POL 9MFY22: Of oil prices and exchange rate

FY22 has seen record-high crude oil prices among other commodities. And the Russia-Ukraine tensions have kept oil prices high. This is a key growth factor for the E&P sector’s earnings in the latest quarter (3QFY22). Pakistan Oilfields Limited (PSX: POL) announced its financial performance for 9MFY22 last week where its earrings were seen climbing by 83 percent year-on-year.

The growth in the E&P firm’s earnings came primarily from the top line due to higher international crude oil prices. Revenues of the company grew by 41 percent and 37 percent year-on-year for 3QFY22 and 9MFY22 respectively. Oil prices were higher by 70 percent year-on-year in 3QFY22, and 72 percent year-on-year in 9MFY22. Besides higher prices, currency depreciation of 11 percent was also added to the topline. However weak production stats for oil and gas continued to reign in the topline growth. Crude oil and natural gas production decline continued during the 3QFY22 where the two were seen falling by around 13 percent and 5 percent year-on-year, respectively.

There was also a hefty growth in exploration and prospecting expenditure - rising by four times in 9MFY22 versus 9MFY21 and by 78percent year-on-year in 3QFY22 increased seismic activity and hence increased geological cost. Finance costs also escalated. And other income witnessed a big jump due to exchange gains, which resulted in growth in other income of around 39 times year-on-year in 9MFY22, and from exchange lossQFY21 to exchange gain in 3QFY22.

9MFY22 performance for POL has been a mix of currency depreciation and oil prices due to elevated oil and global uncertainty. Though oil prices are expected to remain high in the medium term, what is a key concern for POL and other E&P companies is the falling production levels of both oil and gas. Depleting reserves and small discoveries have been a highlight of the E&P production landscape, which must be addressed by the sector and the government with policies and incentives to spur foreign as well as local investment.