Oilfields: PAKISTAN OILFIELDS LIMITED - Analysis of Financial Statements Financial Year 2003-1Q 2009

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 search of oil and gas within and outside Pakistan. The free-float of POL in equity markets is around 42%.
The company is listed on all the three stock exchanges of Pakistan.
BACKGROUND OF THE INDUSTRY The industry of exploration and production of oil and gas had existed in Pakistan pre-partition. 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 exploratory purposes.
These drilling activities have produced 219 wells, out of which 54 were of oil and 165 were of condensate oil and gas. It is also said that success rate of finding a commercially viable well is much higher in Pakistan than the international success rates. Between every 3 to 4 drillings there is a find, while at international level discovery comes after eight to ten 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 for Petroleum and Natural Resources has so far awarded 119 exploration licences to the 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, which will remain so in the foreseeable future. All of these supplies come from onshore drilling sites, as Pakistan's offshore drilling areas have not seen much activity till recently.
COMPANY'S 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. If POL's revenues are scrutinized, it would be seen that Crude Oil's sale constitutes 57% to the company's revenues.
The next biggest contributor is POLGAS, a subsidiary under whose brand name the company markets LPG, making 23% of the total revenues. Natural gas makes 19% and the remaining accounted for by solvent oil, sulphur and LPG. It is apparent that POL is heavily dependent on its oil production for revenues. 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. This indicates the company's risk averse attitude in taking up projects.
The exploration and production portfolio of POL includes two exploration licences 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 development 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).
Recently, POL has become more active in Ikhlas, Margalla and Margalla North blocks for exploration. 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 Q1FY09. 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.
RECENT RESULTS 3Q09 The company has earned a profit after tax of Rs 822 million for the quarter ended March 31, 2009 (quarter ended March 31, 2008: Rs 1,703 million). The results translate into earnings per share of Rs 3.47 per share (quarter ended March 31, 2008: Rs 7.2 per share). On year-to-date basis, profit after tax for the nine months ended March 31, 2009 is Rs 4,687 million (nine months to March 31, 2008: Rs 5,422 million). Earning per share for the nine-month period, are Rs 19.82 (nine months to March 31, 2008: Rs 22.92).
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 Margala 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.
During the nine months, the Company's share in production, including that from joint ventures, averaged 3,876 barrels of crude oil per day (nine months to March 31, 2008: 5,258 barrels per day), 39 million standard cubic feet per day of gas (nine months to March 31, 2008: 45 million standard cubic feet per day), 83 barrels per day of solvent oil (nine months to March 31, 2008: 103 barrels per day) and 97 metric tones per day of LPG (nine months to March 31, 2008: 120 metric tonnes per day).
COMPANY ANALYSIS In FY08, crude oil formed the major contributor, as much as 57%, to POL's net sales of Rs 17 billion (58.5% of net sales of over Rs 5 billion in Q1FY09). This is due to a 27% increase in the Crude Oil sales carried out in FY08 as compared to FY07. Natural gas contributed about 18.6% to the net sales, while that of POLGAS/CAPGAS amounted to 22.4%.
Interestingly, the sales of natural gas showed a very marginal decline for FY08, while the production of POLGAS/CAPGAS increased by nearly 13% from last year. The sales of Sulfur are worth mentioning as it increased by nearly 2.8 times from FY07, although it forms a very negligible portion of POL's net sales for the year.
POL has a relatively fair set of profitability ratios, although its profit margin is hovering above the average seen in the E&P sector. The gross profit for the year touched a new record high in the company's history, amounting to Rs 10.6 billion. It was a 24.6% increase compared to 2007's gross profit of Rs 8.5 billion.
The profit of FY08 was Rs 8.4 billion, a 22% increase from the previous year's Rs 6.9 billion. For Q1FY09, the profit for the period was Rs 2.3 billion, an increase of 36.3% from the same period last year. Both ROA and ROE of the company can be brought up from its current levels to that of its competitors, thus indicating the untapped potential of POL.
The cost of purchasing gas, transport, etc, of POLGAS/CAPGAS grew by 15% from last year, on account of greater gas prices and transport costs prevailing in the country. It must be noted that this cost subsided in FY09's first quarter compared to the costs for the same period of last year, but that was due to a fall in production.
POL's exploration costs saw a dramatic increase of 2 times compared to the same costs in FY07. If first quarter figures are compared, the difference amounts to 7 times that of Q1FY08's exploration costs. The major reason for this substantial increase was the cost incurred because of digging up dry wells or abandoning of wells not found to be of commercial value in Khaur, one of POL's own fields.
The costs incurred in Khaur formed over half of POL's total exploration costs this year. Growing exploration costs were also seen in the Tal, Margalla and Margalla North Blocks, which are areas on which POL is currently concentrating its exploratory activities. 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 marginal decline due to slightly greater growth in POL's current liabilities than its current assets. This is despite the fact that POL's cash and bank balances showed a 3.5 times increase from the last year, amounting to 60% of the total current liabilities.
In FY07, cash and bank balances only amounted to 40% of the current assets. A relatively similar trend was seen in this year's first quarter. One reason that accounts for the greater change in current liabilities is that the company has more than doubled its provision for taxes. The inventory turnover ratio of POL lags behind its competitors, although it improved significantly in FY08.
This improvement was on the back of a smaller inventory kept of oil and other products. The Day Sales Outstanding, which was already many times better than the industry average, has seen a very favourable decrease than last year. Both these factors combine to give POL one of the shortest operating cycles of the sector.
The Total Assets Turnover has dropped below 0.5 this year, primarily due to greater indulgence in exploration 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. Side by side, the impact of an abnormal increase in cash and bank balances was reflected in larger current assets.
The sales to equity ratio declined further in FY08, after witnessing a drop below the industrial average last year. This can be attributed to large increases in the special reserves and general reserves in the equity section of the company.
This represents the company's share of post-acquisition profit set aside as a special reserve by National Refinery Limited. This was a result of a directive of the Government to divert net profit after tax above 50% of paid-up capital to offset against any future loss or to make investment for expansion or up gradation of refineries.
This trend continues in Q1FY09, when a bonus reserve was also kept aside. But keeping this circumstance aside, the above two ratios are less than the industry's average, making it apparent that the company's sales are not as high as they should have been considering the level of assets and equity of the company. 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 Q1FY09, the debt to assets ratio increased to 30% on account of a slight decrease in equity and the liability for paying dividends to the company's shareholders.
FY08 saw the Times Interest Earned ratio dropping to new low, despite the slightly higher amount of debt in that year. It should be noted that despite the company's better overall debt ratios, its TIE ratio is far behind its competitors. This suggests that other companies manage to earn many more times their finance costs than POL does. Market performance of POL has been commendable for a long period of time.
Ever since a dip in the earnings per share ratio in FY03, the EPS has seen a growth trend that has continued during FY08. The EPS for the company has been higher than the industry average. Similarly, the price to earnings ratio, dividend per share and the book value per share are relatively higher than POL's competitors.
In FY08, the EPS of POL had risen to Rs 42.68 from Rs 34.94 in FY07. In the first quarter of the current year, POL's EPS was Rs 11.65, an increase of over 36% from the same period last year.
FUTURE OUTLOOK The Tal block is another major source of production for POL, with the company holding 25% stakes in the block. In the Tal block, the discoveries of the Manzalai field and the Makori fields as being fit for commercial exploration have added to the production of the company. The company's oil and gas production will increase substantially as the additions from these fields come online. The EPS of the company will be favorably affected by these changes.
In addition, as mentioned previously, oil contributes 57% 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 addition of more fields as well as the restoration of production levels from the Pindori and Pariwali fields is, therefore, very essential for company's future profitability.
Petroleum Policy 2007 bode well for the exploration and production sector, but had its limitations. Sources said that 2007 Petroleum Policy could not be implemented, as it had been formulated when the international crude oil prices were in the range of 50-70 dollars/bbl.
Thereafter, the international oil prices showed tremendous hike and at a time, touched 146 dollars per barrel. As a result, the E&P companies and Pakistan's Petroleum Exploration and Production Companies Association (PPEPCA) resented the fact that Petroleum Production and Exploration Policy (PPEP) of 2007 had a pricing formula which did not offer the sufficient incentives, since the costs of doing business had increased manifold due to high energy prices in the international market.
The new Petroleum Policy 2009 seeks to rectify the shortcomings of the old policy. It focuses on inducing investment into the exploration and production sector so that immediate energy needs of the country are catered to as soon as possible. This would be done by offering incentives to promote exploration on a fast track basis.
The previous policy criteria for companies, entitled to acquire petroleum rights, are being changed, made flexible and simple. The main objective is to create more competition among companies (local and foreign) and to develop local technical base to reduce dependence on foreign companies.
The procedure for a company to enter into Pakistan's E&P sector is being simplified. Measures in the Petroleum Policy 2009 that are made to ease entry in to the sector are: call-for-nomination concept is being relinquished to reduce the time taken in awarding exploratory blocks; bidding process for a new bidder would be complete in 60 days instead of 90; and smaller local Pakistani companies will be allowed as new entrants to join consortia of other companies as non-operators to gain requisite experience to handle the operator-ship independently. Also, for the grant of lease after expiry of lease term (off shore and on shore) the existing leaseholder is being given first right to match the highest bid.
The pricing policy has been kept such that does away with the complications of 2007's policy and at the same time induced speedier exploration by companies. For example, bid evaluation procedure has been simplified by eliminating the factor of biddable gas price gradient (GPG); also, in the extended well testing (EWT) (off shore and on shore), discount in gas prices has been reduced from 15 percent to 10 percent during the EWT phase.
It would encourage companies for early production of gas. Interestingly, there also is a cap of $100 per barrel in order to safeguard the government interest against the high international crude oil prices. The above policy was made on E&P companies' resentment over the Petroleum Policy of 2007. Thus, the new measures would help these companies to gain much more out of exploratory activities.
Unfortunately, we have not seen that POL indulges in risky exploration projects, although this trend has been changing in the recent years. The incentives of the above mentioned policy would influence the company to venture into riskier avenues. On the other hand, it will encourage new firms to enter the industry as POL's competitors.
POL's established competitors, OGDCL and PPL, are looking to expand to other countries like Yemen, Iraq, Nigeria and Sudan. Furthermore, off-shore drilling has been started in the country, with companies hopeful that there will be massive gas discoveries in offshore drilling. The government is working to intensify exploration activities in Balochistan's area of Kohlu, which is famous for having natural resources in abundance.
Unfortunately, POL has not ventured into any of the 3 opportunities mentioned above. It does not plan any expansion out of Pakistan, and it does not have any operations or mining/D&P leases in offshore areas, or in the Kohlu district. POL would have to make the most out of the government incentives offered and the opportunities presented in order to successfully expand from a small firm into a bigger player in the E&P sector.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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