Pakistan Oilfields likely to witness robust growth

Pakistan Oilfields (POL), a leading exploration and production company from Pakistan is all set to slingshot into FY14 with an earnings growth of 43% YoY to PKR72.2/share. The robust growth in earnings will be marked by notable volumetric additions, stable oil prices and continued support from steady dividend income. The stock offers an upside potential of more than 17%, an attractive dividend yield of 12% at current market price. Going forward, sizeable additions primarily from Manzalai (9 and 10), Mamikhel-2, Maramzai-2 and Makori East (ME) GPF will provide strong impetus to FY14 onwards earnings. The Company is likely to witness a remarkable 3 year CAGR of 14% and 5% for oil and gas production respectively.

According to a detailed report by BMA Capital, POL witnessed a disappointing FY13 so far as both oil and gas production of the company dwindled by 5% and 16% YoY respectively in 9MFY13. Lackluster trend in oil production is attributable to notable decline from own operated areas while slowdown in gas production from TAL block further compounded the problem. Going forward, sizeable additions primarily from company’s mainstream TAL block from recent appraisal and development drillings at Manzalai (9 and 10), Mamikhel‐2 and Maramzai‐2 will provide strong impetus to FY14 onwards earnings. These wells contribute 15% and 20% to current oil and gas production respectively. Not to forget, full year impact of Makori East (ME) EPF (commenced in December’12) with 23% share in current oil production will further support the production profile of the company. These aforementioned wells plus outcome of further drilling at Maramzai, Mamikhel and start up of Makori East GPF will remain the key volumetric triggers in near‐medium term.

In long term, the fate of company’s production profile will continue to heavily rest on TAL block and possibly Margalla block. At Tal block, the company has already started exploration drilling at Mardankhel‐1, Malgin‐1 and Kot‐1. Unfortunately own operated area (particularly Ikhlas block) has failed to deliver any positive news in recent past as Sadrial‐1 well has entered fault zone while work over job is being carried out at Domial to ramp up the production.

Aggressive 2D and 3D activity has already been conducted by company in partner operated areas which signals towards a gradual shift in company’s strategy towards being an aggressive explorer (contrary to past) like its local peers. In recent bidding of new exploration licenses (post approval of Petroleum Policy 2012), the company has acquired three blocks.

With relative immunity to circular debt and rising profits, the company will post strong recovery in cash flows during FY14 after witnessing a dismal FY13 period. In 9MFY13, cash flows of the company dwindled by 32% YoY to PKR38/share on account of lower profits and sizeable capex. This will hamper company’s ability to payout in FY13 at PKR45‐50/share. Going forward, robust recovery in earnings (assuming capex at current peaking level) will enable the company to comfortably payout PKR60‐70/share in FY14‐FY15 translating into an attractive yield of 12%‐14%.

Oil prices remained volatile in FY13 on account of dampening global demand, ample supplies and slowdown in both US and China which resulted in 4% YoY contraction in average oil prices during FY13TD. With demand supply equilibrium in place post OPEC’s recent decision to maintain the production target, analysts believe oil prices to remain stable. Recent data has also shown improvement in jobs and retails sales in the US. The market is keenly awaiting the outcome of US central bank policymakers’ meeting later in the week. Furthermore, escalation in Iranian and Syrian turmoil will continue to play a key role in determining oil price direction. However, any production hike in OPEC members (beyond agreed quotas) and further economic contraction in 2HFY14 will remain the key downside risk.

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