Oilfields Company: PAKISTAN OILFIELDS LIMITED - Analysis of Financial Statements Financial Year 04-1H'10

Pakistan Oilfields Limited 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 exploration of oil and gas in and outside Pakistan.
The free float of POL in the equity markets stands at around 42.0%. The company is listed on all the three stock exchanges of the country.
Industry background: The industry of exploration and production of oil and gas had existed in Pakistan even before the Partition. According to government sources, 66 exploratory wells were 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 also said that the success rate of finding a commercially viable well is much higher in Pakistan than international success rates. Almost 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 indicate 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 licenses 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 a 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.
Recent results 1H10:
Sales declined by 11.25% to Rs 8.17 billion. The decline in sales and GPM was due to declining international oil prices. Gross margin declined to 55% from 63% in 1H09. Exploration costs have reduced by more than 50%. This decrease was brought about by charging an amount of Rs 964 million to the account of abandoned and dead wells in profit and loss statement.
Financial charges have also reduced by more than 50%. Other operating income has also declined to Rs 845 million as compared to Rs 1410 million in 1H09. The decline can be attributed to lower interest earned on funds placed with the banks. During the period the company has made profit after tax of Rs 3.319 billion (December 31, 2008: Rs 3.866 billion), which is lower by 14.2% from the corresponding period.
Earnings per share decreased from Rs 16.34 to Rs 14.03 per share as compared to last period. During the period, "Manzalai Central Processing Facility" has commissioned successfully. This field is currently producing 220 million standard cubic feet per day (MMSCFD) of Gas and 4,000 barrels per day (BPD) of Condensate, which is expected to increase in future.
POL's share in production from all fields including operated and non- joint ventures for the period under review averaged at 3,834 barrels of crude oil per day (BOPD) and 45.76 million standard cubic feet per day (MMSCFD) of gas, 87 barrels per day (BPD) of solvent oil and 93.90 metric tons per day (MT/D) of LPG.
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's sale 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 downwards, which did not send positive vibes in 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 7.052bn. The second biggest contributor is gas, which commands around 26% of the revenue.
It is worth mentioning that in the FY08, the second largest contributor to the revenue was POLGAS (with a 25% contribution 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 the FY09 revenue, showing a modest rise in terms of percentage of total revenue. Sulphur and LPG contribute a negligible 0.34% to the total revenue. It is apparent that POL is heavily dependent on its oil production for revenues. Overall, the revenues for the FY09 registered a decline of 15.21%.
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 Margalla and Margalla 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 1Q09.
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.
Company analysis: 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 plus 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 noticing that there was an increased 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 volumes decreased by 27.5%, Gas by 14.3% and POLGAS 25.0%. 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.
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). The net profit for FY09 is Rs 5.58 billion, which is about 33% down 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 ended weaker against various foreign currencies, specially the greenback. These external situations, coupled with 27% less crude production this year have adversely affected the profitability. 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.
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 the send year ie FY09. FY08 saw a dramatic increase of 2 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 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. 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 total current assets whereas, cash and bank balances amounted to around 60% of the current assets. One reason that accounts for the smaller change in current liabilities during FY 09 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 FY08.
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. 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.
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.
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 the FY08. This is largely on account of increase in total liabilities, which stood at Rs 8.952 billion, almost 16% higher than that of 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 market performance of POL has been commendable for a long period of time. 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% 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.
Future outlook: Against all odds, the 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. However the company is undertaking aggressive exploration and joint ventures. Recently, the POL has been awarded two new exploration licences in D.G. Khan and Rajanpur areas by the government.

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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Copyright Business Recorder, 2010