PPL 1HFY16

The oil and gas exploration and production (E&P) sector has had a slow start of FY16 on account of steep decline in international crude oil prices. Pakistan Petroleum Limited (PSX: PPL) also saw a clip in its earnings for 1HFY16.

The E&P firm's revenues are one of the chief reasons for the cut in the bottom-line; net sales for 1HFY16 travelled south by 29 percent year-on-year due to softer crude oil prices that dropped by around 45 percent year-on-year. Apart from that, the decrease in profits for the period also came from increase in operating expenditures, and higher exploration costs. Moreover, it is also expected that the firm would have incurred impairment charges that would have further eaten away the bottom-line. However, the increase in volumetric sales is likely to have provided the much needed support; oil and gas volumes witnessed an eight and three percent year-on-year growth in the first half of FY16.

PPL also saw a decline in its other income, which assisted the reduction in the bottom-line. Despite the notorious decline in crude oil prices, PPL is going forward with aggressive exploration activity. In 1HFY16, the E&P giant spudded four exploration wells compared to three in similar period last year. The firm increased seismic activity has incurred three dry wells since the start of FY16.

Going forward, some peace to the firm's earnings might be found with reducing the constraint on the liquidity by pulling in reins on aggressive exploration activity as crude oil prices continue to oscillate on the lower band. Exploration and drilling activity is capital intensive in nature. At the same time the firm should continue its development activity, which is less expensive.