Being responsible for 22 percent of the country's gas production, Pakistan Petroleum Limited (PSX: PPL) has been an aggressive player in the oil and gas exploration and production sector. In 1997, BOC disinvested from the E&P sector worldwide and sold its equity in PPL to the Government of Pakistan. Later, the GoP holding was reduced via an IPO in 2004 and was further decreased with the initiation of the Benazir Employees Stock Option Scheme (BESOS) in 2009. Further divestment of another 5 percent shares in a secondary public offering occurred in 2014.
Currently, PPL's majority shareholding continues to be with the government, which owns 67.5 percent. The other key shareholder is PPL Employees Empowerment Trust that has a little over 7 percent and non-resident financial institutions that hold over 10 percent shareholding. A breakup of both ordinary shares and convertible preference shares is shown in the illustration.
PPL and its subsidiaries hold a portfolio of 44 exploration blocks. 26 blocks are operated by PPL (including one in Iraq) and 18 are operated by the company's partners including three offshore blocks in Pakistan and two on-shore blocks in Yemen. However, recently the company has decided to relinquish one of its exploratory blocks in Yemen due to security issues. PPL operates 10 producing fields that include Sui, Kandhkot, Adhi, Mazarani, Chachar, Adam, Adam West, Shahdadpur, Shahdadpur East and Shahdadpur West; and holds working interest in seventeen partner-operated producing fields that include Qadirpur, Miano, Sawan and the famous Tal Block.
The Company has three fully-owned subsidiaries: PPL Europe E&P Limited (PPLE), PPL Asia E&P B.V. (PPLA) and Pakistan Petroleum Provident Fund Trust Company (Private) Limited (PPPFTC). These are part of the Group. Except PPPFTC, the group is principally engaged in conducting exploration, prospecting, development and production of oil and natural gas resources
Overview of past performance
PPL is a key player in the country's oil and gas E&P sector. The company has been improving margins, and has been working aggressively towards hydrocarbons drilling. Back in FY13, though the firm continued to see growth in profits, the gas production dwindled due to depleting gas reserves in the country; PPL's decline in gas production came from the firm's pioneering fields like Sui, Miano, Kandhot and Sawan as they continued to mature. The production however, was compensated by higher crude oil production and better gas prices. Led by higher crude oil prices and crude oil production and discoveries, PPL's financial performance was based on higher revenues. Earnings took a hit in FY15 however, due to lower oil prices, which continued in FY16. PPL continued its drilling and exploration activity throughout these years of low oil prices, and hence low cost period.
Recovery in oil prices in FY17 was welcomed by the E&P sector. Hence FY17 was a good year for PPL as it announced a whopping increase in its earnings largely led by revenue growth, which was around 46 percent year-on-year, while the earnings more than doubled. Also in FY17, the firm received gas price adjustment of Rs31.12 billion for 25 months starting June 2015 to June 2017, which boosted the top-line along with improvement in natural gas output from its key fields: Sui and Kandot. Its overall production exceeded the firm's long time average of 1 bcfd, registering a growth of around 8 percent year-on-year. Lower finance costs also helped the earnings of FY17. Exploration costs also remained on the lower side in FY17 in spite of the firm's aggressive drilling activity. During FY17, PPL drilled 28 development wells, out of which 15 were drilled in areas operated exclusively by the company, while 13 wells were drilled in areas operated by the company's partners.
Performance in FY18
FY18 was another encouraging year for the upstream sector because of the upward trend in oil prices. Higher oil prices continued to complement PPL's financial performance in FY18. The company reaped benefits of investing in exploration and drilling during low oil price years as it earned the second highest profit in its history in FY18.
In the fiscal year, PPL drilled 11 exploration wells in operated areas including 3 wells in frontier areas, whereas 7 exploration wells were drilled in partner-operated areas. The firm also made a discovery PPL-operated area. The company also drilled 15 development wells, which include 8 in operated areas and 7 development wells in partner-operated areas. The annual report highlights that the firm was able to arrest the decline in maturing fields through a year-on-year production increase from Gambat South, Adhi, Tal and Kirthar fields.
Overall, PPL's gas and oil production marginally declined by 1.9 percent and 2.6 percent, respectively in FY18, whereas LPG production increased by 17.3 percent on a year-on-year basis. Despite a decline in volumes, higher oil prices and rupee depreciation resulted in 8 percent year-on-year increase in revenues for PPL for FY18.
Earnings for the company for the year increased by 28 percent, year-on-year, and the main reasons for higher profitability were increase in sales revenue and other income and decline in other charges and levies. This was partially offset by increase in operating expenditures. The increase in other income came from exchange gain, receipt of signature bonus from UEPL against farm out of Kotri North block, and receipt of late payment surcharge from Asia Resources Oil Limited. On the other hand, the decline other charges were due to recording of impairment loss on investment in wholly owned subsidiary, PPL Asia E&P B.V (PPLA) in FY17.
In FY18, PPL continued to face the pressure from the circular debt. As per the Annual Report 2017-18, receivables increased from Rs99 billion as at June 30, 2017 to Rs143 billion as at June 30, 2018, which is making the liquidity position of the company an immediate concern.
PPL in 1QFY19
PPL was able to improve gas production by around 6 percent year-on-year in 1QFY19, which along with higher crude oil prices and depreciation of the domestic currency led to 19 percent year-on-year growth in revenues for the first quarter of FY19. However, crude oil production witnessed a drop of about 4 percent year-on-year.
Apart from higher top-line, the increase in the earnings also came from higher other income, which was a result of exchange gains due to significant loss in the value of the rupee. However, the earnings growth was cut short by higher exploration costs incurred on the declaration dry wells. For the quarter, earnings increased by 12 percent year-on-year.
Outlook
The company has planned 12 exploratory wells and 9 development wells in the current fiscal year (FY19), and plans to increase its exploration portfolio by participating in the upcoming exploration bidding process. As per the company's annual accounts, PPL is also a partner in an offshore block where a well is planned in 2019. PPL is also planning to drill its first well in Iraq in 2018-19. In the latest AGM, it has been informed that the company would invest $190 million for oil and gas exploration and production during the year, which includes $20 million on offshore drilling.
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PPL-Pattern of Shareholding (as at June 30, 2018)
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Categories of Shareholders Percentage held
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Ordinary Shares
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Associated companies, undertakings and related parties
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PPL Employees Empowerment Trust 7.35%
PPL Employees Retirement Benefit Funds 0.06%
NIT and ICP 0.07%
Banks, Development Financial Institutions, Non-Banking Financial Institutions 0.89%
Insurance Companies 1.44%
Modarabas and Mutual Funds 3.35%
Shareholders holding 10% or more Government of Pakistan 67.51%
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General Public
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Resident 3.99%
Non-Resident 0.01%
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Others
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Non-Resident Entities 10.69%
Public Sector Companies and Corporations 3.14%
Joint Stock Companies 0.55%
Employee Trust/Foundations etc. 0.95%
Total 100.00%
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Convertible Preference Shares
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Individuals 96.39%
Joint Stock Companies 3.26%
Nazir of High Court 0.35%
Total 100.00%
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Source: Company Accounts
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PAKISTAN PETROLEUM LIMITED (UNCONSOLIDATED)
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Rs (mn) 1QFY19 1QFY18 YoY
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Net sales 38,217 32,212 19%
Operating expenses (9,086) (7,728) 18%
Royalties and other levies (5,637) (4,890) 15%
Gross Profit 23,493 19,593 20%
Exploration expense (3,187) 85
Administrative expense (530) (547) -3%
Finance cost (134) (103) 30%
Other charges (2,100) (1,543) 36%
Other income 1,985 1,178 69%
Profit before tax 19,527 18,663 5%
Tax (5,338) (5,984) -11%
Profit after tax 14,189 12,678 12%
EPS (Rs/share) 7.20 6.43 12%
Gross margins 61.5% 60.8%
Net margins 37.1% 39.4%
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Source: PSX
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