E&P sector in FY20

The looming gas crisis this winter is a testament to declining gas production and depleting gas reserves in the country. Production volumes by oil and gas exploration and production sector have been sluggish while the demand has been on the rise, and COVID-19 played its part in pushing them down further.

And though the domestic oil and gas exploration and production companies have kept themselves busy in the drilling and exploration activities, the foreign investment picture of the sector is also not sanguine. FDI in the country is struggling and now that even CPEC projects are completing, the prospects amid COVID-struck world are also weak as global producers and investors are sitting on the fence. Within shrinking FDI, the E&P sector’s share has also been erratic off late: from an average of 34 percent between FY12-FY15 to 6 percent in FY18 and 12 percent in FY20.

Against the backdrop, the E&P sector’s performance in FY20 was substantially affected by 4QFY20, which coincided with the first three months of the coronavirus pandemic. Overall in FY20, the listed E&P sector saw its earnings squeezed by 10 percent year-on-year, which was brought by decline in overall revenues by 3 percent year-on-year, as well as other income that came down by over 30 percent due to currency devaluation. However, company-wise, OGDCL, POL, and PPL witnessed steeper decline compared to MARI that posted a 21 percent rise in topline and a 25 percent growth in the bottomline, year-on-year.

Coming to fourth quarter, the decline in revenues of about 28 percent for the listed E&Ps - particularly OGDCL, PPL and POL – was sharper owing to a decline in oil and gas production amid low demand and hence low offtake by the refineries. Earnings declined by a massive 40 percent year-on-year for the listed E&P sector in 4QFY20, where decline in other income of around 65 percent also played its part.

What is in for FY21? The sector’s profitability in at least the first quarter (1QFY21) that continues to coincide with the some sort of COVID-19 related lockdowns and restrictions will be reined in by the ongoing pandemic as the crisis is far from over – resulting in lower earnings year-on-year. However, some respite in 1QFY21 versus the previous quarter (4QFY20) is likely to result in higher quarter on quarter profitability. As far as FDI in the sector is concerned, there is not much happening to attract foreign investors who are already scaling back on investment plans due to the pandemic. The government is hoping to award 20 new exploration licenses and is reportedly working on its long-awaited shale gas policy to attract foreign investors, but with no timelines and much uncertainty, it is safer to not bet on them as yet.