Oil prices drive POL’s earnings

One thing that has flipped in FY22 versus FY21 has been the price trend of commodities including crude oil, which has a key bearing on the oil and gas exploration and production sector’s profitability. The first quarter of FY22 (1QFY22) for the domestic E&P sector is expected to benefit from the upswing in crude oil and gas prices along with significant currency depreciation.

Pakistan Oilfields Limited (PSX: POL) in its recently announced financial performance for 1QFY22 has posted a 27 percent rise in revenues and a 45 percent year-on-year growth in earnings. The increase in the E&P company’s topline resulted from an almost 70 percent increase in crude oil prices. At the same time, the currency depreciation also played its part in lifting the revenues for the 1QFY22, and together the oil prices and currency depreciation were able to offset the decline in production. POL’s oil and gas production continued to slowdown, posting around a 10 percent decline in oil and gas each, year-on-year.

There was also a hefty growth in exploration and prospecting expenditure - rising by 6 times in 1QFY22 versus 1QFY21 due to increased seismic activity in a block named Taung according to AKD Securities. Finance costs also escalated by 17 times during the quarter. However, currency depreciation helped the bottomline with 9 times increase year-on-year due to exchange gains.

A key concern for the oil and gas exploration and production sector is weakness in production volumes despite the demand. Where oil and gas production was up in the last quarter of FY21, it was down again in 1QFY22. Higher international oil prices along with significant discoveries and higher oil and gas production are what drive earnings for the sector, but the sector has been affected by the circular debt. Where foreign investment in the E&P sector has been waning with a few significant ones exiting, the circular debt has weakened the liquidity position of the domestic E&P sector in general, leaving them with little cash for aggressive oil and gas exploration, drilling, and production activity.