Gas: Mari Gas Company Limited - Analysis of Financial Statements Financial Year 2004 - 2001 H 2009
Mari Gas is a Pakistani E&P company currently operating in the second largest gas field of the country, located at Dharki, District Sukkur. The company is the third largest in the industry, holding 12.3% of the total oil and gas reserves of the country, preceded by OGDC and PPL.
MGCL has the highest reserves life (28.8 years) in the industry. During FY05, MGCL discovered gas in the Ziarat block of Balochistan. The company plans to establish the early production facilities on a fast track basis after acquisition of 2D seismic data, completion of Well No 1 and drilling of two appraisal wells.
The Ziarat Block is a joint venture between MGCL with 60% working interest as operator and MND Exploration and Production Company Limited of the Czech Republic (40% working interest). Besides this, the company also has exploration licences at Hanna, Harnai and Sujawal as operator with 100% working interest. In addition to this, the government, on 19th July 2007, granted two petroleum exploration licences to the company along with OGDCL.
MGCL entered into the Zarghun South Gas Sales and Purchase Agreement with SSGC in August 2006. MGCL, with 35% interest, is the operator in the Bolan block where the Zarghun Gas Field is located. According to the agreement, the Bolan venture will supply 20-22 mmscfd of pipeline quality gas to SSGC. The gas reserves are expected to last 15 years and the field development project is in progress. Mari Gas has made a significant new gas discovery in Koonj Well No 1A in the Sukkur Exploration Block.
The Sukkur joint venture comprises MGCL - Operation with 50 percent interest share, Petroleum Exploration Limited (PEL) 35 percent, a Pakistani exploration and production company, and international Sovereign Energy Corp 15 percent, a Canadian exploration and production company.
The well was spud-in on April 22, 2008 and drilled down to a depth of 1475 metres in Pab Sandstone of cretaceous age. As a result, the Koonj Well No 1A discovery was made in the Sui Main Limestone Formation which tested minimum gas flow rate of 14.28 mmscf/day. The flow rates are expected to increase significantly with acidization treatment, which is planned to be completed well after completion.
The company has also conducted extensive exploration activities in the block area. There exist two other prospects within Sukkur block area, which will be drilled shortly. The construction of wellhead facilities and laying of pipelines are almost completed and the Foundation Power Co Dharki Ltd will start the commissioning period for their plant from March 2009.
Similarly, the drilling of three deep wells in Mari D&P Lease is in progress. MGCL being one of the major gas producers of the country has also made three new gas discoveries viz. (i) Mari-Sui Main Limestone, (ii) Mari-Pirkoh Limestone Formation and (iii) Ziarat Gas Field. It is listed on all the three stock exchanges of Pakistan.
E&P SECTORS RECENT PERFORMANCEThe exploration and production (E&P) sector showed 34 percent growth in the first half of FY09 as compared to the same period last year (SPLY). Sectors net profits increased to Rs 49.7 billion in the first half of FY09, as compared to Rs 37.0 billion in the corresponding period of FY08.
Sectors profitability increased despite a 3 percent marginal decline in oil and gas production. This has been mainly achieved due to higher oil and gas prices and 21 percent depreciation in rupee value against the dollar.
Also, cash-rich E&P sector was the greatest beneficiary of increasing interest rates scenario. Sectors other income which mainly includes interest income grew at 117 percent and stood at Rs 6.7 billion in 1HFY09 as compared to Rs 3 billion, a year earlier. This further supported the bottom-line growth of the sector. Also sectors earnings growth was mainly contributed by PPLs 48 percent followed by OGDCs 34 percent, Maris 29.44 percent earnings growth.
RECENT PERFORMANCEGross sales for the first six months of FY09 recorded 25 percent growth and stood at 13,280 million as compared to 10,622 million in the SPLY. Increase in GST from 15 percent to 16 percent and 38.24 percent increase in the fuel prices are the two major reasons for substantial gain in sales revenue.
Profit after taxation for the six-month period grew at approximately 200 percent and stood at Rs 1663.2 million as compared to Rs 551.9 million in the SPLY. Enormous growth in PAT is mainly because of increased average selling price. This has been partially offset by 27.3 percent growth in operating expenses, 16.8 percent growth in exploration expenditure and approximately 100 percent increment in financial cost.
Shareholders, currently, as per arrangement made under Gas Price Agreement, are entitled for guaranteed rate of return of 30 percent per annum. The return increases at the rate of one percent for each additional 20 mmscfd of gas beyond the level of 425 mmscfd on annual basis to a maximum of 45 percent per annum.
As a result, additional return of 2.17 percent was provided for the year-end June 30, 2008. On the operations side, Mari provided uninterrupted gas supply to its large customers like Fauji Fertilizer Company Limited, Engro Chemical Pakistan, Wapda and Sui Southern Gas Co Ltd. The average daily gas production in the six-month period stood at 465mmscf as compared to 464mmscf in the SPLY.
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RECENT PERFORMANCE 1HALF09 1HALF08 %CHANGE
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Gross Sales 13,276,550 10,622,602 25.0%
Operating Profit 1,732,276 1,279,129 35.4%
Other Operating Income 165,444 184,604 -10.4%
Finance Cost 143,713 71,453 101.1%
Other Charges 106,368 119,414 -10.9%
Profit Before Taxation 1,647,639 1,272,866 29.4%
Taxation (15,608) 720,968 -102.2%
Profit After Taxation 1,663,247 551,898 201.4%
Basic EPS 3.71 3.19 16.3%
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FINANCIAL ANALYSIS (FY04-08)
MGCL accounts for approximately 8.8% of the total production of oil and gas in the industry and 12.2% of the total gas production. This makes it the third largest producer of gas in the country. Companys net sales growth trend continues to show positive trends over the last three years. MGCLs net sales growth showed an impressive 82.13 percent in FY08.
This growth in gross sales may, then, be attributed partly to a favourable trend in wellhead oil and gas prices. This, along with other supporting factors, has resulted in manifold increase in profit after taxation, which increased from Rs 683.885 million in FY07 to Rs 2.56 billion in FY08.
Consequently, the profitability of MGCL, which had been witnessing a declining trend up to FY06, showed remarkable recovery in FY07 and in FY08. As a result, the profit margin and return figures jumped up. This change was a consequence of increased sales in the year, higher interest income and lower exploration expenditure besides the high wellhead oil and gas prices.
The companys ROE and ROA has also been improving because of impressive performance showed by the companys bottom line. The operating expenses formed only 5.96% of gross revenue during FY08, up from 5.01% in FY06. This reflects decrease in the operating efficiency of the company during FY08. However, the higher oil and gas process is deemed responsible for the trend.
MGCL fares better than the average firm in the sector in terms of inventory management but as well as in the collection of receivables. This longer receivables collection period up till 2006 had resulted in a longer operating cycle for the company. However, the average collection period is decreasing for the last two years.
The total assets turnover had been stagnant at 0.34 for the FY06 and FY05, which improved in last two years stood at 0.53 in FY08. The sales to equity rose slightly over the same period. The sales/equity decreased in FY08 and stood at 1.08 as compared to 1.13 in FY07.
The DSO of MGCL has been one of the highest in the industry. For the last two years, DSO has shown declining trend similar to other industry players. Declining MGCL shows MGCLs increasing efficiency in managing its assets. This is particularly important because it will positively affect the companys financial strength. The companys liquidity management as reflected in the current ratio is below the industrys standards.
The liquidity position, measured in terms of the current ratio continued to deteriorate till FY06 and then after a slight increase in FY07 declined to FY06s level. In FY07-08, both current assets and current ratio showed nominal growth rates of 2.1 percent and 4.59 percent respectively.
The debt ratios for MGCL have been considerably higher than its competitors; this reflects a much greater degree of leverage for the company compared to the average firm in the industry. The TIE seems satisfactory on a stand-alone basis but in comparison to the industry, the companys financial strength appears tarnished. The company in FY08 arranged a term finance loan of Rs 500 million from a consortium led by Bank Alfalah and other financial institutions.
The company acquired these loans to finance the drilling of three wells in Mari Deep, Goru B reservoir. The major portion of financial charges is composed of borrowing cost (decommissioning) which grew at 34.19 percent in FY08. The trend for EPS and book value seems positive for the company. The EPS jumped from Rs 18.61 in FY07 to 69.97 in FY08. The P/E ratio also dropped below average in FY08 and stood at 2.97 as compared to 30.81 in FY07. The company is far better in terms of book value but this might be due to a lower level of equity financing compared to competitors.
FUTURE OUTLOOKThe sectors overall profitability performance showed impressive in the first half of FY09. As we know that the main contributing factor behind the profitability was international oil prices and weakening rupee against the dollar. The recent decline witnessed in the international oil prices, which has already fallen below $40 per barrel, poses significant uncertainty about the sectors profitability on similar footings.
Although the falling oil prices present a downside risk to the sectors earnings, the weak Pak rupee against the US dollar is expected to make up for it as the sectors revenues are priced on an international parity basis. The soon-to-be announced Petroleum Policy 2009, is expected to be provide more incentives to encourage foreign and local investors in Exploration and Production of oil and gas.
It is expected that a separate policy for dormant fields, tight gas and unconventional hydrocarbon reservoirs would be approved to boost the gas exploration and production in the country. It is quite obvious that Petroleum Policy 2007 was not able to properly attract foreign and local investors within the country.
Especially, much operational problems have been witnessed in the Gas Price Gradient (GPG) mechanism. The Economic Co-ordination Committee of the Cabinet, recently, promised to review the GPG mechanism in the new Petroleum Policy. Mari Gas, itself, has several expansion and exploration plans in progress in the near future. In the production facilities, the Foundation Power Co.
Dharki Ltd will start from current month. Drilling of three deep wells in Mari D&P lease is in progress. Also Front End Engineering Design (FEED) to develop Zarghun Gas Field has been completed too. Volatile situation in the international oil prices, especially after Opecs demand of flooring the prices at $47/barrel, makes it quite uncertain to predict the trend of profitability. However, due to higher average gas prices, profit after taxation in second half of FY09 will certainly be higher as compared to same period last year.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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