Rising oil will benefit oil and gas companies, general public bear the brunt

Interview with Mr Adil Mirza — Equity Research Analyst

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Mr. Adil Mirza is a senior research analyst and currently working with Standard Capital Securities (scstrade.com). He is a member of ACCA. He has keen interest in financial modeling, valuations and analysis. He takes care for foreign clients at scstrade.com.[/box]

PAGE: YOUR VIEWS ON RECENT TREND IN RISING OIL PRICES:

ADIL MIRZA: Following the production cut from OPEC and non-OPEC countries, the oil prices rose in line of the expectations. The measure was cheered by oil dependent economies as things could have turn out very ugly for them considering some of the small players were forced out of oil business previously.

PAGE: WHAT COULD BE THE IMPACT OF RISING OIL PRICES ON THE ECONOMY OF PAKISTAN?

ADIL MIRZA: Depressed oil prices were one of the contributors for Pakistan’s falling CPI. I am recently covering the cement sector and was fascinated to see their gross margins increasing as high as 45 percent chiefly due to weak energy costs. The rising oil prices will be a dent in the excessive earnings of the companies depending on oil as their fuel for energy. Due to the anticipated rise in FO costs, some of the companies have planned to shift to alternate sources, mainly coal. The Government of Pakistan is committed to curtail power shortage in the country. There are 22 power projects under CPEC (China-Pakistan Economic Corridor) project, most of them dependent on local coal. The Oil Companies Advisory Council (OCAC) predicts the FO demand to remain stable, but a jump of 46 percent in demand of MOGAS till 2019-20 mainly due to rise of car sales in the country.

The general public will bear an increase in the petroleum. The beneficiary of this rise will be oil exploration companies. The crude oil production of Pakistan is expected to reach 100,000 barrels per day. The rise in international oil prices have been seen positively by the investors in the oil and gas exploration companies with share prices rising manifold in anticipation of the higher possible future earnings. The Oil Marketing Companies will also benefit in terms of rising inventory gains and better margins.

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PAGE: HOW WOULD YOU COMMENT ON THE INDIGENOUS ENERGY RESOURCES IN PAKISTAN?

ADIL MIRZA: Pakistan is a rich country in natural resources and now one of the few nuclear states of the world. Due to poor political and management history, the company has never been able to benefit from the potential of the countless energy resources. The recent focus on adding more than 10,000MW through CPEC priority projects, there is an expectation that Pakistan will be able to exploit the coal.

Sindh has coal reserves of more than 185 billion tonnes, sufficient to meet Pakistan’s requirement for energy. Further discoveries will add much more to the resources.

PAGE: YOUR VIEWS ON STRATEGY OF OPEC AND OTHER OIL PRODUCING COUNTRIES PARTICULARLY RUSSIA:

ADIL MIRZA: The foremost matter to understand is that price of oil is not merely dependent on demand and supply. It is affected from the geo-political situation. The cut has been beneficial for the No.1 oil producer of the world, Saudi Arabia, with a rise in government revenue.

The cut by Russia, not a member of OPEC, shows signs of maturity in the world economics and will result in some better ties between USA and Russia. The long-term repercussions are yet to be witnessed by the world.