PPL – 1QFY21 simple and maintained

It could easily be called a non-event quarter for Pakistan Petroleum Limited (PSX: PPL) with flat earnings growth and no significant expenditure. However, on sequential basis, the first quarter of FY21 is a rebound from the 4QFY20 financial performance.

In FY20, the E&P company’s unconsolidated revenues were seen falling by around 4 percent year-on-year due to fall in global oil prices during the year, around 11 percent decline in both oil and gas production in FY20. Earnings fell by 19 percent year-on-year and this was primarily due to a weaker 4QFY20 where revenues were seen falling by 30 percent year-on-year, and earnings by 33 percent year-on-year.

In Q1, PPL’s revenues were seen falling by around 6 percent year-on-year due to ongoing oil prices even though the company witnessed a meager increase of around 1 percent in oil and gas production. However, compared to the quarter before, the revenues in Q1 were seen climbing by 25 percent due to over 60 percent quarter-on-quarter increase in oil prices and 8 and 28 percent increase in oil and gas production.

The Q1 earnings for PPL benefitted from lower exploration and prospecting expenditure which were down by 21 percent year-on-year due to only one dry well reported versus three in 1QFY20. Even though the exploration costs significantly increased quarter-on-quarter, the bottomline growth on sequential basis was seen rising by around 30 percent.

The biggest challenge for the exploration and production sector in 2020 has been very weak oil prices. In addition, falling oil and gas production volumes amid depleting resources have been a key concern for the domestic E&P sector. However, the E&P giant has announced a major gas discovery worth over 1 trillion cubic feet in Kalat block in Balochistan – a frontier area struck by security challenges and infrastructure bottlenecks – which could be a gamechanger for the company and the country’s dwindling reserves and foreign investment in the sector.