Can Oil Price Changes Predict the Profitability of OGDC, PPL, MARI, and POL?
Explore how changes in oil prices can impact the profitability of OGDC, PPL, MARI, and POL, and what key factor you should consider for each company to assess the potential profit increase.
Quiz Questions on Impact of Oil Prices on OGDC, PPL, MARI, and POL Profitability
1. Which oil price should you look at to forecast OGDC's, PPL's, MARI's, and POL's profitability?
2. Let us say that oil prices go up by 10% - do you think the profits of all the above-mentioned companies will go up by exactly 10% - less than 10% or more than 10%?
3. To know how much profit might go up due to an increase in oil prices, what is the one thing that you should know about each of these companies?
Answers
Arab light oil price is the benchmark we follow in Pakistan. Mostly all the oil price benchmarks go up and come down together, but at certain times, the change may be different.
A 10% oil price increase doesn't necessarily mean a 10% increase in the earnings (other things constant). This is because they also explore and sell natural gas and natural gas pricing is very much different than crude oil.
They have so many different fields (old fields get less for the gas they sell while new fields get more), each field may have different pricing and cost structures, there are different pricing policies, and there are mechanisms where companies are given higher prices for natural gas if they produce more than a threshold from a field.
After all that, gas prices change after 6 months (called the well-head gas pricing mechanism) unlike oil where the change happens in real time. This means that if oil prices are higher this month, exploration companies will see the impact in the next month but the same is not the case with natural gas.
This is why the one thing you should about exploration companies is how much oil they sell vs. natural gas i.e. share of gas vs. share of oil.
For instance, PPL's gas share is 64% while oil's share is 28%. This means that the impact of oil price change will be delayed and less.
On the other hand, POL's oil share is 55% (the highest among all) and hence the impact will be higher.
Worksheet
As promised, you will find the Excel sheet's link below but to operate it you need to know the following:
1. Change the oil price from the top (yellow highlight) and you will see the impact on each of the companies in columns A and B. However, this impact is for the oil price change only (as explained about the gas price above).
So to solve this,
2. You will find a table on the right-hand side for sensitivity. This is not editable. This will tell you an analyst's expectation of earning on different oil prices.
After reading the email and looking at the Excel sheet, a few of my savvy subscribers will have a question. I have the answer prepared! Let's see how many can find that!
Founder at InvestKaar.com. 15 years of investing and wealth management experience. Worked at most renowned brokerage houses in Pakistan. Won the best sales trader award for 2021 by CFA Society of Pakistan.
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