Since all of you liked our recent thread on banks, we thought to try something similar for the oil and gas exploration sector. After all, this is another sector foreign investors have decided to sell religiously.

Foreigners have sold USD445mn worth of oil and gas exploration stocks since 2017. Why?

Let’s first see what’s happening in the sector?

Oil and gas productions from the big three #OGDC, #POL, and #PPL’s have been consistently falling. They are down by 15% for oil and 16% for gas.

One question, isn’t this due to lack of exploration activities led by circular debt?

Of course, it is!

But as an investor, should I be giving them brownie points for financing the government’s inability? And that’s me saying, a local investor who has no option but to have 11% of these companies in my portfolio simply when I buy the KSE100 index.

Foreign fund managers don’t have to live with it! They have hundreds of oil explorers across the world to choose from and they can be invested anywhere.

Even our pitch to foreign fund managers has become rusty. Read research reports and you will see analysts trying hard to make a strong case and falling short. Honestly, we push FFMs to buy Oil&Gas when:

• Production growth is literally none with little to no prospects
• Oil reserves are falling and at best their exploration activity will just maintain falling flows
• Even, if they get lucky and find good oil reserves, most of their future cash flows will be eaten up by circular debt. So, on paper they will have awesome earnings but nothing to payout
• These are government owned entities hence no matter how crucial it is for them to invest in exploration activities, they will keep on financing the government by parking circular debt on their books
• The world is moving to renewables and reliance on oil is slowing down
• So, the only growth coming in will be through increasing global oil prices. (But can’t foreign fund managers capitalize it with 98% leverage by just buying oil as a commodity?)

There is no surprise that these companies trade 3-4 times of their earnings. Do you know these are lower than even Gazprom’s PE multiple despite Russia’s geopolitics and financial sanctions?

But are these companies really cheap? Depends on what metric you want to look at. PE multiples? Price to book multiples?

Academically yes as value stocks! But not as growth stocks.

See how value stocks have done in the past globally vs growth stories!

We write content like this to share a unique perspective vs run of mill research reports.

If you like this, we are sure you will like the content we have shared in the past.