Pakistan Petroleum Limited

Being one of the industry giants, Pakistan Petroleum Limited (PSX: PPL) is a key supplier of natural gas in the country. The company is engaged in conducting exploration, prospecting, development and production of oil and natural gas resources with its production portfolio is spread across the country and international presence in Iraq and Yemen. PPL also holds mineral rights in Balochistan through Bolan Mining Enterprise (BME), a 50:50 joint operations between PPL and Government of Balochistan.

PPL’s history is as old as 1950, when Burmah Oil Company (BOC) of the United Kingdom has the largest shareholding in the company for exploration, prospecting, development and production of oil and natural gas resources. In 1997, BOC disinvested from the E&P sector worldwide, which included selling its equity in PPL to the Government of Pakistan.

Over the years, the GoP has reduced its holding first through an IPO in 2004, followed by a further decrease with the initiation of the Benazir Employees Stock Option Scheme (BESOS) in 2009, and a 5 percent divestment in a secondary public offering in 2014. The government is now looking to divest another 10 percent of PPL’s shares for which it has approved the financial advisors.

At present, PPL’s shareholding is divided between the government, which owns about 68 percent, PPL Employees Empowerment Trust that has a little over 7 percent and private investors, who hold nearly 25 percent. A breakup of categories of shareholders with respective share in both the ordinary shares and convertible preference shares is shown in the illustration.

PPL has three fully-owned subsidiaries: PPL Europe E&P Limited (PPLE) which was previously called MND E&P Limited, PPL Asia E&P B.V. (PPLA) and Pakistan Petroleum Provident Fund Trust Company (Private) Limited (PPPFTC). The Group, except PPPFTC, is engaged in conducting exploration, prospecting, development and production of oil and natural gas resources.

Past performance            

PPL has been one of the key performers in the domestic oil and gas exploration and productions sector. However, over the years, decline in gas production has resulted in stagnation in the E&P sector. 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 its 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.

In FY14, again the earnings were compensated by higher crude oil prices and crude oil production and discoveries. However, Earnings took a hit in FY15 due to lower oil prices, which continued in FY16 and remained an impediment for the sector along with contraction in gas production volumes.

Recovery in oil prices in FY17 was a breather for the E&P sector, where PPL announced a whopping increase in its earnigns largely led by revenue growth, which was around 46 percent year-on-year. Earnigns grew more than twice on ayear-on-year basis. Also in FY17, the firm received gas price adjustment of Rs31.12 billion, which boosted the topline along with improvement in natural gas production from key fields.  PPL’s overall production exceeded the firm’s long time average of 1 bcfde, 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.

FY18 was another favourable year for the upstream sector because of the upward trend in oil prices. Higher oil prices continued to complement PPL’s financial performance as the company reaped benefits of investing in exploration and drilling during low oil price years and earned the second highest profit in its history during FY18. According to the FY18 annual report, 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. On the production side, PPL’s gas and oil production continued to witness slow growth.  Despite a decline in volumes, higher oil prices and massive 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 in FY18, which was also supported by higher 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

Financial Performance FY19

In FY19, significant currency depreciation lifted PPL’s earnings. The company announced a 35 percent year-on-year increase in unconsolidated bottmline for FY19. PKR lost more than 30 percent of its value during the year; and while the costs were adversely impacted, it had a positive effect on the company’s revenues as these are mostly linked with USD. PPL’s topline witnessed a growth of 30 percent year-on-year. Amid flattish growth in volumetric sales of oil and gas and some recovery in oil prices, the growth in revenues had largely to do with currency devaluation during the year.

In FY19, PPL’s gas production of has declined again marginally by around 1.7 percent year-on-year, whereas Condensate/NGL/Oil & LPG production increased by approximately 1.3 and 22 percent year-on-year, respectively. decline in gas volumes was due to natural decline from mature fields, however it was being partially offset by increase in production from Gambat South and proactive production management. Increase in oil production from Adhi contributed to the overall growth in oil production.

Currency devaluation also positively affected other income that grew by 77 percent in FY19. Growth in other income was also due reversal of impairment loss on investment in PPL Europe E&P Limited. However, on the expense side, despite lower exploration and prospecting activity PPL’s exploration expenditure increased by over two times due to the incorporation of offshore Kekra-1 dry well cost.

PPL also announced that it is increasing its authorized share capital by Rs10 billion, and the company announced a 20 percent bonus share for ordinary shareholders and 10 percent bonus shares for convertible preference shareholders for that.

The company’s liquidity continued to deteriorate due to the circular debt. The trade debts of the company reached to a historically high level of Rs227 billion inFY19 versus Rs143 billion as on June 30, 2018 -  translating into 1.1 times of gross revenue.

1QFY20 and Beyond

PPL posted flat earnings growth in 1QFY20. PPL’s revenues increased by over 9 percent year-on-year in the first quarter of FY20.  With missing volumetric sales growth, the growth in the company’s topline was likely due to increase in indexation factor because the oil prices also declined during the period. The decline in volumes was largely due to natural decline from maturing fields and lower offtake by SNGPL during July and August 2019 due to load management issues arising from the import of LNG.

The company’s other charges doubled and other income slipped by more than half during 1QFY20 on a year-on-year basis. According to the the Director’s report, the decline in other income and the increase in other charges stemmed from exhange losses in the current period as compared to exchange gain in the previous corresponding period and impairment loss on investment in PPL Asia in 1QFY20 versus a reversal of impairment on investment in PPL Europe in 1QFY19.

However, the company continues to play an aggressive role in the country’s hydrocarbon drilling. It is participating in the upcoming exploration bid rounds to expand and diversify its exploration portfolio. PPL planning to expand its international portfolio and reportedly plans to export up to 400,000 barrels of crude produced from its Gambat South Block.