Oil & Gas Exploration Companies: PAKISTAN PETROLEUM LIMITED - Year Ended June 30, 2004

Pakistan Petroleum Limited (PPL) was incorporated on the 5th of June 1950 as a public limited company. It took over the assets and liabilities of Burmah Oil Company (Pakistan Concessions) Ltd and commenced business on 1st July 1952.
Burmah Oil Company Plc of UK was the majority shareholder of PPL till September 1997 when Burmah, as part of its strategic decision to disinvest from the upstream oil and gas business, sold its entire shareholding to the government of Pakistan. The government of Pakistan held 93.4% of PPL shareholding out of which the government disinvested a portion of its equity that amounts to 15% of the paid up capital of the company through an Initial Public Offering.
PPL is a leading oil and gas exploration and Production Company that owns major producing fields and has working interest in several exploration concessions in the country.
PPL's gas production accounts for about 30% of the total gas production in the country. It is the owner and operator of Sui and Kandhkot gas fields that contribute significantly to the country's gas production.
PPL's exploration and production portfolio includes developed producing fields, prospects, leads, plays and new exploration acreage. Its exploration and production strategy is geared towards replenishing its declining reserves. Its reserve replacement plans includes the review of attractive investment opportunities for the acquisition of oil and gas producing assets in order to boost its hydrocarbon reserves profile and at the same time it participates in securing the country's overall energy plan. PPL's exploration portfolio has been expanded significantly during the last few years. Its present exploration portfolio consists of 14 blocks, of which 8 are operated by PPL and the remaining 6 are partner operated. The company is also seeking exploration opportunities overseas.
The board of the company has eleven directors including the chairman. All directors are nominees of the Government of Pakistan except one director who is the nominee of the International Finance Corporation that holds over 6% shareholding in the company. It seems that none of the directors of the company is an independent director in the real sense. It would be in the interest of the government to appoint some of the directors that are independent and have no vested interest in the company. That should bring in effective and more co-ordinated efforts to manage the company.
Capital structure of the company
The company has a paid-up capital of 6.858 billion rupees divided into 685 million shares of Rs ten each. It has a reserve of 7.478 billion rupees that includes 5.407 billion rupees unappropriated profit and the balance amount of 2.071 billion is composed of general and contingency reserves insurance reserves and assets acquisition reserves.
The total reserves for the year ended June 30 2004 compared with the previous years show an increase of rupees 3.531 billion rupees. This increase in reserves is basically due to declining hydrocarbon reserves profile of the company. It is intended to acquire producing reserves for which a separate asset acquisition reserve has been established and the company plans to build up this reserve in future years.
BREAK UP VALUE
With this equity base, the company's break up value comes to Rs 20.90 per share whereas the current market price of the share is fluctuating between Rs 115 and 120 per share.
TOTAL ASSETS BASE
The Company has total assets base of 25.340 billion rupees compared with the previous year of 20.451 billion. This is an increase of about 24% over the last year.
SALES
The company has recorded a 17.667 billion rupees turnover during the year compared with the last year of 12.182 billion. This amounts to an increase of about 45% for the current year. This increase in sales is mainly due to higher gas prices according to Sui and Kandhkot Gas Pricing Agreement that provided a phased increase in the price of gas to the level of the Petroleum Policy Price less 50% discount over a period of 5 years with semi annual adjustments on July 1 and January 1 of each year. This new agreement has favourably affected the company's profitability.
The company has not provided any details regarding any increase in quantities of sales during the year. This indicates that the increase in sales is mainly due to the price increase of gas. It is arguable if the company has been able to maintain its production quantities during the year under review compared with the last year in the absence of any statistics available in this regard.
FIELD AND OPERATING EXPENSES
The company has spent 6.260 billion rupees for field and operating expenses compared with the last year of 5.945 billion rupees. That amounts to an increase of about 5% in these expenses. This increase is mainly due to some field expenses going up with a substantial increase in the charges of depreciation, increased exploration and the amortisation of decommissioning costs and that increase is mostly off-set by a substantial saving in development drilling cost.
ROYALTY COST
This has gone up by 50% due to increase in sale as the royalty is calculated and paid to the government of Pakistan at its well head value according to the Concession agreements between the company and the government of Pakistan.
OPERATING PROFITS
The company has earned an operating profit of 9.063 billion during the year under review compared with the last year of 4.839 billion rupees. The operating profit is higher by 87% mainly due to increased gas sales prices.
TAXATION
The company provided an amount of 2.446 billion compared with the last year of only 648 million rupees. This amount is higher by 376% this year due to a provision made on the basis of 43.66% applicable tax-rate compared with last year tax rate of 39.61%. No reasons have been given in the director's report regarding the increased rates used for the current year. Higher tax provisions have been provided due to higher profits earned during the current year.
EARNING PER SHARE
The company has earned Rs 9.65 per share during the year under review compared with Rs 6.11 per share for the year ended June 2003. This is a satisfactory increase in earning per share that amounts to an almost 58% increase. It is anticipated that the company would be able to show better earnings for the year ended 2005 due to higher gas prices linked to higher oil prices. It is being predicted that if the company earns around Rs 12-12.50 per share, its market price of the share should range between Rs 122 and 132 due to its higher earnings next year.
LIQUIDITY
The company earned a net cash surplus of 3.420 billion compared with the last year's deficit of 70 million rupees. This surplus cash generation has in fact strengthened the company's liquidity and that has been reflected in an increase in cash and bank balances of an additional amount of 2.170 billion that amounts to almost 48% over the last year.
GENERAL COMMENTS
The company has not shown actual production for the year under review and has not provided any disclosure regarding its reserve base. There is also no disclosure if the company's reserves have increased or depleted during the year under review. Under note 40 of the annexed notes to the audited accounts of the company, it has been reported that this disclosure is not relevant due to the nature of the business. It is arguable that if this is the case then why cannot production and reserves be disclosed under this disclosure.
It is suggested that the management of the company make a disclosure to its shareholder regarding the opening reserves, any additions during the year, total production and closing reserves and this information should be compared with the last year's. Without this disclosure, the shareholders/investors would not be able to make a judgement regarding the exploration and production successes of the company.
The director's report is also silent whether the company's present reserves have been independently certified or not. This should have been disclosed to the investors/shareholders. As this is the first reporting year of the company after its listing at the three stock exchanges of the country, there is a need that additional disclosure, that is material information to the shareholder, must be made on a timely basis to fulfil the requirements of good corporate governance.