Amid crashing stocks, investors find ‘deep value’ in OGDCL shares

The Pakistan stock market crashed on Friday, but amidst all the doom and gloom smart money was chasing one stock: Oil and Gas Development Company Limited.

When the KSE-100 was bleeding, down 4.6% within five minutes of the market’s opening, the share of oil and gas giant OGDCL hit Rs96.20, its lowest level in more than five years. It appreciated slightly to Rs96.55 when trade halted for 45 minutes to stop the panic.

After the trade halt was lifted, OGDCL’s stock rose 3.6% to Rs103.75 per share with three million shares changing hands. The oil and gas giant, one of the top 10 companies with 4.1% weight in the KSE-100, led the recovery. The stock market recovered almost entirely by 3pm.

But why invest in a sector that has negative outlook: oil prices have crashed amidst low demand in the aftermath of the coronavirus outbreak, which has dented revenues of airlines, one of the largest buyers of oil. The ongoing price war between major oil producing countries (Saudi Arabia and Russia) will only send prices down further and will eventually drag down profitability of oil stocks.

“Investors are finding deep value in OGDCL,” says Adnan Sami Sheikh, a market analyst. “It’s a rare opportunity,” he said, referring to OGDCL’s share price, which hit its lowest level in more than five years.

The stock is trading Rs7.5 higher than the day’s low, but that’s still a lot cheaper than the Rs154.2 it was at on January 2 and cheaper still than the Rs204.95 it was worth on March 13, 2015. Should one buy at this price or wait a little to see if it falls further? This is not an easy question to answer. 

A particular stock can rise 7% before it hits the upper lock, which didn’t happen. If it ends the day at this price, it will simply mean investors aren’t willing to pay more. What is going through investors mind, we ask Sheikh who takes us back in 2016.

When oil prices crashed in 2016, the two-month average (Jan-Feb) was $30-35 per barrel. OGDCL’s stock also crashed but by that July, oil prices were back to $50 a barrel.

Are investors looking back at 2016 and hoping oil prices will rebound in a few months?

The 2016 crash was triggered by slowing demand in China, a major buyer of oil and rising production by US. This time, however, we have an ongoing price war and a fallout of coronavirus, which has slowed down growth, especially in China and can turn into a full blown financial crisis if not stopped. 

Does that mean stocks can fall below 100 again? Sheikh says investors are betting on oil prices increasing soon but as this report was being filed, the stock showed volatility at the current price level, swinging up and down between Rs103 and Rs104.75. He, however, says from a long-term point of view, most stocks give profit.

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