Pakistan Petroleum Limited

Pakistan Petroleum Limited (PSX: PPL) is a key supplier of natural gas in the country. The company is engaged in conducting exploration, prospecting, development and production of oil and natural gas resources. PPL and its subsidiaries hold a portfolio of 44 exploration blocks. 26 blocks are operated by PPL (including one in Iraq) and 18 are operated by the company's partners including three offshore blocks in Pakistan and two on-shore blocks in Yemen. PPL operates 10 producing fields that include Sui, Kandhkot, Adhi, Mazarani, Chachar, Adam, Adam West, Shahdadpur, Shahdadpur East and Shahdadpur West; and holds working interest in seventeen partner-operated producing fields like Qadirpur, Miano, Sawan and the famous Tal Block.
Its history dates back to the establishment of a public limited company in 1950, with major shareholding by Burmah Oil Company (BOC) of the United Kingdom for exploration, prospecting, development and production of oil and natural gas resources. In 1997, BOC disinvested from the E&P sector worldwide and sold its equity in PPL to the Government of Pakistan. Later, the GoP reduced its holding through an IPO in 2004, which was further decreased with the initiation of the Benazir Employees Stock Option Scheme (BESOS) in 2009. Further divestment of another 5 percent shares in a secondary public offering occurred in 2014.
At present, PPL's shareholding is divided between the government, which owns about 68 percent, PPL Employees Empowerment Trust that has a little over 7 percent and private investors, who hold nearly 25 percent. A breakup of categories of shareholders with respective share in both the ordinary shares and convertible preference shares is shown in the illustration.
On the investment side, PPL has 100 percent shareholding of PPL Europe E&P Limited, which was previously called MND E&P Limited, a company incorporated in England and Wales. It also has a subsidiary called PPL Asia E&P B.V. with corporate seat in Amsterdam, Kingdom of Netherlands that focuses on exploration and production of oil and gas in the region.
Overview of financial performance
PPL has been a key player in the E&P sector with significant share in gas supply of the country. It has had a strong operational history. However, gas reserves have been depleting and the firm has ventured into major oil fields as well with rising share.
Overall, PPL's financial and operational performance has been positive. The company saw good profits and revenues in FY12 with sky high expectations for FY13. However, the coming years saw dwindling gas production due to depleting gas reserves in the country; PPL's decline in gas production came from the firm's pioneering fields like Sui, Miano, Kandhot and Sawan as they continued their way to maturity. However, the decline in gas flows was compensated by higher crude oil production and better gas prices.
FY14 was a year where PPL conducted its secondary public offering. The company's financial performance was based on higher revenues led by higher crude oil production and key oil discoveries. However, the firm's earnings were dented in FY15, because of lower oil prices. During FY15, low oil price environment was main clip in the earnings of oil and gas exploration and production segment, which continued in FY16. However, PPL has been an aggressive exploration and production firm; it continued its drilling and exploration activity throughout these years of low oil prices.
After around three years of low oil prices, the country's E&P sector took a sigh of relief as crude oil prices improved in FY17. Hence FY17 was a good year for PPL as it announced a whopping increase in its earnings largely led by revenue growth.
In the latest complete fiscal year, PPL's revenue growth was around 46 percent year-on-year, while the earnigns more than doubled. Revenues improved notably due to increase in both oil and gas sales. The firm received gas price adjustment of Rs 31.12 billion for 25 months starting June 2015 to June 2017, which boosted the top-line along with improvement in natural gas output from its key fields: Sui and Kandot. Its overall production exceeded the firm's long time average of 1 bcfd, registering a growth of around 8 percent year-on-year. Lower finance costs also helped the earnings of FY17.
Exploration costs also remained on the lower side in spite of the firm's aggressive drilling activity: According to the firm's 2017 annual report, 28 development wells were drilled during the year, and out of these 15 were drilled in areas operated exclusively by the company, while 13 wells were drilled in areas operated by the company's partners.
9MFY18 and beyond
PPL had a hearty 9MFY18 as the E&P giant continued its profitability growth. The firm had a good financial performance during the times of uncertainty when the E&P companies await the decision that they challenged regarding the amendment in the supplemental agreement and the implementation of windfall levy following revision in Petroleum Policy 2012 being contested by all those that are part of the Tal block (JV partners).
The robust financial performance in 9MFY18 has been a mix of revenue growth and cost reduction. On the operational front, PPL during the nine-month period made one discovery in Adhi field. It continued with its aggressive seismic and drilling activities where 11 wells were spudded during the period.
Revenues for PPL increased on account of production flows, higher oil as well as gas prices and exchange rate; international crude oil prices were up by around 22 percent in 9MFY18, whereas the higher price on Sui field along with depreciation of rupee also lifted 9MFY18 revenues.
A further boost to PPL's bottom-line came from lower exploration costs in 9MFY18 that remained flat during the nine-month period. Though the explorations costs were up in 3QFY18 by around 49 percent year-on-year, they were still lower by 35 percent, on a quarter-on-quarter basis (i.e. versus 2QFY18). A significant boost to the other income was led by exchange gains, signature bonus received from UEPL, and late payment surcharge received from Asia Resources Oil Limited (as per the company's quarterly Director's report). PPL had apprised in an announcement at the bourses that Asia Resources Oil Limited (AROL) has finally settled its civil case of outstanding dues/late payment surcharges on Gambit South, Naushahro Feroz and Kotri North Blocks and forfeited its 10 percent working interest in Naushahro Feroz in PPL's favour.
These gains were partially offset by impairment loss on investment in PPL Europe E&P Limited and increase in operating expenses and levies. All these resulted in gross margins improving by 650 basis points and net margins trotting up by 630 basis points in 9MFY18.
PPL has been improving margins, and has been working aggressively towards hydrocarbons drilling. The sector's drivers seem back in action as oil prices have started climbing once again. The key players like PPL and OGDCL have also ramped up efforts in Balochistan and KPK fields that were previously riddled with security threats.

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PPL-Pattern of Shareholding (as at June 30, 2017)

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Categories of Shareholders                                             Percentage held

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Ordinary Shares

Associated companies, undertakings and related parties

PPL Employees Empowerment Trust                                                   7.35%

PPL Employees Retirement Benefit Funds                                            0.06%

NIT and ICP                                                                       0.07%

Banks, Development Financial Institutions, Non-Banking Financial Institutions     1.01%

Insurance Companies                                                               0.18%

Modarabas and Mutual Funds                                                        2.36%

Shareholders holding 10% or more Government of Pakistan                          67.51%

General Public

Resident                                                                          4.52%

Non-Resident                                                                      0.01%

Others

Non-Resident Entities                                                            11.61%

Public Sector Companies and Corporations                                          3.46%

Joint Stock Companies                                                             0.66%

Employee Trust/Foundations etc.                                                   1.20%

Total                                                                           100.00%

Convertible Preference Shares

Individuals                                                                      96.58%

Joint Stock Companies                                                             3.09%

Nazir of High Court                                                               0.33%

Total                                                                          -100.00%

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Source: Company Accounts

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PAKISTAN PETROLEUM LIMITED (UNCONSOLIDATED)

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Rs (mn)                        9MFY18   9MFY17    YoY    3QFY18   3QFY17     YoY

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Net sales                      91,823   63,973    44%    30,849   23,948     29%

Operating expenses             24,323   22,921     6%     8,474    9,183     -8%

Royalties and other levies     13,478    7,594    77%     4,516    2,833     59%

Gross Profit                   54,022   33,458    61%    17,859   11,932     50%

Exploration expense             7,090    7,143    -1%     2,817    1,895     49%

Administrative expenses         2,012    1,372    47%     1,010      318    217%

Finance costs                     450      347    30%       211      115     84%

Other charges                   3,092    1,420   118%       799      552     45%

Other income                    6,571    3,432    91%     2,088    1,197     74%

Profit after tax               33,193   19,070    74%    11,169    7,273     54%

EPS (Rs)                        16.83     9.67    74%      5.66     3.69     53%

Gross margins                   58.8%    52.3%            57.9%    49.8%

Net margins                     36.1%    29.8%            36.2%    30.4%

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