There are two wide-spread perceptions prevailing in the market: 1) exploration and production companies (E&P) declare high dividend to facilitate the government in meeting the budget deficit, rather than investing in exploration and production activities and 2) the successive governments have failed in offering incentives for downstream oil companies. The get a clear picture an attempt has been made to review the performance of two companies one from E&P and other from downstream.
With an asset base comprising of 12 leases and possessing 9 exploration licenses, Pakistan Oilfields (POL) has lagged behind its peers in terms of exploration activities, spudding only 9 wells during the past 10 years. However, the company is broadening its asset base as it recently added Jhandial to its production portfolio while drilling another exploratory well at Khaur. Moreover, the Company is conducting seismic surveys at Balkassar lease while processing previous data of another field as well. In this regard, addition of another producing well can further reduce its reliance on the JV fields (84% currently) while augmenting its top-line at the same time. With regards to its 1HFY18 financial performance, the Company is expected to post net profits of Rs7.68 billion (EPS: Rs32.45), up by 65% YoY as it is likely to benefit from 1) nearly 21%YoY increase in international oil price, 2) Jhandial being added to the production facility and 3) the re-pricing of TAL block fields. However, with lack of information regarding the reserve size at Jhandial and lower than expected flows analysts are not sure about the income and expenses.
POL is scheduled to announce its 1HFY18 results on 23rd January 2018. According to AKD Securities the Company is forecast to post profit after tax of Rs7.68 billion (EPS: Rs32.45), higher by 65%YoY. The spike in profitability is expected from: 1) about 21% increase in international oil prices, 2) tie-in of Jhandial with current flows of 1,300bpd of oil and 9.2mmcfd of gas and 3) a one-time impact of Rs5.99/share emanating from the re-pricing of Tal block fields. Overall hydrocarbon production during 1HFY18 is expected to be recorded at 4.0MMBOE with an 8% increase in LPG production, especially from Jhandial taking the top-line to Rs18.5 billion from Rs12.8 billion for 1HFY17. Exploration expenses are expected to rise to Rs532 million as the Company pursues geological and seismic surveys in its operated lease (Balkassar) and a non-operated block (Gurgalot with 20% share) while amortization costs can decline by 22%YoY as no significant development wells were added during the period. On sequential basis, earnings are expected to spike by 104% on the back of jump in international oil prices, connection of Jhandial and the one-off impact from price revision.
POL has historically remained less aggressive in its exploration efforts. It has spudded only 9 exploratory wells in the past 10 years with a success ratio of 22.2% only, far below than Pakistan’s average of 35.3%. In this regard, its latest discovery of Jhandial proved to be of much importance. The Company still relies heavily on its JV fields, with the number slightly going down to 84% after the tie-in of Jhandial. However, the company seems to be diversifying its asset base where another exploratory well is going on in its lease: Khaur North, along with Siesmic surveys in Balkassar. Successful discoveries in the region can provide additional impetus to its top-line. On the flip-side, realized oil prices can further slip as the crude will have to be transported all the way to southern ports for export as refineries face a tough time in the wake of furnace oil glut in the country. However, the brokerage house just could not resist from saying that prolonged curtailment of production from certain northern fields can negatively impact POL as a significant portion of its flows emanate from Tal block fields in the north.
Taking into account tumbling furnace oil (FO) consumption (industry volumes down 21%QoQ) and Rupee depreciation (weakening more than 5.1% during 2QFY18), oil marketing companies (OMCs) seems to be heading towards a difficult time. The reversal in refined POL benchmarks witnessed during 1QFY18, following two years of tumbling oil prices (49.7% decline on average) are exerting input cost pressures. One of Pakistan’s leading brokerages house has examined sector profitability of PSO and APL over the last 8 years, highlighting depressed margins and earnings as a major symptom of unexpected devaluation. APL emerges stronger due to its superior asset quality, unlevered balance sheet, creating a case for slower below the line margin attrition. Exemplifying these credentials through solid earnings, APL is expected to post profit after tax of Rs1.32 billion (EPS: Rs15.9) for the quarter, taking 1HFY18 forecast earning to Rs2.65 billion. Declining trend in the exchange rate has previously eroded profitability of OMCs. Import based-POL mix, coupled with inflation prone macroeconomic scenario has previously harmed the industry.
APL stands distinguished on its high asset quality, unlevered balance sheet, creating a case for slower below-the-line margin attrition following rupee weakness, despite sector-led weakness on the gross level (considering margins and prices of major product segments are fixed, limiting room to maneuver. These factors hold weight over market expectations as well, exhibited in stock price movements in period of major devaluation, where the OMC remained largely tethered to its price band. Healthy pay-out ratios (5-year historic POR of 86%) have kept volatility to a minimum, both in the business cycle and stock performance.
The brokerage house expects APL to poste Rs2.65 billion profit after tax for 1HFY18, as compared to the corresponding period last years due to higher below the line expenses, significant hike in input costs and absence of HSD margins increment for the quarter. Following on, a QoQ tapering in volumes and higher inventory costs have eroded sequential profit growth for 2QFY18, where net profit is expected to decline to Rs1.32 billion (EPS: Rs15. Going forward, growth from retail outlet expansion (adding 33 pumps in CY17 taking total to 613 pumps) and storage facilities are expected to supplement earnings in the medium term. Encouragingly, the Company has held onto market share in an otherwise tepid FO demand environment, losing only 2% of volumes QoQ, where analysts see the trend continuing.