Gas: MARI GAS COMPANY LIMITED - Analysis of Financial Statements Financial Year 2004 - Financial Year 2010

MGCL is a Pakistani E&P sector company currently operating in the second largest gas fields in the country, located at Daharki, District Sukkur.
The company is the third largest in the industry, holding 12.3% of the total oil and gas reserves of the country, preceded by OGDC and PPL. MGCL has the highest reserves life (28.8 years) in the industry. As of June 30, 2010, the operated blocks, in which the company had working interest included Ziarat, Karak, Sukkur, Hanna, Harnai, Hala, Kohlu, Kalchas, Sujawal, Kohat and Bannu West, and its non-operated blocks included Dhadar, Oman 43B and Yemen block 29.

=============================================================

Ticker:                                                  MARI

Price (as closed on 30-06-2010):                    Rs 129.38

Turnover (on 30-06-2010):                      176,711 shares

Profit after taxation as on 30-06-2010:      Rs 1,185,954,000

Earnings per share (undistributed):                  Rs 16.14

=============================================================

MGCL being one of the major gas producers of the country has also made three new gas discoveries viz. (i) Mari - Sui Main Limestone, (ii) Mari - Pirkoh Limestone Formation and (iii) Ziarat Gas Field
During the FY05, MGCL discovered gas in the Ziarat Block of Balochistan. The company plans to establish the early production facilities on a fast track basis after acquisition of 2D seismic data, completion of Well No 1 and drilling of two appraisal wells. The Ziarat Block is a joint venture between MGCL with 60% working interest as operator and MND Exploration and Production Company Limited of the Czech Republic (40% working interest).
Besides this, the company also has exploration licenses at Hanna, Harnai and Sujawal as operator with 100% working interest. MND Exploration has a 40% working interest in the Hanna and Harnai projects. In addition to this, the government, on the 19th of July 2007, granted two Petroleum Exploration Licenses to the company along with OGDCL. MGCL completed drilling of its well Sujawal X-1 at total depth of 3,000 meters BKB in Sujawal Exploration Block. Acquisition of 128 line km 2D seismic data was completed on May 22, 2010. Interpretation and mapping will be carried out to exercise drill or drop option by April, 2011.
MGCL entered into the Zarghun South Gas Sales and Purchase Agreement with SSGC during August 2006. MGCL, with 35% interest, is the operator in the Bolan block in which the Zarghun Gas Field is located. According to the Agreement, the Bolan Venture will supply 20-22 MMSCFD of pipeline quality gas to SSGC. The gas reserves, estimated at 93 billion cubic feet, are expected to last 15 years and the field development project is in progress. Besides drilling a development well, the field development work includes; construction of gas processing facilities, gas gathering system and laying of a 64km 12" gas export pipeline to Quetta transmission system. The project has an estimated capital outlay of around US$47 million. However, the field development activity for Zarghun Gas is largely dependent on the improvement of law and order situation in the area and thus has resulted in delay.
Mari Gas Company Limited has made a significant new gas discovery in Koonj Well No 1A in the Sukkur Exploration Block. The Sukkur joint venture comprises MGCL- Operation with 50 percent interest share, Petroleum Exploration Limited (PEL) 35 percent, a Pakistani exploration and production company and International Sovereign Energy Corp 15 percent, a Canadian exploration and production company.
The well was spud-in on April 22, 08 and drilled down to a depth of 1475 meters in Pab Sandstone of Cretaceous age. As a result the Koonj Well No 1A discovery was made in the Sui Main Limestone Formation which tested minimum gas flow rate of 14.28 MMSCF/day. The flow rates are expected to increase significantly with acidization treatment which is planned to be completed well after completion. The well location falls in the flood protection band of River Indus, which is flood prone during monsoon season. Therefore, the spud-in of the well has been postponed till the first quarter of 2011.
The company has also conducted extensive exploration activities in the Block area. There exist two other prospects within Sukkur Block area, which will be drilled shortly.
MGCL commenced the gas supply to Fatima Fertilizer Company Limited (FFCL) by diverting it from PEPCO on November 27, 2009. Similarly, the drilling of three deep wells in Mari D & P Lease is in progress. Mari has a 100% working interest in this project. The three wells are located at Sui Main Limestone, Sui Upper Limestone and Pirkoh Limestone formations. The SML-1 exploratory well was spudded on February 16, 2005. The well was completed and is capable to produce around 6 MMSCFD from three formations.
MGCL has successfully completed construction of production & process facilities of Mari Goru-B development Project in order to supply 109 MMSCFD to two IPPs. The de-hydrated gas is being supplied to Foundation Power Company Dharki Limited for testing and commissioning of their plant on as and when required basis.
-- It is listed on all the stock exchanges of Pakistan.
-- Costs, sales volume and sales price projections
-- Internationally, world oil prices are expected to rise by about 8%, according to the current futures curve as shown.
Crude oil prices: US dollars per barrel
The forecasted oil and gas liquids production in Pakistan amounts to less than 65,000b/d by 2015, with the country able to pump an estimated 80,000b/d in 2010/11. Consumption beyond 2010 is forecast to increase by around 2% per annum to 2015, implying demand of 464,000b/d by the end of the forecast period. The import requirement would therefore be approximately 399,000b/d by 2015. Gas demand is set to rise from an estimated 38bcm in 2010 to 45bcm by 2015, requiring imports of up to 3bcm.
Between 2010 and 2020, there is a forecasted decrease in Pakistani oil production of 42.50%, with crude volumes falling steadily to 46,000b/d in 2020. Oil consumption between 2010 and 2020 is set to increase by 22.49%, with growth slowing to an assumed 1.5% per annum during the period and the country using 512,000b/d by 2020. Gas production is expected to rise from an estimated 38bcm in 2010 to a possible 48bcm by 2020. With demand growth of 44.27%, this will require imports rising to almost 7bcm by the end of the forecast period.
The following chart shows the projected gas scenario in Pakistan.
Gas prices vary with world oil prices, with the oil price/gas price ratio being 5.00 thus gas price in Pakistan is expected to rise. This would cause the profit retained by gas companies to rise. However, the sales tax on gas products would decline from 17% to 15% thus partly mitigating the increase in gas prices, causing a decrease in gas company's taxes.
Sales volume is seen as consistently falling in the above graph. Hence there is greater reason for rise in gas prices. However, the impact on company profits in the short-term cannot be predicted with certainty; the impact of both decline in sales volume and rise in sales price can have mixed effects on profits.
E&P sector's recent performance
The exploration and production (E&P) sector showed a low growth of 0.12 percent in FY10 as compared to FY09. On the whole, sector's net profits increased to Rs 91.120 billion in FY10, as compared to Rs 91.012 billion earned in the corresponding period in FY09. Sector's profitability decreased significantly from 35% in FY08 to 0.12% in FY10. Although POL exhibited a growth of 32% and OGDCL 7%, PPL's earnings declined by 16% and Mari showed a yet greater decline of 45%.This negative growth was observed despite the rupee shedding Rs 1.20 against dollar, and increasing interest rates scenario with interest rates rising five percentage points to 14% in July 2010. However, the realised world oil and gas prices steadily decreased during FY09-FY10 and contributed to the reduction in sector profitability.
Sector's other income which mainly includes interest income decreased slightly from Rs 9.825 billion in FY09 to Rs 7.744 billion in FY10.
The gross profit margin for the industry for FY10 shows that MGCL has the least gross profit margin as compared to competitors. The average for the other three firms in the industry is 63.1% whereas MGCL has GPM of 27.2%.
The sales level is shown for the firms in the industry, as a comparison of size and revenues of the firms. OGDCL is the industry leader and ranks highest at Rs. 142 billion in sales, followed by PPL at Rs. 59.96 billion and POL at Rs. 17.84 billion. Mari is a relatively small company with a sales level of Rs. 5.24 billion.
The beta for MGDCL stock for FY10 is 2.19 compared to a beta of 1.00 for the market (defined by KSE 100). This is due to lower operating efficiency of the company, causing MGCL to be more sensitive to E&P sector shocks. Another reason is the higher finance cost, since Mari is more leveraged than the average firm.
Recent performance:
The company continued uninterrupted gas supply throughout FY10 to all its customers namely, Engro Fertilizer Limited, Fauji Fertilizer Company Limited, Fatima Fertilizer Company Limited, Pakistan Electric Power Company (PEPCO), Foundation Power Company Dharki Limited and Sui Southern Gas Co. Ltd. The total volume of gas produced was 179,753 MMSCF at a daily average of 492 MMSCF. Sales were as follows: Mari Field Rs. 27.922 billion, Sukkur block Rs. 14.443 million, and Hala block Rs. 159.473 million.
Gross sales for the FY10 recorded 7.38% growth and stood at 28.49 billion as compared to 26.53 billion in the FY'09 due to increase in gas sales volume from 169,705 to 179,753 MMSCF. However, increase in GST paid, by 6.30%, and in Gas Development Surcharge by 8.90% caused the net sales to record decline of 9.48%. Profit after tax in FY10 reduced by 44.89% and stood at Rs 1.185 billion as compared to Rs 2.151 billion in the FY09. This reduction has been caused by 38% growth in operating expenses, 45% growth in finance cost. However it has been partially offset by 46.98% increase in other income. Lower wellhead price also resulted in lessening of profits.
In the category of operating expenses, maintenance and repairs have increased significantly by 41.9% depreciation increased by 23.1%, causing the large increase in operating expenses. Two new projects initiated in FY10 have considerably added to operating expenses: Sukkur block with operating expenses of Rs. 1.334 million and Hala block costing Rs. 240.495 million. A compression study was also conducted, costing Rs. 66.550 million. Finance cost also recorded significant increase, mostly due to unwinding of decommissioning cost (closing down of wells) which increased from Rs. 258.393 million to Rs. 193.012 million.
The company obtained long-term financing amounting to Rs 1,112 million to meet the requirements of its two development projects namely Mari Deep and Zarghun Gas field, which will further increase the finance cost in the following years and is likely to create uncertainty in future net income.
MGCL paid 2nd interim dividend of 10.0% (2008-09: 10.0%) on ordinary shares in June, 2010 in addition to the 1st interim dividend of 21.00% (2008-09: 22.17%) on ordinary shares in February 2010. This makes the total cash dividend payout to the ordinary shareholders during the year to 31.00% (2008-09: 32.17%) which is paid to the ordinary shareholders as provided in the Gas Price Agreement.
Financial analysis (FY04-10)

=============================================================

(Rupees in thousands)          FY'09         FY'10   % Change

=============================================================

Gross Sales               26,531,863    28,490,653       7.38

Net Sales                  5,789,203     5,240,117      -9.48

Operating Expenses         1,745,825     2,409,175      38.00

Exploration Expenditure      773,884       744,677      -3.77

Operating Profit           2,545,844     1,425,712     -44.00

Other Operating Income       332,518       488,719      46.98

Finance Cost                 321,064       465,539      45.00

Other Charges                162,573        97,804     -39.40

Profit Before Taxation     2,394,725     1,351,088     -43.58

Taxation                     242,808       165,134     -31.99

Profit After Taxation      2,151,917     1,185,954     -44.89

Basic EPS                       3.71          4.58      23.45

=============================================================

MGCL accounts for approximately 8.8% of the total production of oil and gas in the industry and 12.2% of the total gas production. This makes it the third largest producer of gas in the country.
Company's net sales growth trend continues declined from 2008 onward causing decline in net profit after taxation. Despite the increase in gross sales, this decline may be attributed partly to an unfavorable trend in well head oil and gas prices, as well as increase in government levies.
The profitability of MGCL showed a significant decline in FY09 and FY10. The profit margin fell and return figures slumped likewise. This change was a consequence of high operating expenses that formed 19.2% of net revenue in FY08 increased to 30.2% during FY09, and went up to 45.9% in FY10; finance cost which increased from 2.8% of net revenue in FY08, through 5.5% in FY09 to 8.9% in FY10; and increasing exploration expenditure (6.9% as share of net revenue in FY08 through 13.4% in FY09 to 14.2% in FY10). The company's ROE and ROA also fell because of weak performance showed by the company's bottom line ie decrease in the operating efficiency of the company.
The DSO of MGCL has been one of the highest in the industry that has resulted in a longer operating cycle for the company. The average receivable collection period showed a decreasing trend in FY07 and 08 similar to other industry players. Unfortunately, the DSO again increased dramatically in FY09 and FY10. The debtors contributing to this increase in receivables are Pakistan Electric Power Company and Foundation Power Company Dharki Limited. This shows MGCL's decreasing efficiency in managing its trade debts. This is particularly important because it will negatively affect the company's financial strength.
The increase in DSO consequently caused an increase in the operating cycle which is negatively affecting the firm's business. As regards, inventory turnover ratio, it improved from a low of 9.92 in FY08 to 19.94 in FY10. The total assets turnover had been stagnant at 0.34 up till FY06 and improved to 0.53 in FY08. However it again decreased to 0.24 in FY10. This shows that the company is not generating enough business, given the asset investment. The sales to equity rose also decreased from 1.08 in FY08 to 0.57 in FY10.
The company's liquidity management, as reflected in the current ratio is below the industry's standards. The liquidity position, measured in terms of the current ratio deteriorated till FY06 and then after a slight increase to 1.23 in FY07 declined further to 1.10 in FY09. However liquidity recovered to 1.23 in FY10. In the period FY09-10, current assets increased by 4% while current liabilities decreased by 7% thus leading to improvement in liquidity.
The debt ratios for MGCL have been considerably higher than those of its competitors; this reflects a much greater degree of leverage for the company compared to the average firm in the industry. The company in FY08 arranged a term finance loan of Rs. 1.9 billion from a consortium led by Bank Alfalah and other financial institutions. The company acquired these loans to finance the drilling of three wells in Mari Deep, Goru B reservoir. In order to finance Zarghun Gas Field, the Company has arranged another Term Finance Loan of Rs 1,112 million from Habib Bank Limited to meet the requirements of Mari Deep and Zarghun Gas field projects.
The TIE seems satisfactory on a standalone basis but in comparison to the industry, the company's financial strength appears tarnished. Times Interest Earned was 23.9 in FY08 but decreased to 4.11 in FY10, due to higher finance cost and the lower net income earned in FY10. The debt to asset ratio increased from a low of 0.51 in FY08 to 0.59 in FY10, and debt to equity ratio increased from 1.03 to 1.40 in the same period, showing that a greater amount of debt must be supported by the assets and equity, thus increasing the riskiness of the company. Long-term debt to equity showed a similar trend. The main factor contributing to increase in total debt was the long-term borrowings as mentioned above.
The trend for EPS and book value was positive up till 2008 but declined thereafter from 69.67 in FY08 to 16.14 in FY10. This dramatic decline was due to decreased net income in FY10 coupled with 100% increase in the number of shares, ie shares issued between FY09-10. The P/E ratio also dropped below average in the FY08 to 2.97. However P/E showed an increase to 9.74 in FY10 due to decrease in net income. In terms of book value, the company's position weakened after a high of 224.02 in FY09 to 125.05 in FY10 due to the great increase in number of shares. The decrease in book value resulted in increase in price to book value in the period FY08-10. Dividend per share showed slight variation over the period.
Future outlook
The sector's overall profitability performance was seen to be stagnant over the period FY09-10. The decrease witnessed in the international realised oil prices was the major reason why respectable gains in profitability could not be achieved. Although this presents a downside risk to the sector's earnings, the weak rupee against the US dollar is expected to make up for it as the sector's revenues are priced on an international parity basis.
Further, world oil prices are expected to rise by about 8% in 2011. Volatile situation in the international oil prices, especially after Opec's demand of flooring the prices at $ 47/barrel, makes it quite uncertain to predict the trend of profitability. The effect of oil prices on profitability is yet to be seen.
Mari Gas, itself, has several expansion and exploration plans in progress in the near future. Gas supply to Fatima Fertilizer Company Limited was commenced during FY10. Under Goru-B Gas Production Project, the dehydrated gas is being supplied to Foundation Power Company Dharki Limited for testing and commissioning of their plant. Drilling of three deep wells in Mari D and P lease is in progress. Also Front End Engineering Design (FEED) to develop Zarghun Gas Field has been completed too. However, due to the volatile law and order situation in the area, field activity is yet to commence.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Copyright Business Recorder, 2011