Oil: PAKISTAN OILFIELDS LIMITED - Analysis of Financial Statements Financial Year 2009 - Financial Year 2010

Pakistan Oilfields Limited was incorporated on 25th November 1950. It is a subsidiary of the Attock Oil Company which holds 53.9% shares of the company.
In 1978, POL took over the exploration and production business from AOC and since then it has been investing independently as well as in the form of joint ventures with other E&P companies for exploration of oil and gas within and outside Pakistan. The free float of POL in equity market stands at around 42%. It is listed on all the three stock exchanges of Pakistan.
Industry background
The industry of exploration and production of oil and gas had existed in Pakistan even before the partition of 1947. According to government sources, 66 exploratory wells existed in the country before its creation. Up till now, 725 wells have been drilled in the country for the purpose of exploration. These drilling activities have produced 219 wells, out of which 54 were of oil and 165 were of condensate oil and gas.
It is pertinent to mention that the success rate of finding a commercially viable well in Pakistan is much higher than international success rates. In every three to four drillings, there is a find, while at the international level discovery comes after eight to 10 attempts. The country has so far 960 appraisal wells, which indicates how much potential of oil and gas exists in the area and whether an area is commercially viable or not.
The Ministry of Petroleum and Natural Resources has so far awarded 119 exploration licences to public and private sector companies.
Currently, the country has about 45 rigs from which the country's oil and gas demands are met. Local gas production is 4 billion cubic feet per day (bcfd) and the oil production is 37,000 barrels per day (bpd) against the demand of 9-10 bcfd of gas and 77,000 bpd of oil. Without any doubt, there is an excess demand situation that will remain so in the foreseeable future. All these supplies come from onshore drilling sites, as Pakistan's offshore drilling areas have not seen substantial activities till recently.
Operational facts
POL holds about 10% of the total oil reserves of the country. But it constitutes a greater portion, ie 13%, of the total oil produced in the country. In FY08, crude oil sales constituted 57% to the company's revenues. In FY09, the percentage dropped to 48.5%. This is mainly due to the fact that crude prices were unstable and the trend was mostly downward, which did not send positive signals to the industry for higher crude production. Also, due to work-over activities at two of the company's oilfields (Pindori-3 and Pindori-4), the revenues from crude declined by 27% to stand at Rs 7.052 billion. The second biggest contributor is gas that commands around 26% of the revenue. It is worth mentioning that in FY08, the second largest contributor to the revenue was POLGAS, which generated 25% to the revenue.
However, with the decline in total output and a 17% increase in gas production has caused the previous year's order to reverse in FY09. POLGAS, (a subsidiary under whose brand name the company markets LPG) is the third biggest contributor to the revenue, 9% down from FY08's, making up 23% (Rs 3.482 billion) of the total revenues. Solvent oil comprises 1.56% of FY09 revenue, showing a modest rise in terms of percentage of total revenue. Sulphur and LPG contributed a negative 0.34% to the total revenue. It is apparent that POL is heavily dependent on its oil production for revenues. The revenue mix for 2010 below shows net sales of various products. It reinforces the fact that Pakistan Oilfields Limited is mainly dependent on crude oil, gas and POLGAS for its revenues. Crude oil contributes 44.7%, gas 30% and POLGAS around 23.7% to the total revenue. Solvent oil contributes only 0.7% and sulphur and LPG combined contribute 1.2%.
Being a relatively small firm in the E&P sector, POL is less aggressive in its exploration activities. The exploration activities are mainly carried out in the form of joint ventures unless the prospects are exceptionally good. The major exploration interests of the company include Hyderabad, Ikhlas, Gurgalot, Kotra, Tal block and Kirthar South. All the above mentioned areas, except Kirthar South, have a low risk profile.
The exploration and production portfolio of POL includes two exploration licenses operated by POL itself which are in the Ikhlas and Hyderabad blocks. The former block is located in the Potwar Basin while the latter is in the Lower Indus Plain. POL has also acquired interests in five exploration licenses, namely Tal, Gurgalot, Kotra, New Block B, and Nawabshah blocks in joint ventures operated by MOL, OGDCL and TULLOW.
The production portfolio includes nine developments and production (D&P) leases operated by the company. All of these leases are in areas located in the Potwar Basin of the Upper Indus Plain. These fields are Balkassar, Dhulian, Joya Mair, Khaur, Turkwal, Meyal, Minwal, Pariwali and Pindori. Out of these, Pariwali and Pindori have a major contribution towards the company's overall production of oil. There are also seven D&P leases held in joint ventures with various operators. These include the fields of are Chak Naurang (operated by OGDCL), Adhi (PPL), Dhurnal (OPI), Bhangali (OPI), Ratana (OPI), Sara (TULLOW), and Suri (TULLOW).
Enhanced exploration activities are under progress at TAL Block, Ikhlas, Gurgalot and Margala and Margala North Blocks. It has diverted its exploration activities a little from the Tal block where significant oil and gas discoveries were announced recently. The Tal block is actually operated by MOL, and is the block where commercial quantities of hydrocarbons were found from test wells in the fields of Manzalai and Makori. These discoveries have contributed to POL's total reserves. Furthermore, POL has also applied for new exploration acreage in Sagri block, Kirthar South block and Peshawar block.
The major share of oil production for POL comes from four fields, namely Pindori (35% working interest), Pariwali (82.5% working interest), Adhi (11% working interest) and Tal block (21.1% working interest). In FY07, the production from the Pindori fields had declined temporarily due to the excess water injections in the wells. The effect of that event has had deep repercussions for the company. Its total oil production by sales volumes has seen a decline which has continued till FY08 and 1QFY09. However, the relatively higher prices of oil, as well as all other products, had translated into greater sales figures through the last two financial years, thus offsetting the effect of a production shortfall. But in FY09, the company faced tough situations mainly due to decreased production and falling prices of the Saudi light crude. The net sales of POL increased to Rs 14.04 billion in FY09 and 17.84 in FY10.
For FY10 POL has been granted two new licences for exploration in Rajanpur and Dera Ghazi Khan blocks.
Financial performance
Crude Oil continues to be the major contributor (48.5%: Rs 7.052 billion) to POL's net sales of Rs 1454 billion in FY09. However the contribution of the crude oil to revenue declined by 28% in FY09 (57% of net sales of over Rs 9.81 billion in FY08). This is due to a 26.8% decline in the crude oil prices during the year compared to FY08 and due to work-over activities taking place at the Pindori 3 and Pindori 4 fields. Natural gas contributed about 25.6% to the net sales, while that of POLGAS/CAPGAS amounted to 24% in FY09. Interestingly, the sales of natural gas showed an improvement of 17% for FY08, while the revenues from POLGAS/CAPGAS decreased by nearly 9% YOY 2009. The sales of sulphur declined by 35% from FY08 to Rs 0.754 billion, although it forms a very negligible portion of POL's net sales for FY09. It is worth mentioning that there was an increase in gas price by 36.9%, POLGAS price by 15.7%, solvent oil price by 16.8% and sulphur price by 72.3% as compared to last year. Crude oil sales volume decreased by 27.5%, gas by 14.3% and POLGAS by 25%. The cumulative effect of products price fluctuation and the decrease in volumes has led to a decrease of 16.1% in net sales to Rs 14,047 million.
The profitability ratios for many companies in the industry fell in FY10. However the profitability of Pakistan Oilfields Limited has slightly increased from 2009 to 2010. The gross profit margin has increased from 59.3% to 61.00%. The ROA has increased to 26.83% and ROCE to 25.53%. The profit margin has also increased to 41.68% from 39.99% in 2009.So the profitability has increased in 2010.The increase in gross profit in 2010 is due to the fact that gross profit has increased by around 31% as compared to 2009.The after tax profit of Pakistan Oilfield limited has increased by 32% from 2009 to 2010 and there has been no significant increase in the total assets therefore this increase in ROA is observed. Again net income has increased and common equity remains same so ROCE has increased in 2010.Despite a turbulent year for the oil gas sector, Pakistan oilfields limited managed to perform fairly reasonably. In terms of profitability, the Gross Profit for FY09 registered a sizeable decline of 20% to stand at Rs 8.41 billion (FY08 Rs 10.6 billion). Net profit for FY09 is Rs 5.58 billion, down about 33% from the previous year's Rs 8.412 billion. There are many apparent reasons for the decline in profitability of the company. During the year, the international oil prices saw considerable fluctuations, the prices of Arabian light ranging from a low of US $35 to a high of US $141 per barrel amid economic uncertainty and poor global economic projections. The rupee also devalued against various foreign currencies, especially the greenback. These external situations, coupled with 27% less crude production this year have adversely affected the profitability of the company. Both ROA and ROE can be brought up from its current levels to that of its competitors, thus indicating the untapped potential of POL.
FY09 cost of POLGAS/CAPGAS (ie purchasing and transportation costs) fell by 20% as compared to the same period last year. It must be noted that this cost subsided in FY09's first quarter compared to the costs for the same period of previous year, but that was due to fall in production.
POL's exploration costs continue to rise consecutively for FY09. FY08 saw a dramatic increase of two times compared to the same costs in FY07. The trend continues in FY09 and the cost stood at Rs 2.075 billion, a 100% increment compared to FY08. The major reason for this substantial increase was the cost incurred in exploration/abandonment activities at the company's own fields and in other joint ventures such as Adhi, Dhumal, Tal block, margalla block, Margalla south block. Growing exploration costs were also seen in the Tal, Margalla and Margalla south blocks, which are the areas on which POL is currently concentrating its exploratory activities. Other operating income increased by 46.7% to Rs 2,041.9 million. This increase is mainly due to good returns on bank deposits, dividend income from subsidiary and associate companies.
In FY10 cash and bank balances make around 33% percent of the total current assets. The current ratio has increased from 3.54 in 2009 to 3.69 in 2010, a slight change over the previous year. The liquidity position of the company, which had dropped below the industry's average last year, has declined slightly again. The current ratio has shown a decline of about 15% due to 20% decline in POL's current assets and a 5% decrease in current liabilities the decrease in current assets being mainly due to the cash at hand which stood at Rs 4.074 billion, 45% down from FY08 (Rs 7.5 billion). In FY09 cash and bank balances represented around 41% of the total current assets whereas, cash and bank balances amounted to around 60% of the current assets. One reason that accounts for smaller change in the current liabilities during FY09 is that the company has about 32% less tax liabilities.
The inventory turnover ratio of POL in FY09 stands at 71.54. This increase was mainly at the back of higher stock in trade, which rose by 52% in FY09 to stand at Rs 0.9591 billion and stores and spares grew by 21.52%. The Day Sales Outstanding finished higher this year as compared to last year, standing at 45.23 in FY09. The trade debts were slightly higher this year about 1.43% from FY08 to stand at Rs 1.82 billion. The non-proportionate change in net sales seems to be an important factor in this regard.
The Total Assets Turnover has dropped below 0.49 in FY09 to 0.39, primarily due to greater indulgence in exploration and the work-over activities by the company. This increased the acquisition of plants and equipment and simultaneously the exploration and evaluation assets of POL this year, adding to the non-current assets. The asset management ratios too have shown an upward trend in 2010, the total asset turnover has increased to 0.48 in 2010. The reason can be attributed to the increase in sales of 27% in 2010.The sales to equity ratio has increased to 0.61 showing that the stock invested is generating more sales per unit as compared to 2009. As the receivables turnover has increased the Day Sales Outstanding has fallen to 45.12 in 2010.
The Sales to Equity ratio declined further in FY09 at 0.53. This can be attributed to large decrease in the net sales of about 15% during the current fiscal year and a modest rise of about 1% in the total Equity. However it has increased to 0.61 in FY10. This can be attributed to the increase in sales in FY10 as compared to FY09 by 27%, equity remains the same.
Overall, the debt ratios relating to POL reflect the fact that the company is largely equity financed. It was only in FY06, when POL had taken long term loans that these ratios increased. Ever since the loans were repaid in FY07, debt ratios have plunged, making POL's debt management as good as its competitors. In FY09, the debt to assets ratio was 24.5% as compared to 22.08% in FY08. This is largely on account of increase in total liabilities which stood at Rs 8.952 billion, almost 16% higher than FY08. FY09 saw the Times Interest Earned ratio dropping to new low of 15.26%, despite the higher amount of debt in that year.
The debt ratios of 2010 also are indicative of the fact that the company is largely equity financed. The debt to equity ratio for 2010 is 35% and the company has very little debt on its balance sheet. The debt to asset ratios and long term debt to equity ratios are 25.9% and 23.6% respectively. This has not shown a substantive change from 2009.2010 showed a commendable increase in TIE to 45.29.This can be attributed to a 45% decline in finance costs and increase in EBIT of around 60%.
The market performance of POL has been commendable for a long period of time. The earnings per share of the company stood at Rs 23.59 per share in FY09. This is lower than the previous year's earning per share of Rs 35.57. This can be attributed to the lower net income and the demand for retained earnings for the various explorations and other activities the company is looking forward to.
This year, the company announced an interim dividend of 80% per share ie Rs 8 per share and further recommended a dividend of 100% ie Rs 10 per share. The cash dividend is higher this year as compared to FY08's dividend per share of Rs 16 and 20% bonus shares. The dividends per share for FY09 and FY10 have increased to 18 and 25.5. An increase in dividends per share shows that the company is making good profits. The book value fell in FY09 and later increased back in FY10 from 109.65 to 123.13. The EPS for 2010 is 31.44. The price/earning ratio has also increased to 6.87 in 2010.
Future outlook
Against all odds, Pakistan Oilfields Limited has managed to stay profitable in turbulent times. The decrease in profitability is primarily attributable to the decrease in production and the impact of the relatively higher exploration expenditure in this nine-month period, incurred primarily in Kirthar South, Ikhlas and Margalla blocks. This has, however, been offset by a favourable exchange rate variance between the rupee and the dollar and recognition of revenue upon the finalization of long outstanding crude oil sales agreements of certain fields.
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].