A glimpse into the E&P sector

During the times of the acute energy crisis, profits from listed E&P sector companies during the first half of FY12 brought smiles to the oil and gas producers, riding sanguine expectations for the remaining of the year. The period witnessed relatively higher international oil prices, domestic well-head gas price, and rupee depreciation. During 1HFY12, oil prices shot up by more than one-third versus 1HFY11, while volumetric increases in production were negligible. The revenues of the sector shot up to Rs152 billion during 1HFY12, an increase of almost 15 percent over same period last year. Consequently, earnings of the overall sector grew by more than 28 percent to almost Rs70 billion during 1HFY12. However, unconventional factors like higher other income and falling exploration and prospecting expenditures were key drivers of earnings growth during the period. Amongst the four listed E&P companies, OGDC led the show with the greatest increase in its earnings of around 32 percent during 1HFY12. Although the results were below market expectations, other players in the sector, namely PPL and POL, were also able to post pleasing results. Mari gas was also in line with the industrys earnings trend, with all three companies lying in the 17-21 percent earnings bracket. Delving further reveals a varying pattern between the three large E&P players. Where OGDC led in terms of bottom line for the period, growth in the top line of the company was smaller relative to sales, highlighting the four-fold increase in earnings from cash and bank balances. Even though a reduction in expenditure is seen as an achievement, one reason for a fall in exploration expenditure has been the muted exploration and drilling activities during the current year. This is definitely not a good sign as in an ideal scenario E&P companies would want to be seriously engaged in production and development activities round the clock. Satisfactory performance of the sector has been able to instill some optimism among local and international players. However, with circular debt hovering as the greatest threat to the energy sector, a great deal of uncertainty tags along any suppositions for the future.