Its a healthy sign that earnings of the exploration and production sector are being driven by production flows and not just rupee depreciation and subsequent increase in prices. Like others, Pakistan Oilfields Limited (POL), the third largest E&P firm in the country, has been witnessing increased production flows. The tilt has been towards oil production, and why shouldn it be? Favourable oil price and production prospects amid dwindling gas flows are enough reasons for E&P companies to focus more on oil flows.
9M FY14 performance of POL also banks on the same; strong production coupled with better realised prices due to rupee depreciation was the chief reason for the increment in the revenues of the oil and gas firm. Top line jumped by 23 percent year on ear in 9M FY14. Most of the oil production during the period under review came from the commencement of Makori Gas Processing Facility and the Tal block with overall oil production reportedly increasing between 25-27 percent, year on year. Gas production has also inched up by around 9-10 percent year on year.
However, the inhibiting factor to the firms profitability has been the phenomenal increase in the amortisation cost. Around 2.5 times increase in amortisation expense diluted the gains from the top line.
The recent underperformance of POL stock against the broader index, even after the commencement of Makori GPF in March-2014 has been primarily due to the recent currency appreciation. Remember that, all E&P companies have dollar denominated revenues, and any improvement in rupee value negatively impacts market sentiments for the same.

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Pakistan Oilfields Limited
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Rs (mn)               9MFY14    9MFY13      chg    3QFY14    3QFY13     chg
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Net sales             26,248    21,424      23%     8,410     7,680     10%
Operating costs        5,573     5,476       2%     1,760     2,008    -12%
Amortization           3,269     1,352     142%     1,199       448    168%
Gross profit          14,646    12,353      19%     4,587     4,405      4%
Exploration cost       1,424     1,134      26%       580       415     40%
PAT                   10,103     8,624      17%     3,198     2,961      8%
EPS (Rs)               42.71     36.46      17%     13.52     12.52      8%
Gross margin           55.8%     57.7%              54.5%     57.4%
Net margin             38.5%     40.3%              38.0%     38.6%
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Source: KSE Announcement