libyan output, iii) sizeable uptick in Saudi output to ~10mnbpd and iv) concerns on additional exports from Iran following the Iran Nuclear deal. However, i) continued downtick is US rig count and ii) 4% weakening in USD index contained the downward slide in oil prices. Declining trend in oil prices coupled with bearish sentiment in benchmark index kept BMA E&P Universe under pressure as it underperformed KSE-100 by 7% during the last one month.

Near term upside in the E&P sector will remain restricted due to depressed earnings outlook in FY15F (down 30%YoY). However, long term prospects remain convincing on account of i) aggressive development and exploration activity, ii) strong cash balance and iii) gradual recovery in prices as shale production eases off in late 2015. We believe the sector has priced in the negatives as it is currently trading at FY15F P/E of 8.5x (inline with KSE100 P/E) compared to 10.5x (8% premium over KSE100) on Feb3’16 when market multiple peaked at 9.7x.

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