E&P sector’s real challenge

The oil and gas sector’s financial performance for 1QFY20 was nothing close to what is called sanguine for the sector; earnings for all the listed sector players were stagnant as the gains from the currency depreciation were negligible versus those in FY19.

However, a much bigger concern for the oil and gas exploration and production sector is the production running dry. Even though profits of the listed E&P sector were in double digits in FY19, the performance on the volumetric front remained weak and growth in earnings came primarily from exchange gains and higher oil prices. So when the profitability is up, the sector performs well on the stock exchange as the sector has the highest weight in KSE100 index.

In reality, the companies have been facing a squeeze in production flows of oil and gas. Part of it has to do with the sector facing the brunt of the circular debt; the E&P companies are facing liquidity constraints, which is affecting the drilling activity. During FY19, the state-run E&P companies drilled 27 wells versus an average of 37 in the last five years, which is likely due to the liquidity concerns evident from rising overdue receivables for OGDCL and PPL.

While the other factor for lower oil and production flows is new discoveries not big enough to offset the depleting and maturing fields. While the company has no plans to shift from its core business of oil and gas exploration and production, Pakistan Petroleum Limited has planned to expand and diversify into mining and exporting of minerals like zinc and lead. The company aims to generate around $100 million annually in revenue from its mining business.

Will the E&P companies come out of the liquidity crunch?  The government has increased gas price by 15-20 percent, which will bode well for the sector’s profitability in the coming quarters. Also, after the issue of the second energy Sukuk, the circular debt might fall from the current estimates.

Moreover, the Petroleum Division is likely to initiate a three-round bidding process for awarding 35 new oil and gas block, which will begin in December this year. At the same time, OGDCL is looking into tight gas and shale gas as well and is expected to start exploration with foreign companies beginning in December as well.