Protest in National Assembly, Senate

ISLAMABAD: The National Assembly and Senate on Wednesday echoed with harsh voices against the raise in prices of petroleum products as the government allies also joined the opposition in protest, staging walkout from the two houses of parliament, leaving the petroleum minister to defend the decision with no solid reasons.

The government and its petroleum minister came under fire from the parliamentarians for acting against the recommendations of the Oil and Gas Regulatory Authority (Ogra) while announcing the increases in the prices of petroleum products.

PML-N member Ahsan Iqbal sought permission from the Deputy Speaker Faisal Karim Kundi to move a joint resolution to demand of the government to withdraw the exorbitant increase in the prices but the proceedings of the National Assembly were adjourned till Thursday evening.

Members from PML-N, JUI-F,group have signed the joint resolution. The PML-Q members, however, did not join the token walkout. The resolution would now be moved in the house on Thursday if the prices of petroleum products are not withdrawn.

The opposition parties and MQM separately walked out of the house while ANP member Dr Bushra Gohar also spoke against government’s decision.

Chairman of the National Assembly standing committee on Petroleum and Natural Resources Sardar Talib Nakai also registered his resentment as head of the committee and on behalf of PML. He also protested against statement of the petroleum minister in which he disclosed raise in prices, five days earlier.

Wasim Akhtar of MQM was the first to raise the issue in the National Assembly saying that it was decided to establish a committee comprising members from all the parliamentary parties on this issue. “The committee was not taken into confidence while increasing prices,” he said demanding immediate withdrawal in raise.

He also protested against re-start of target killings saying that the authorities knew as to who were the miscreants, but they were not taken to task. “We walk out of the house against raise in prices of petroleum products and target killings in Karachi,” he said.

Speaking on separate points of order, Ahsan Iqbal and Chaudhry Birjees Tahir of PML-N said the government had buried poor people alive by giving yet another raise in petroleum products.

Ahsan Iqbal said the government’s decision has come as a shock as for the first time, per litre price of diesel had crossed Rs100 mark while petrol also does not seem to lag behind and may well cross the Rs100 mark soon.

He said that Ogra in its recommendations had warned the federal government that increase in prices of petroleum products would skyrocket prices of daily use but the government paid no heed to the advice.

Chaudhry Birjees said that increase in prices of petroleum products and CNG and LPG would bring a new flood of price hike, making life of the poor more miserable.

Professor Khurshid Ahmad of Jamaat-e-Islami (JI) and PML-N senator Ishaq Dar raised issue of raise in petroleum prices on identical adjournment motions after which members from JI, PML-N, MQM and JUI-F staged walk out from the house.

Responding to adjournment motion, Minister for Petroleum and Natural Resources Dr Asim Hussain has offered that it is for the parliament to withdraw GST or Petroleum Development Levy (PDL) on POL products and gas to bring their prices down.

The Chairman held the motions in order and the House would hold a debate on the matter. He said the members could also suggest alternative financial resources if they want subsidy on these products.

The minister said the decision to raise prices of petroleum products and gas was unfortunate but the situation is not in the hands of the government. He said Pakistan is producing only 70,000 barrels of oil per day as against requirements of 380, 000 barrels saying the country is heavily dependent on import of crude oil and domestic prices have to reflect any change in the international market.

He said the Ogra calculates prices on the basis of change in the world fuel oil prices and rupee-dollar parity. Senator Ishaq Dar, however, said that the government could take administrative decision to decrease GST and PDL on petroleum products to facilitate masses.

National Oilwell Varco Could Break $100, Baker Hughes Gains

For investors betting on a quicker than expected recovery, Baker Hughes (BHI) and National Oilwell Varco (NOV) are particularly attractive value plays. Having a beta of 1.7, both are highly correlated with the macro-economy due to the direct industrial application. I find that both companies have significant upside and little downside given the earnings potential and the likelihood of multiples expansion.

From a multiples perspective, Baker Hughes is the cheaper of the two. It trades at a respective 12.8x and 9.3x past and forward earnings while NOV trades at a respective 16.2x and 12.1x past and forward earnings. On the other hand, the latter has a significantly cleaner balance sheet, which more than makes up for its lower dividend yield. NOV has a net cash position of $3.4B, which represents 11.2% of market value. Baker Hughes has net debt of $3.1B, which represents 14.8% of market value. Due to the onshore expansion for NOV, analysts rate the company higher at a "strong buy."

On the third quarter earnings call, NOV's Chairman and CEO Merrill Miller noted impressive performance:

"Earlier today, we announced the earnings of $532 million or $1.25 per fully diluted share on revenues of $3.74 billion. This compares to earnings of $481 million or $1.13 per fully diluted share in the second quarter of 2011, and third quarter 2010 earnings of $406 million or $0.97 per fully diluted share. We are very pleased with these results, and they reflect the confidence our customers have in our products and services.

Additionally, we also announced today new capital equipment orders in the quarter of $3.94 billion, a new record for the company. These new orders increased the total capital equipment backlog to $10.27 billion, a 33% increase from the second quarter of 2011."

At the same time, the company is progressing in streamlining the business through decreasing its cost base, restructuring its offshore fleet, and adding rig production. The Macondo report recommended more reliable drilling activity in from BOP systems and the Shear Max Cow Force Casing Shear Rams addresses some of the regulatory issues. Overall, management is de-risking the business through increasing onshore rights and improving shipyard time. The subsequent greater certainty with earnings will inspire investor entry. NOV is further doing well with exercising options and Petrobras trade.

Consensus estimates for NOV's EPS are that it will grow by 14.7% to $4.69 and then by 25.6% and 14.9% more in the following two years. Assuming a multiple of 17x and a conservative 2012 EPS of $5.80, the rough intrinsic value of the stock is $98.60, implying 39% upside.

Baker Hughes similarly had a strong third quarter performance with record sales figures. The company is increasing staff by 20% in the Marcellus and ramping up production in the Utica, which illustrates confidence in end market demand. While difficulties in integrating BJ Services and sand taking shortages will mitigate margins in the fourth quarter, the company's expansions will spread out fixed costs. The company recently reached a $640M contract with the Iraqi government for three years worth of building 60 wells in Zubair. This comes off of an earlier 23-well deal with Lukoil.

Consensus estimates for Baker Hughes' EPS are that it will grow by 94.6% to $4.32 and then by 28.2% and 18.8% more in the following two years. Of the 14 revisions to estimates, 13 have gone down for a net change of -0.7%. Assuming a multiple of 16x and a conservative 2012 EPS estimate of $5.47, the rough intrinsic value of the stock is $87.52. If the multiple were to hold steady at 12.8x and 2012 EPS is flat to the consensus of the preceding year, the stock would still rise by 32.2%. Baker Hughes thus deserves its near "strong buy" rating on the Street.

It is important to note that analysts are bullish on the sector, in general. The much smaller Newpark Resources (NR), for example, trades at a respective 14x and 10.5x past and forward earnings and is rated a "strong buy" as well.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BHI, NOV, NR over the next 72 hours.

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