MPCL: Progressing or simply overvalued?

Mari Petroleum Company Limited, an oil and gas exploration and production firm has been under the limelight for reasons like better earnings, and revised GPA. Another reason for it being in the news has to do with the government’s plan to divest MPCL shareholding.

Earlier this year, the government initiated the process for sale of its 18.39 percent shareholding in MPCL. MPCL is a joint venture of Fauji Foundation and Oil and Gas Development Company (OGDCL) where both them have the first right to refusal in the planned divestment. Without getting into the divestment plan and progress, this article will look at one contention that was raised a number times: the company’s share was perceived to be overpriced, signalling the lack of interest by any keys shareholder.

Is MPCL share overpriced? MPCL has improving financial and operating performance over the last few years, and this upward trend in earnings and operations has remained buoyant during the recent challenging times for the E&P sector; the firm’s recent financial performance has been phenomenal – 30 percent surge in revenues and lower exploration costs (absence of dry wells) hurled MPCL’s 1HFY17 earnings up by 215 percent year-on-year.

The firm’s share price has also outperformed the benchmark index unlike the other traditional players in the sector. Along the same lines, Financial Times & London Stock Exchange (FTSE) has decided to include MPCL along with five other companies from Pakistan into Global Equity Index Series (Asia Pacific Excluding Japan) starting March 20, 2017.

On the operations side, Mari gas field’s cost plus pricing formula has been replaced under the revised Gas Price Agreement (GPA) with international crude price linked formula, at a stated discount to price under Petroleum Policy 2001. This discount would gradually decrease every six months to offer higher wellhead gas prices. Also, the agreement offers that any production exceeding by 10 percent from benchmark of 525mmcfd is entitled for higher gas price under Petroleum Policy 2012. The increase in revenues recently have largely been due to the revised GPA combined with the application of 2012 Petroleum Policy on incremental gas volumes.

The firm’s future earnings prospects are also bright; the approval of additional 50 MCFD of natural gas from Mari gas field to TPS Guddu/GENCO-II with pricing under 2012 Petroleum Policy will be a boost to the earnings. MPCL has been aggressive in exploration activity; it plans to drill a total of 9 wells (6 exploratory and 3 development/appraisal) in the current fiscal year to improve its reserve replacement ratio. MPCL is also looking to diversify into power generation, planning a 400MW gas-fired plant in southern Punjab as per media reports.

Lastly, the table shows that the firm’s PEG ratio (P/E to earnings growth) is well below absolute upper threshold of 2. PEG is one of those quick-and-dirty, back-of-the-envelope calculations that address the shortfall of a P/E ratio; lower the ratio, the better, with anything at 1 or below considered good. In short, the PEG ratio shows that MPCL is not overvalued.