Pakistan Petroleum Limited

Pakistan Petroleum Limited has been in business for more than seven decades, contributing about one-fourth of total gas supplies, besides producing crude oil, condensate and LPG. The company is a frontline player in the energy sector since 1950s. The current capital structure of the company consists of 71.05 percent shareholdings of GoP, 7.36 percent of PPL employee empowerment trust, and 21.59 percent of private investors. In order to accelerate the pace of privatisation, another 2.5 percent of government holding are to be divested via domestic stock exchanges sometime during the ongoing year.
PPL in the E&P industry Presently PPL's share in the country's total natural gas production stands around 24 percent. The company operates the largest gas field at Sui and five others at Kandhkot, Hala, Chachar, Adhi, and Mazarani. It holds working interest in 12 partner operated fields including Qadirpur, Sawan, Nashpa and Latif. PPL-operated fields produce an average of one bcfd which is sold to the company's main clients: Wapda, SSGC and SNGPL.
During the year FY12, PPL participated in Iraq's fourth licensing round and successfully acquired Block 8 as an operator in that country. In addition, the company during the period also acquired 100 percent shareholding of MND Exploration & Production Limited, a company incorporated in England and Wales. Subsequent to the acquisition, the name of the subsidiary has been changed to PPL Europe E&P Limited.
The wholly-owned subsidiary's main objective is exploration and production of oil and gas. It currently holds partner-operated working interests in five Pakistan and Yemen based producing field and exploratory blocks. The exploration portfolio of the company consists of 35 exploration blocks including offshore block Indus-G. Pakistan Petroleum Limited is the operator in 19 of them, while it has working interest in 15 of them as well.
These numbers also include the exploration license in Yemen, which is a joint venture between PPL, OMV and Yemen General Corporation for Oil and Gas. However, due to security issues, progress in this regard has been halted completely in recent times.
Upstream sector 9MFY13
With only the last quarter to go, nine-month performance of the oil and gas upstream sector should be sufficient to sit in judgement upon the sector's overall performance for FY13. Despite a bag of mixed performance by the leading exploration and production companies, two features appear to stand out during the nine months period ending March 2013.
First, even amidst bearish crude oil prices, sturdy oil production during 9MFY13 remained a contributing factor to the overall revenues of leading E&P companies. The robustness in oil flows during 9MFY13 was apparent particularly in Oil and Gas Development Company (OGDC) and Pakistan Petroleum Limited (PPL), while Pakistan Oilfields Limited stumbled during the third quarter of FY13.
Secondly, lower-than-expected gas production tarnished the sector's charm. With natural gas becoming rare, a decline in gas production by the leading upstream oil and gas companies makes it more than just a tad uncomfortable.
Performance 9MFY13
Like it or not, the continuous decline in Pakistan Petroleum Limited's (PPL) gas production does not sound pleasant. Country's pioneer in natural gas sector has been facing dwindling gas flows since the beginning of FY13. With natural gas in the country becoming rare, a decline in gas production by the PPL that generally contributes to around 24 percent to the total gas production is an omen for some serious future drilling activity.
The company's latest performance notice is livid with ageing gas fields and consequently, dissipating gas production. An extrapolation by BR Research of an estimated gas production of 924 mmcfd during the latest quarter (3QFY13) by Optimise Capital Management shows that production of the hydrocarbon dropped by almost seven percent year on year during 9MFY13.
Decline in the gas flow of the exploration and production (E&P) company predominantly emerged from maturing fields like Sui, Miano and Sawan which roughly accounted for over 60 percent of PPL's total gas production. Also gas sales from other large fields like Kandhkot and Tal Block also slipped during the ongoing year.
With restricted gas production containing the upside in gas revenues and oil prices remaining quite stable during 9MFY13, sheer gains in the top line of the E&P Company came from robust oil flows. Earnings of PPL remained considerably flat during the period under review, while they receded by eight percent, year on year, in third quarter of FY13.
The major source of concern for the oil and gas producer as of now is the falling gas production flows amid rising exploration expenses. In case things continue to proceed the way they are right now, the company might face a nine to ten percent year on year decline in gas flows in FY13.
One important addition to the top line and the bottom line has been the acquisition. PPL Europe E&P Limited has contributed around Rs 62 million to the group's revenue and Rs 22 million to the group's profit.
Outlook Interestingly, a bird's eye view of the sector has some positive extensions for the last quarter, as well as for the year to come. These can be rightly called the volumetric additions through the recent uptick in development activities and the resultant increase in exploration costs.
The most promising ones that have been advocated recurrently in some of the recent BR Research articles are the Kunnar Pasahki Deep-Tando Allah Yar, Sinjhoro, Uch-II, Nashpa, Mela, Makori Latif and Tal block additions.
With E&P sector's profitability formula to circle around higher crude oil production and high rupee depreciation versus the dollar, the caveat for the upstream sector will continue to remain the combination of dwindling gas production flows and bearish crude oil prices.
On a similar note, PPL is likely to enter into an exciting drilling and development phase in the last quarter of FY13, analysts name Tal Block, Makori, Nashpa and Latif as key triggers to production accretion during 4QFY13 and FY14. Although it is just an initial phase and nothing can be said about the future production prospects, one thing clear from the firm's recent acquisition of eleven exploration block, PPL has the enthusiasm to overcome the production plateau it is sitting on right now.

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Pakistan Petroleum Limited

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Profitability           9MFY10      9MFY11      9MFY12      9MFY13

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Net Profit Margin        39.2%       42.1%       45.1%       43.4%

ROE                      22.8%       26.1%       27.4%       23.4%

ROA                      17.0%       19.4%       20.1%       16.7%

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Liquidity & Efficiency

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Current ratio              2.8         3.5         2.8         3.0

Fixed asset turnover       1.1         1.3         1.5         1.2

Total asset turnover       0.4         0.5         0.4         0.4

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