E&Ps - production running dry?

While the local E&P companies might be seen to boast increased drilling and exploration activity, the ongoing fiscal year looks dim in terms of growth in hydrocarbon production and hence sales volumes. All the listed oil and gas exploration and production companies have witnessed flattish production volumes in 9MFY19 on a year-on-year basis – whether of crude oil or natural gas. And production volume numbers for April 2019 are no encouragement; according to a research note by Optimus Capital Management, crude oil and gas production remained dreary in April 2019 as per the provisional data from PPIS. Moreover, since January 2019, production of both hydrocarbons has been falling on a monthly basis.

Despite weak production flows, the revenues of the oil and gas exploration and production companies are seen to grow in double digits in 9MFY19. And while higher international crude oil prices have helped lift revenues in times of weaker volumes, what describes growth in top-lines is the depreciating currency.

Higher operating costs kept gross margins in check, while higher exploration and prospecting expenditure on account of dry wells announcements was a key feature of the E&P sector’s profitability in 9MFY19. OGDC however, was an exception as the E&P giant not only contained its operating costs, but also posted a significant decline in exploration and prospecting costs as it declared only one dry well versus two in similar period last year.

Growth in profits remained elevated – in excess of 35 percent year-on-year in 9MFY19 for the four listed companies; however, much of it came from higher rupee depreciation, and little from the core business operations.

Recently, the OGDC’s newly appointed chairman of the BoD has been reported to have laid down the strategy to enhance oil and gas production in the country by forming joint ventures with foreign companies and attracting foreign investment in exploration. In the last five years or so, a noticeable number of foreign E&P companies have moved out of Pakistan - OMV’s plan to divest from the country’s upstream segment is one of them. If OGDC is able to execute some new JVs with foreign companies, not only will the volumes get a boost, but the sluggish FDI in the sector that has become a concern will also get a fillip of hope. In that sense, hopes are also pinned to the drilling of offshore well Kekra-1 in Indus-G block near Karachi coast by ExxonMobil and Eni Pakistan, where the local giants OGDCL and PPL are also part of it. While the estimated deposits of gas and crude oil are huge, an update on the presence of hydrocarbons not expected until at least the end of May 2019.