Oil and Natural Gas: PAKISTAN OILFIELDS LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2007
POL was incorporated on 25th November 1950. It is a subsidiary of the Attock Oil Company which holds 53.9% stake in 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 the search of oil and gas within and outside Pakistan.
The free float of POL in equity markets stands at around 42%. The company is listed on all the three stock exchanges of the country. It is a private sector E&P company with the Attock Oil Company being its major shareholder. POL holds 3.6% of the total oil and gas reserves of the country, consisting of 11.7% oil reserves and 2.2% of gas reserves (heating value). Hence it is a relatively small player in the industry.
Besides the production and exploration of crude oil and natural gas, the company is engaged in the business of producing LPG, sulphur and solvent oil. The LPG is marketed under the company's own brand name POLGAS, as well as under its subsidiary, CAPGAS Limited.
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 company holds about 4.3% of the total area under exploration. 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, hence the company avoids taking up projects in high risk areas. POL is the operator in Hyderabad, Ikhlas, and the Kirthar South.
For the FY08, the company plans to pursue an aggressive exploration strategy, reflected in the higher exploration costs being incurred for the last two years. The company is now concentrating on new blocks. It has managed to acquire 30% working interest in Margala and Margala North Blocks, located in Punjab and NWFP respectively.
The blocks are operated by MOL. After seismic study of Kirthar South Block, the company has plans of drilling two exploratory wells by June 30, 2008. Moreover, Pariwali-6 in Pariwali Field was completed and on an average the well produced 950 bpd and 8.7mmcfd of gas. Drilling of Pariwali-7 well is planned during the year after completion of work over at Pindori-6 Well.
The civil works at the well location have been completed. Besides this, Hashim-1 well, in Hyderabad Block was spudded in Sep'06. However, due to negative results, well was abandoned as a dry hole. At Adhi field stem drill was performed in Khewra and Tobra sandstones tested 235 bpd and 2mmcfd of gas.
In the Tal Block, Manzalai-3 was tested for 11.78mmcfd of gas and 67 bpd of oil. Manzalai-4 is being drilled from Makori-1 after the work over the well was flowing at 1,667 bpd and 22.03mmcfd of gas. An application over Kalachitta Block in NWFP and Punjab is pending due to security reasons.
POL has interests as operator in 9 fields and non-operating stakes in another 7 fields. The major share of 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).
The production from the Pindori fields has declined temporarily due to the excess water injections in the wells. During the first half of FY07, POL completed the drilling and testing of the Pariwali-6 Well.
Various drilling and testing projects were also undertaken during the year in POL's non-operated blocks. These include the development of Adhi-18 and a work over at Adhi-13 Well. In the Tal block, the testing of Manzalai-3 and a work over on Makori-1 was also conducted.
The E&P sector has been enjoying the impact of higher international oil prices since the FY06. The oil prices peaked during the period from July-august 2006. Oil contributes to 56% of POL sales revenue as against a 38% contribution for OGDCL and only 2.2% contribution for PPL. Hence POL is the biggest beneficiary of the rising oil and gas prices in the international arena.
The FY06 witnessed a 73.6% increase in the gross sales of POL. This translated into 81% higher gross profits and 62.7% higher net profits for the FY06, as compared to the FY05. The increase in sales revenue was a result of higher oil prices as well as higher production during the FY06.
The increase in production came from the Pindori, Pariwali and Manzalai fields. POL holds 82.5% shares in the Pariwali fields and 35% shares in the Pindori fields, and theses fields are a major source of production for the company. Hence the increase in production had a significant impact on POL.
The company was less fortunate in the FY07 wherein net sales revenue declined by 2.8% on the back of a 16.5% decline in average oil production by the company. POL suffered from declining production in the FY07 from its two main fields, Pindori and Pariwali.
Production from Pindori declined due to excess water injections in the fields. POL holds 35% interest in the Pindori fields and 82.5% interest in the Pariwali fields. The decline from the two fields therefore has a significant impact on earnings. The effect of the decline in oil production was partially offset by a significant growth in the POLGAS business.
However this problem has been curtailed to some extent and further work on the field is in progress and the production figures are expected to improve in future from this field.
At Pindori Well-2, severe water inflow was observed, resulted in plugging and abandoning of the well and decision to drill a replacement well - Pindori Water Injector Well-2A - was made. Drilling is still in progress at the site.
With respect to Pindori-6, A consultant has been approached for quick analysis to work out the rationale for the early water breakthrough at the field and to prepare a remedial action plan to arrest the decline in production in which the consultant will recommend future production optimization by having in-fill/more development wells.
The production from Pariwali followed a negative trend and its contribution to total production fell from 32.3% in March 2007 to 21% in April. This production trend from the two fields is illustrated in the graph below. The accompanying table shows the impact on EPS at various production levels of Pindori and Pariwali fields.
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Production scenarios
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Pindori Pariwali
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Avg Gas Avg Oil Revenue EPS/07F Avg Gas Avg Oil Revenue EPS'07F
(mmcfd) (bpd) (Rs m) (Rs) (mmcfd) (bpd) (Rs m) (Rs)
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8.0 5000 7,047 18.95 13.5 1,900 3,493 9.39
6.5 4000 5,645 15.18 12.5 1,800 3,287 8.84
5.5 3000 4,283 11.52 11.5 1,700 3,080 8.28
4.5 2000 2,920 7.85 10.5 1,600 2,874 7.73
3.5 1500 2,200 5.91 9.5 1,500 2,667 7.17
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The price trends, however, remained positive for all products except sulphur, showing an increase as compared to last year. The average crude oil price increased by 2.4%, gas by 4.1%, POLGAS by 24.1%, solvent oil by 4.9% whereas there was a decline in the average selling price of sulphur by 24.4%. Sales volumes declined for crude oil by 17.1% and gas by 3.9% whereas there was an increase in sales volumes for POLGAS by 16.1%, solvent by 5.5% and sulphur by 25.9%.
The higher product prices cushioned profits against the decline in production, thus resulting in a nominal increase in net profit of 3.1% and an improvement in the net profit margin. The gross margin, however, has suffered in the FY'07 due to the higher cost of production.
During FY'07, the cost of sales increased by 16.5%, mainly due to the higher number of work over jobs carried out, increase in the quantity of LPG acquired for POLGAS operations and an increase in amortization of exploration and development cost due to higher development activities. Exploration cost for the FY06, rose by 43.2% and was a major reason for the lower profit margin for the year.
The capitalization of the Manzalai exploration costs during the FY07 after the declaration of commercial feasibility of the field brought about a 72.4% decrease in exploration costs for FY07. This capitalization has greatly enhanced profits for the year. Excluding the impact of this capitalization, however, the exploration charges have increased nominally during the last fiscal year. The mounting exploration costs indicate the company's greater focus on exploration activities to enhance its growth potential.
Other operating income increased significantly as compared to last year by 23.5% to Rs 913 million. The increase is mainly due to better returns on bank deposits, higher profit earned on available-for-sale investments and higher dividends from subsidiary/associated companies.
Finance costs had jumped up during the FY06 as a result of the debt servicing of the loan taken during the year. However, during the first half of the FY07, the company managed to repay the entire outstanding amount of Rs 2.7bn for the loan which had been obtained by the company to finance 25% stake in National Refinery Limited. As a result, the finance cost has declined by 40% for FY07, compared to FY06.
The liquidity position of POL dropped below the industry average during the FY06 but the company has been able to regain its former superior position in the FY07. The decline was a result of the loans taken by the company during the FY06, which increased the current liabilities portion of the company's debts as a portion of the loan matured in the short term and interest charges became due. Consequently, the cash assets of the company also declined for the FY06 as the company repaid the outstanding debt. The FY07 saw an improvement in liquidity as the current portion of the long term debt was eliminated as a result of a complete repayment of the loan.
Trade debts and inventory make up the major portion of current assets. This may not reflect well on the financial position of the company and its efficiency in asset management. So even though the current ratio depicts a strong liquidity status of POL, the allocation of resources may be questionable.
POL is a largely equity financed company, as indicated by the low debt ratios. The debt ratios observed a jump in the FY06 when the company acquired long term loans. Consequently, the TIE declined to its lowest level over the last four years. With The repayment of the loan in the FY07, the debt ratios dropped, falling below the FY05 levels. The debt ratios have performed better than average throughout the period under consideration, except on the FY06 when the long term debt to equity for POL was higher than the industry average.
The TIE is also strong, even though it has dropped tremendously over the last few years. But even after the decline, the company's financial position remains healthy, especially after the repayment of loan taken during FY06.
POL performs better than its competitors in terms of collection of receivables but lags behind the industry in terms of inventory management. However, the operating cycle of the company is shorter than the average firm in the sector. The inventory turnover has been on an increasing trend since the FY05. Similarly, DSO also jumped up during the FY06 but improved slightly during the FY07, dropping below the previous level. The company's total assets turnover has performed slightly better than average for the FY06 and FY07. The sales to equity, however, observed a decline in the FY07, thus bringing the company below average. The 2.8% decline in sales revenue during FY'07 played a role in the declining trend of TATO and sales/equity.
The EPS has been on a positive trend since the FY04 and the trend continued during the FY06 and the FY07 on the back of higher profits. The EPS for POL has been higher than the EPS of competitors. Moreover, the P/E ratio, the dividend per share (DPS) and the book value figures are also higher for the company. POL has declared the highest DPS for the FY07, compared to the other major E&P companies in the country. This reflects favorably on the company's performance. At the end of FY'07, the company's stock was trading at a PE multiple of 9.90.
Future outlook
The Federal Budget 2007-08 has announced the removal of excise duty on POL products and an exemption of 1% surcharge on all imports by POL. Through this measure, the government seeks to maintain the prices of petroleum products at reasonable levels for consumers. This means that the prices of POL products are likely to remain constant, given that international prices also follow a similar trend. Moreover, the budget has also exempted Permanent establishments of non-resident E&P companies from withholding tax on supply of crude oil and gas.
The Tal block is another major source of production for POL, with the company holding 21.1% stakes in the block. The discoveries of the Manzalai field and the Makori fields in the Tal block will substantially add to the production of the company. The company's oil and gas production will increase by a whopping 123% as the additions from these fields come online. The EPS of the company will be favorably affected y these changes. Moreover, the company is hopeful for improvement in production from Pindori from FY'08 as the field has recoverable balance of 34.95m boe. Workover and development work is being carried out for Manzalai 3 and Makori-1 of Tal block, while drilling of Manzalai 4 and Mami Khel 1 is in progress, therefore improvement in production is expected from these blocks in the near future.
In addition, as mentioned previously, oil contributes to more than 56% of revenue for the company; hence it is the major beneficiary of any increase in oil prices. However, the drawback of this reliance on oil is that the company faces a direct hit in case of a decline in oil production. The additions of more fields as well as the restoration of production levels from the Pindori and Pariwali fields is, therefore, very essential for the company's future profitability.
The Government has also announced the Petroleum Policy 2007. Under this policy, the $36 per barrel cap has been removed and the oil and gas prices are linked 100% to international oil prices with appropriate discounts and differentials. Moreover, the policy also allows the companies to export gas, crude oil and condensate if the domestic supply is sufficient to meet demand. Furthermore, the energy policy announced in July 2007 envisages a 6-8% increase in the oil and gas production prices on explorations made by the petroleum exploration and development companies from now on. The policy also requires the producers to sell their production through a 25km from the field gate and then get a transportation tariff for participating in pipeline development beyond the obligatory 25km. However, the existing companies are to follow the existing policy but companies which have already submitted their application or grant of license are in the exploration phase can switch to the new policy at 20% discount. This policy can open up new avenues for the company
The new policy holds incentives for the E&P sector companies, especially for companies which are pursuing aggressive exploration activities. The policy will lead to a 6-8% increase in the oil and gas production prices on new discoveries made by the exploration and development companies. Hence, keeping in mind the company's enhanced focus on exploration activities, POL is likely to benefit greatly from the new policy and the policy will broaden the horizons for the company.
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PAKISTAN OILFIELDS LIMITED
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INCOME STATEMENT (Rs '000) FY'04 FY'05 FY'06 FY'07
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Net Sales 6,842,397 8,998,031 15,375,194 14,239.420
Royalty 675,340 804,635 1,447,500 1,281.229
Gross Profit 3,825,295 5,391,007 9,756,491 8,536.524
Exploration Expenditure 803,866 703,109 1,238,618 341.784
Other Operating Income 613,214 610,625 739,273 913.156
Finance Cost 1,280 14,998 376,882 226.016
Taxation 866,000 1,174,000 2,149,000 1,908.000
Profit After Taxation 2,496,387 3,777,704 6,502,524 6,314.587
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BALANCE SHEET (Rs '000) FY'04 FY'05 FY'06 FY'07
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Share Capital 1,314,144 1,314,144 1,971,216 1,971,216
Total Equity 9,008,153 11,132,417 14,624,496 19,476.203
Long Term Loan Secured - - 1,620,000 -
Total Long Term Liabilities 2,483,259 2,942,931 4,667,048 3,635.234
Total Current Liabilities 1,212,053 1,764,617 3,949,704 1,908.959
Total Liabilities 3,695,312 4,707,548 8,616,752 5,544.193
Stores And Spares 740,154 694,912 1,566,890 2,279.523
Stock in Trade 20,681 30,216 62,774 69.207
Trade Debts 770,392 1,083,357 2,489,937 2,343.639
Cash And Bank Balances 5,062,542 5,240,201 3,923,783 3,173.303
Fixed Capital Expenditure 4,675,482 5,829,506 6,500,547 8,153.327
Total Non-current Assets 5,216,871 8,385,889 14,847,560 16,819.885
Total Current Assets 7,486,594 7,454,076 8,393,688 8,200.511
Total Assets 2,703,465 15,839,965 23,241,248 25,020.396
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PROFITABILITY FY'04 FY'05 FY'06 FY'07
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Profit margin 36.48% 41.98% 42.29% 44.35%
Return on Asset 19.65% 23.85% 27.98% 25.24%
Return on Common Equity 27.71% 33.93% 44.46% 32.42%
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LIQUIDITY FY'04 FY'05 FY'06 FY'07
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Current Ratio 6.18 4.22 2.13 4.30
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY'07
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Inventory Turnover 40.03 29.01 38.16 59.38
Day Sales Outstanding* 40.53 43.34 58.30 59.25
Operating cycle 80.56 72.36 96.46 118.63
Total Asset turnover 0.54 0.57 0.66 0.57
Sales/Equity 0.76 0.81 1.05 0.73
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07
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Debt to Asset(%) 29.09% 29.72% 37.08% 22.16%
Debt/Equity 0.41 0.42 0.59 0.29
Times Interest Earned 2626.90 330.20 22.96 40.08
Long Term Debt to Equity(%) 27.57% 26.44% 31.91% 18.67%
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MARKET VALUE FY'04 FY'05 FY'06 FY'07
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Earning per share 19.00 28.75 32.99 32.03
Price earning ratio 10.98 9.83 10.16 9.90
Dividend per share 12.50 12.50 12.50 15.00
Book value 68.55 84.71 74.19 98.80
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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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