Pakistan Oilfields Limited

Pakistan Oilfields Limited (PSX: POL) is involved in the exploration, drilling, and production of crude oil and gas within the nation. It produces LPG, natural gas, and crude oil, which it sells under the POLGAS brand and through its subsidiary CAPGAS (Private) Limited.

In addition, POL manufactures sulfur and solvent oil. Its extensive pipeline network is used to deliver crude oil to the refinery of the Attock Group and its subsidiary, Attock Refinery Limited (ATRL). The group, Attock Oil corporation (AOC), holds more than half of the shares in the corporation.

Historical Financial Performance

The global pandemic and the decline in oil prices significantly impacted FY20, leading to slower growth in earnings across the oil and gas exploration and production sector.

Pakistan Oilfields Limited (POL) reported a 13 percent year-over-year decline in revenue, with a 48 percent drop in sales revenue during 4QFY20, which was heavily affected by the pandemic.

The decrease was largely attributed to falling oil prices and declining volumetric sales. During FY20, POL’s oil and gas production declined by 13 percent and 9 percent year-over-year, respectively, while average oil prices fell by 25 to 26 percent.

On a positive note, the absence of dry wells led to a reduction in exploration and prospecting expenses. Additionally, lower interest rates contributed to a decline in both other income and finance costs. As a result, POL’s earnings in FY20 remained flat.

In FY21, hydrocarbon production and global crude oil prices remained subdued. Sector-wide profitability, including that of POL, was impacted by these factors along with exchange losses. POL’s revenue remained flat year-over-year.

The company’s earnings fell by approximately 18 percent, primarily due to currency depreciation, reduced income from bank deposits, and higher tax expenses, which resulted from lower exploration and development activity. Production also slipped, with gas output down 2.5 percent and crude oil output down 0.77 percent year-over-year.

FY22 marked a sharp turnaround for POL, with a 94 percent year-over-year increase in earnings. The boost came from a 44 percent rise in revenue, driven by a surge in crude oil prices and the depreciation of the Pakistani rupee. While crude oil prices climbed by over 65 percent year-over-year, the rupee depreciated by about 10 percent. Despite lower production—gas and oil flows declined by 10 percent and 9 percent, respectively—topline growth remained robust.

However, exploration and prospecting expenses jumped 77 percent, fueled by increased seismic activity and higher geological costs. Finance costs soared by 20.4 times due to rising interest rates. On the upside, other income surged sevenfold, supported by favorable exchange gains from currency depreciation.

In FY23, POL recorded a 41 percent year-over-year growth in earnings, driven by a 17 percent increase in revenue, mainly due to the continued depreciation of the rupee. However, oil and gas production continued to decline, and oil prices saw a 3 percent annual drop.

Despite this, gross margins improved, helped by a 65 percent reduction in amortization costs related to development and decommissioning. Exploration expenses spiked 7.7 times, primarily due to the presence of two dry wells. In addition to topline growth, other income rose 131 percent year-over-year, fueled by exchange gains and higher returns from cash and equivalents.

In FY24, Pakistan’s overall oil production rose 1.4 percent year-over-year, while gas production declined by 4.4 percent. For POL, however, oil and gas production fell by 6 percent and 5 percent, respectively. Despite the production decline, the company reported growth in both profitability and dividends. Revenue increased 7 percent year-over-year, primarily driven by the continued depreciation of the Pakistani rupee, which helped offset lower production.

Net earnings rose 7 percent year-over-year, reaching Rs39 billion. A significant driver behind this increase was a 76 percent decline in exploration expenses, attributed to the absence of dry wells—unlike the previous year.

Operating expenses increased 9 percent, mainly due to rising costs associated with ongoing operations. Nevertheless, POL saw an improvement in gross margins.

Other income dropped by 39 percent year-over-year, reflecting the absence of substantial foreign exchange gains that bolstered FY23 results. However, in 4QFY24, other income rebounded with a 21 percent increase, supported by improved returns on the company’s cash and investment portfolios.

FY25 and Beyond

1HFY25 net sales fell by 11 percent compared to the same period last year, driven by the combined impact of lower production volumes and softer oil prices. Gross profit dropped 16 percent, while operating profit fell sharply by 50 percent year-on-year. The most significant drag came from exploration expenses, which rose sevenfold to Rs8.4 billion, driven primarily by dry well-related costs.

There were, however, positive elements in the performance. Other income rose by 8 percent year-on-year, reaching Rs8.4 billion, supported by improved cash management. In 2QFY25 alone, other income surged 61 percent year-on-year, despite a backdrop of lower yields on fixed-income instruments. Additionally, the effective tax rate decreased to 37 percent in 2QFY25 from 39 percent in the same period last year, offering some bottom-line relief.

Operationally, POL continued to face pressure on oil and gas production due to natural field depletion and logistical challenges. Nonetheless, no new dry wells were drilled in 2QFY25, with the company prioritizing geological assessments. This shift resulted in a significant quarterly reduction in exploration costs.

Despite these near-term constraints, POL declared an interim dividend of Rs25 per share for 1HFY25, underscoring its commitment to shareholder returns. The company’s challenges mirror broader industry dynamics, where the exploration and production (E&P) sector in CY24 faced both regulatory reforms and operational bottlenecks. While policy measures—including circular debt resolution and improved investment frameworks—offered some support, currency devaluation, project delays, and global price volatility continued to pressure revenues.

Outlook

POL has consistently demonstrated its ability to navigate macro and sectoral shocks, including the COVID-19 pandemic, oil price crashes, currency depreciation, and domestic regulatory constraints. While earnings have fluctuated—often tied to oil price movements, exploration costs, and dry well occurrences—the company has maintained profitability and dividend payouts, even during tough quarters. This underscores financial resilience and prudent cost management.

The steady decline in production volumes—due to natural field depletion, limited new discoveries, and operational bottlenecks—remains a key concern. Gas and oil output have consistently dropped year-on-year in recent periods. Unless POL accelerates successful exploration or enhances recovery from existing fields, production decline could weigh on future topline performance, especially in a low oil price environment.

Other income has been a critical support for earnings, thanks to favorable exchange gains and efficient cash positioning. While this isn’t a core revenue stream, it has helped soften the impact of volatile operational earnings. As interest rates and currency volatility fluctuate, this line item may remain a helpful buffer, albeit unpredictable.