Pakistan Petroleum Limited

Share price of Pakistan Petroleum Limited (PSX: PPL) has been underperforming the benchmark index, but that's the case with all the listed oil and gas exploration and production companies as low oil prices have continued drag the industry's revenues.
PPL is a key player in the country's oil and gas exploration and production segment. The firm has been in this business for several years, contributing to about one fourth of total gas supplies, besides producing crude oil, condensate and LPG. The firm has majority shareholding of the Government of Pakistan at 67.51 percent, while 7.35 percent is with PPL employee empowerment trust, and 25.14 percent with private investors.
The firm's operates the largest gas field in the country - Sui, along with five other fields namely, Kandhot, Chachar, Hala, Adhi, and Mazarani. It also holds working interest in 12 partner operated fields including Sawan, Qadirpur, Nashpa and Latif. PPL sells its gas to WAPDA, Sui Southern Gas Company, and Sui Northern Gas Pipeline.
Previous performance Shortage of gas reserves has been a key feature of this gas-heavy E&P company. After a good FY12, gas flows blotted the firm's financial performance in FY13 as the firm faced dwindling gas production, a major contributor to PPL's revenues.
It was evident that the firm's financial performance was livid with ageing gas fields and consequently, dissolving gas production. The dissipating gas production came from the firm's pioneering and maturing fields like Sui, Miano, Kandhot and Sawan, which accounted for over 80 percent of PPL's total gas production. However, PPL being its aggressive self, moved on with gradual inclination towards crude oil; major support to the top line came from oil revenues due to growing oil production in FY13.
PPL has adopted an aggressive strategy when it comes to exploration and drilling activity. In FY13, activity on the exploration front, expectation from its key fields like Tal and Nashpa, and key gas finds in Hala, Sukhpur and Gambat Blocks kept investor interest unharmed.
FY14 was a much better and satisfying for Pakistan Petroleum Limited as 11 new exploration blocks were granted to PPL. The firm also acquired 100 percent shareholding of MND E&P Limited, a company incorporated in England and Wales. PPL's financial performance in FY14 also remained in the spotlight. The revenues in FY14 augmented due to the combined effect of net increase in oil sales volumes, decrease in gas sales volumes and depreciation of rupee versus dollar. Exploration and field expenditure remained on the higher side, but net earnings remained cheerful.
FY15 was again a slow year in terms of profits for PPL as the firm remained held down by the dent in crude oil prices. As the crude oil prices took the slippery road downwards, the low oil price environment became the main clip in the earnings of oil and gas exploration and production segment including PPL. Despite the increase in oil volumetric sales, the top line went down by 13 percent year-on-year. Lower gas sales continued to play its adverse role as well.
PPL's profitability plunged further with the rise in field expenditure in FY15 as the firm incurred three dry wells. Its net profits dipped by 33 percent. Another factor that led to lower earnings for the year was the impairment cost of PPL's subsidiary, PPL Europe E&P.
A positive feature of FY15 was the restructuring the firm undertook; it changed its conventional functional organisational set-up to a hybrid asset based organisational structure in line with current industry practices. Also, the firm continued with its aggressive E&P activity; PPL drilled nine exploratory wells in company-operated areas and made six hydrocarbon discoveries in FY15.
Financial performance 1HFY16 The oil and gas exploration and production sector has had a slow start of FY16 on account of steep decline in international crude oil prices. And PPL too saw a clip in its earnings for the six-month period.
Lower revenues were a key reason for PPL's restricted bottom line; net sales for 1HFY16 glided downwards by 29 percent year-on-year due to softer crude oil prices that dropped by around 45 percent year-on-year. Higher operating expenditure and exploration costs accentuated the contraction in PPL's earnings further.
On the volumetric sales front, there was four percent and 15 percent year-on-year increase in gas and LPG volumes and a six percent decline in oil sales. Gas sales volumes increased due to higher production from Sui, Kandhot, Adhi, Miano, Tal, Latif, Chachar, Hala and Nashpa fields, and commencement of production from Gambat South during March 2015. Higher LPG sales volumes were due to increase in production from Tal and Adhi fields. Unfavourable oil sales volume came from decline in oil volumes from Tal, Hala, Adhi, Nashpa and Ghauri fields
Despite the notorious decline in crude oil prices, PPL has been going forward with aggressive exploration activity. In 1HFY16, the E&P giant spudded five wells (three exploratory and two development wells) as compared to six wells (three exploratory and three development wells) during the corresponding period. The firm increased seismic activity also incurred three dry wells since the start of FY16. PPL also made five discoveries 1HFY16 compared to four in similar period last year. These were two in Gambat South Block, and one each in Hala Block, Dhok Sultan Block and Latif Block.
Outlook Going forward, the firm might be able to see some respite in its earnings decline if it reduces the constraint on liquidity by pulling in reigns on aggressive exploration activity. This is because crude oil prices continue to swing lower.
A key development in FY16 so far has been the revision of well head gas prices for Sui gas field that has been reviewed up and granted 50 percent discount to the 2012 policy.
This would increase well head pricing by approximately 50 percent. The reason put forth for price increase for Sui has been the extraction of remaining reserves by drilling deeper.

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

Pakistan Petroleum Limited

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

Rs (mn)                     1HFY16    1HFY15      YoY

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

Net sales                   41,118    57,811     -29%

Field expenditure           19,974    17,440      15%

Royalties                    4,784     6,820     -30%

Other operating income       3,011     4,031     -25%

Other operating expenses     3,049     4,199     -27%

Finance cost                   328       277      18%

Profit before tax           15,995    33,106     -52%

Tax                          4,237    10,967     -61%

Profit after tax            11,758    22,139     -47%

EPS                           5.96     11.23     -47%

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