Pakistan: Energy Sector Improving Outlook


During first nine months of current financial year (FY13) exploration and production (E&P) companies operating in Pakistan have posted decent growth in earnings as the sector profitability surged by 6 per cent due to better production, steady prices and robust other income. Analysts forecast E&P companies to conclude FY13 on higher earnings during fourth quarter due to improvement in oil production plus expected 2.5 per cent depreciation in value of Pak rupee against US dollar.
According to a report by BMA Capital, during nine-month period companies in its universe posted a decent growth in earnings as the sector profitability surged by 6% YoY to PKR118 billion. The marked increase in earnings has been attributed to better production, steady oil/gas prices and robust other income. OGDC led the pack with earnings growth of 9% YoY owing to robust oil and gas production (up by 7% and 4% respectively) and considerable surge in other income (up by 58%). PPL followed with 4% surge in earnings on account of stellar oil production (up by 14% YoY). However, POL remained the laggard with 8% dip in earnings due to lackluster trend in both oil and gas production (down by 5% and 16% respectively). 

During third quarter (Jan-March 2013) performance was marked by lackluster activity with both PPL and POL depicting notable decline of 8% YoY and 6% YoY respectively in earnings on account of sluggish gas production (declined by 13% and 18% for PPL and POL respectively) and lower oil prices (down 7% YoY). OGDC also depicted a decline of 4% in earnings primarily due to a phenomenal surge in exploration charges (owing to increased number of dry wells written off). 

It is pertinent to note that higher 2D/3D seismic activity and increased number of dry wells propelled exploration charges of the sector to PKR14.8 billion during 9MFY13. Barring OGDC’s dry wells; the exploration charges were still higher by 107% YoY. That said, exploration costs remained a major dent on the profitability during this period. On the other hand, notable uptick in other income by 29% YoY (solely due to OGDC’s interest income of energy sector TFC) partially neutralized the impact of higher exploration expense. 

BMA believes the E&P companies to conclude FY13 on a higher note with 4%‐16% QoQ appreciation in earnings in 4QFY13. The recovery in earnings is likely to come from improvement in oil production plus expected 2.5% depreciation of Pak rupee value against US dollar. Whereas, lower exploration costs (reduced/absence of dry well write‐offs) and improved other income will further support bottomline. However, higher than estimated decline in gas production (for PPL and POL), further dry well write‐offs (particularly OGDC) and more than anticipated decline in crude oil prices will remain key downside risks. 

BMA has trimmed down its FY13 EPS estimates by 6%‐11% to PKR24.7, PKR27.5 and PKR50.5 for OGDC, PPL and POL respectively. Downward revision in earnings estimates is based on 1) higher than estimated explorations costs, 2) lower than expected gas production and 3) slightly lower than anticipated other income in 9MFY13. 

Crude oil prices depicted a volatile trend since the start of CY13 as Nymex peaked to US$98/bbl in Jan13 while it bottomed to US$87/bbl in mid Apr13. The outgoing month of April13 was marked by a sharp retreat in oil prices as both Nymex and Arab light lost ground by 4% and 6% MoM respectively. The bearish trend in oil prices can be attributed to weakening global demand coupled with a hefty jump in US crude supplies. Refinery maintenance period and renewed fears over Euro‐zone economic turmoil kept the oil prices under serious pressure. 

However, oil prices (both Nymex and Brent) closed the last week on a higher note with largest daily gains of 3% on 2nd May in last 6 months owing to 1) below expected jobless claims in the US and 2) cut in interest rates by ECB. Based on these measures to stimulate economic growth, oil prices may rebound sharply in 1HFY14. Weak economic performance by the two largest oil consuming nations US and China will remain key downside risk to oil prices, going forward. 

OGDC with highest volumetric growth stood out in the sector with a healthy 10% YoY uptick in topline during 3QFY13 compared to a nominal 1% and 3% improvement in sales of PPL and POL respectively. Going forward, the completion of phase 2 of both KPDTAY‐II and Sinjhoro‐II coupled with start‐up of Makori East GPF (ME GPF) in 2HFY14 will further strengthen the production. Moreover, development activity at Uch‐II and positive announcement at Nashpa‐4 will further spark activity in the stock. However delay in materialization of cash flows (interest income) on TFC (energy sector) investment will remain a key concern on dividend payouts. 

PPL in the near term is likely to witness additional flows from Nashpa and TAL block will remain the key offsetting factors to persistent decline in gas production from mature fields. Also, any additions from Adhi and Latif will further strengthen the production profile. In the long term, materialization of tight gas flows and positive outcome of company’s ongoing exploration activity (9MFY13 exploration cost already up) will act as key triggers. 

POL after posting a dismal 1HFY13 (oil production down by 11% YoY), has sharply bounced back with production of 5,000bbls/day in 3QFY13 depicting a marked increase of 16% QoQ and 9% YoY. This coupled with additional flows from Manzalai‐9, Maramzai‐2 and Mamikhel‐2 (expected to tie‐up in May‐June 2013) and ME GPF kickoff (expected in Jan14) will further propel the hydrocarbon production of the company. 

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