Pakistan Petroleum Limited is one of the oldest and largest E&P companies in the country. The primary activities of the company are exploration, development and production of Pakistans natural reserves of oil and gas. It was incorporated on 5th June 1950 after the promulgation of the Pakistan Petroleum Production Rules in 1949.
PPL inherited all the assets and liabilities of its parent company, the Burmah Oil Company (Pakistan Concessions) Limited and commenced business on 1st July 1952. The company remained under the management control of Burmah Castrol, UK till 1997. Afterward, the government purchased the entire equity interest of Burmah Castrol PLC, formerly Burmah Oil Company.
After June 2004, the Government of Pakistan sold around 15% equity through an Initial Public Offering (IPO). The government intends to privatise the PPL, and, IPO was a significant step towards this objective. As at June 2008, the government owned 78.4% stake of PPL, International Finance Corporation (IFC) had 3.43% shareholding and the rest 18.17% is on free-float. Since 16 September 2004, the company has been listed on all the three stock exchanges of Pakistan. Karachi Stock Exchange (KSE) rated PPL as one of the top 25 companies for two consecutive years of 2006 and 2007.
PPL is the second largest exploration and production company in terms of both production and reserves. It has been playing a crucial role in augmenting hydrocarbon resources since 1955. Presently the PPL contributes around 25% of the countrys total natural gas production. It is also one of the market leaders in terms of its holdings of exploration area. Out of 242,714sqkms area under exploration in Pakistan, PPL holds the second largest share, ie, more than 22% in joint venture with its partners.
PPL is aggressive in exploration but at the same time, conservative in selecting drilling sites. It has discovered eight gas and three oil fields. PPL has working interest in 24 exploration blocks, of which eight are PPL operated and the other 14, including 4 off-shore are partner operated. Sui and Kandhkot gas fields are two of the major PPL operated fields where PPL has 100% ownership. In 1952 the company discovered the largest gas reserves at Sui. Within three years (1955) the supply of natural gas to Karachi for industrial and domestic use began through pipelines. Sui caters to about one-fifth of the total gas demand in the country.
In 1959, vital discoveries at Kandhkot gas field and Mazarani fields were made. Crude oil was discovered at Adhi field in 1978 and in 1980 commercial production started at Adhi. In 1990, the Liquefied Petroleum Gas (LPG) and Natural Gas Liquid (NGL) Plan was installed and the production of LPG, NGL and gas from Adhi commenced. In 2007, PPL made oil and gas discovery at Mela-1 well (Nashpa Block) and two gas discoveries at Latif-1 (Latif Block) and Tajjal-1 (Gambat Block). In the same year, the first exploratory well Mela-1 at Nashpa Block was completed as oil and gas producer and the extended well test production commenced.
Bolan Mining Enterprises (BME) is a joint venture between PPL and the Government of Balochistan for the development, mining, grinding and marketing of barites mineral deposits found near Khuzdar and other minerals in the province of Balochistan. The Company operates a Baryte mine in the Balochistan province.
RECENT RESULTS H109
The results for the H109 were impressive as the profit after tax of the company grew to Rs 13,775 million during the half year compared to Rs 9,295 million during the corresponding period of the previous year, representing an increase of 48.20%. The increase in profitability during the half year compared to the corresponding period in the previous year is mainly attributable to deferred impact of high international oil price on gas prices and depreciation of Pak rupee against the US dollar. During the period, the decline in production of gas, mainly from Sui and Sawan fields was partially offset by increase in production from Kandhkot and Nashpa fields. Production of NGL and crude oil from Adhi field also declined during the period.

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SALES VOLUME COMPARISON.
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Product                          Unit      H109      H108
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Natural Gas                      MMCF    159,512    165,097
Crude Oil / Natural            Barrel    712,607    752,761
Gas Liquids (NGL) /
Condensate
Liquefied Petroleum            Tonnes     10,293      8,216
Gas (LPG)
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Sales increased to Rs 29.6 billion in H1FY09, an increase of 40% as compared to the same period last year. Royalties and field expenditures surged by 20%. Other income also posted an impressive increase of 90% to higher rates offered by various instruments held by the company. The other operating expenses increased by 55.3% to Rs 1.55 billion. PPL posted an EPS of Rs 16.6 in H1FY09 as compared to Rs 11.20 in H108.
RESERVES
The total oil and gas reserves of Pakistan fell by 3.6% during the first half of FY08. The countrys oil and gas reserves declined from 5.95bn barrels of oil equivalent at the end of Jun07 to 5.74bn barrels of oil equivalent (boe) by end of Dec07.
Overall oil reserves stood at 340m barrels at December FY08, as against 353mbbl at Jun07, showing a decline of 3.8%. The only increase in the oil reserves was noted in Naspha block (increase of 7.15mbbl) and in Tando Allah Yar North (oil reserves revised up by 0.20mbbl to 0.37mbbl).
The total gas reserves of Pakistan decreased by 3.4% (from 32.38tcf in Jun07 to 31.27tcf in Dec07). Mela and Uch were the two fields that showed significant upward revision in gas reserves. The gas reserves of Mela field were revised upward by 32.47bcf to 78.86bcf at the end of Dec07 from 46.40bcf earlier at the end of Jun07. The reserves of Uch field were up by 54.75bcf to 4.49tcf at the end of Dec07. Thus the total reserve life of the country fell to 22.2 years during the first half of FY08 from 23.1 years at the end of Jun07.
PPL has around 19% of total oil and gas reserves in Pakistan and it is second to OGDC in this regard. There has been a net addition of 1.36m barrels in PPLs oil reserves while the reserves of other major companies such as OGDCL and POL, declined by 6.9m barrels and 1.02m barrels respectively. However, PPLs gas reserves fell by 0.01tcf. The gas reserves of OGDC and POL also declined by 0.36tcf and 0.24tcf respectively.
DRILLING
E&P sector missed drilling target in FY08 as the companies could spud-in 72 oil and gas drills as against the target of 87 oil drills. The sector missed its target mainly due to deteriorating law and order situation in Balochistan and NWFP. Also the target was burdensome because the drilling target for FY08 included the target of outgoing fiscal year. The PPL announced only one gas discovery during last fiscal year at Adam-X well in Hala block. In addition, the company is also a JV partner in oil and gas discovery at Mamikhel in Tal Block. PPL has set its target 10 wells average drilling target for a year.
Overall, the E&P sector of Pakistan made 11 oil and gas well discoveries, 23 exploratory and drilled 49 development wells. The new oil and gas discoveries have resulted in a success ratio of 1:2.1 wells (47 percent), significantly higher than countrys historical average of 1:3.4 wells (29 percent).
PRODUCTION
Pakistans oil and gas production during FY08 stood at 703,000boepd (barrels of oil equivalent per day), depicting a growth of 2% as compared to FY07. Oil production alone stood at 698,000 bpd (thousand barrels per day) versus 674,000 bpd depicting a growth of 4%. Similarly, gas production also increased by 1.9 percent to 3.9bcfd (billion cubic feet per day).
Pakistan Petroleum is primarily a gas producing company, however with increased production of crude from Tal block and Adhi fields as well as additional production from Mela field, the production of crude oil increased during FY08. This was in line with the sector trend.
The total production of crude oil and gas in the E&P sector improved during the first 11 months of FY08. Crude oil production grew 4.0% to 69,565bpd during 11mths08 as against 66,900bpd in the corresponding period of FY07. Natural gas production during the same period stood at 3,910mmcfd as compared to 3,841mmcfd in 11mths07, showing a nominal rise of 1.8%.
PPL showed considerable increase in crude production supported by additional production from Mela 1 during the period Jun07 to May08. Crude oil production by the company stood at 4,031bpd in 11mths FY08 as against 2,726bpd in the same period in FY08. Along with this, the production from Tal block also showed an impressive growth of 37.4% and contributed 17.1% of total oil production of the company.
Gas production declined nominally to 989mmcfd during 11mths08 as compared to 993mmcfd in 11mths07. Sui and Kandhkot fields are the main contributors to the companys gas production. The Sui gas field still remains an important source of gas supply meeting a substantial part of gas demand of the country. The volume of gas sales during FY08 from the field was 202,771 million cubic feet as against 207,746 million cubic feet in FY07. The volume of gas sales from Kandhkot field during FY08 was 52,594 million cubic feet as against 48,370 million cubic feet in FY07.
PPL registered a growth of 1% in total oil and gas production in FY08. Oil production of PPL registered a growth of 50% and stood at 43,000 bpd, while in contrast, gas production remained stagnant at 982mmcfd. This was due to decline in gas production from Sui field, which offset the impact of increased production from newer fields. As shown by the field wise contribution of gas and oil, PPL holds the most attractive exploration portfolio and its growth profile is therefore more impressive than other companies in the sector.
REVENUE
The net sales revenue of PPL increased by around 19% during FY08, as the total revenue increased from Rs 38.4 billion in FY07 to Rs 45.7 billion in FY08. This increase was mainly helped by higher production from Kandhkot, Adhi, Qadirpur, Sawan and Tal fields, which more than offset the decline in production of gas from Sui, Mazarani and Miano fields and commencement of production of gas and crude oil from Mela-1 and Mela-2 wells in Nashpa Block.
Also, higher sales volume of all of the PPLs product categories and better well head gas prices caused the rise in revenue in FY08. The well head gas prices improved due to phased increase in pricing under 2002 pricing agreement. The last such increase in pricing became effective from January 2007.

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Revenue Breakup - PPL        FY06               FY07              FY08
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                       Amount    Share     Amount    Share     Amount    Share
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Natural gas         29,617.40   93.30%  34,685.36   90.37%  37,291.64   81.57%
Oil/ Condensate      1,816.20    5.70%   3,288.55    8.57%      7,732   16.91%
LPG                     167.5    0.50%     408.74    1.06%        693    1.52%
Total Revenue       31,756.70     100%  38,382.65     100%     45,717     100%
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The company is less vulnerable to oil price movements because of a greater share of natural gas in the total production. The table shows that natural gas has made a higher contribution to total revenue over the years and in FY08 natural gas contributed to 81.57% of revenue.
PROFITABILITY
The company posted a profit after tax of Rs 19.7 billion in FY08 as compared to Rs 16.77 billion during FY07, showing an increase of almost 18%. The companys operating profit increased from Rs 24.5 billion in FY07 to Rs 29.5 billion. This 20% increase in the companys operating profit resulted despite 15% increase in field expenditure mainly due to extensive exploration activities carried out and 20.5% increase in royalties during the period. The reason for increased operating profit in FY08 was the rise in sales revenue earned.
The company registered an increase of 19% in the sales revenue in FY08. The sales revenue increased from Rs 38.4 billion in FY07 to Rs 45.7 billion in FY08. This improved sales performance was largely due to the growth in the overall production and increase in sales volume across all product categories.

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PRODUCT WISE BREAK UP OF SALES REVENUE
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                               FY07   % Change    FY08
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                                    Rs In million
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Natural Gas                   46,815       4.5%   48,925
Gas supplied by Sui Village       99       8.2%      108
Internal consumption of gas      132       6.2%      140
Condensate Sales               1,015      83.1%    1,859
NGL (condensate) sales         1,465      55.0%    2,271
Crude oil sales                1,082     249.6%    3,783
LPG sales                        471      69.5%      799
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The increase in gas production was mainly on the back of rise in production from Kandhkot, Sawan and Adhi fields. Total oil production by the company rose impressively by 82.3% during the first half of FY08 due to addition by Mela and increase in production from Adhi field and Tal block. During the 3QFY08, there was increased gas production from Kandhkot, Adhi, Qadirpur, Sawan and Tal fields and additional production from Nashpa. Also, high international prices resulted in higher profits for FY08. Arab light prices grew almost by 40% during 3QFY08 as compared to the same period in FY07.
The change in pricing of Sui and Kandhkot fields also boosted the profits for FY08. The wellhead gas prices, especially that of Sui and Kandhkot improved due to phased increase in pricing under 2002 pricing agreement with last such increase becoming effective from Jan07. The gross profit margin of the company has had a declining trend over the past years because the gross profit earned has fallen during all the previous fiscal years. In FY06 the gross profit margin had increased by 36% while in FY07 the increase in gross profit was only by 21%.
During FY08 the gross profit grew by 19% as compared to FY07. This is because, over the years, the royalties have grown more in proportion to the sales revenue of the company. During FY08 the sales revenue increases by 19% while the royalties payment increased by 21%. The company was able to almost maintain its profit margin during FY08. Over the past years, the company has had an increasing trend in its profit margin because profit after taxation grew more in proportion to sales.
PPLs profits were boosted by other sources apart from sales revenue. The share of profit in Bolan Enterprises increased by 17% to reach Rs 55.8 million in FY08. Other operating income rose to Rs 3.0 billion, an increase of 26% over FY07, mainly due to effective fund management policy followed by the company. Income on loans bank deposits and term deposits increased. There were substantial increases in the income on long term held to maturity investments and rental income on assets increased from Rs 2 million in FY07 to Rs 45 million in FY08. Similarly the exchange gain on foreign currency amounted to Rs 246 million during FY08 as against Rs 2.77 million in FY07.
LIQUIDITY
The liquidity management of PPL had been improved greatly since FY03 as illustrated in the figure. The liquid funds generated from operating activities contributed to the improvement in the ratio. In FY07, the company managed to catch up with and supersede the industry, thus breaking the trend of lower than average current ratio. PPL had increased its investments in short term instruments, contributing to the improvement in current ratio during FY07. Also, the company has maintained a low level of inventory than the other major players in the sector. This reflects companys strength in asset management as well as the liquidity of its asset portfolio.
The large amount of cash balances and short term investments maintained by the company will also help PPL in financing future exploration activities. The liquidity position of the company deteriorated during FY08 after a better liquidity position in FY07. This has been due to a 76% increase in the current liabilities of the company while current assets increased only by 12.7%. Companys trade payables and other payables increased during FY08. Taxation liability also showed an increase.
However, the claims to have been on a comfortable liquidity position since an amount of Rs 21.6 billion was generated from operating activities of the company. This amount was used to meet the expenditures on capital projects, operational requirements, payment of dividends to the shareholders and investments (short and long-term). At the end of FY08, the company had cash/bank balances and short-term investments amounting to Rs 22.1 billion. Thus, the company is comfortably placed to meet its existing short-term and long-term commitments and financing requirements of future exploration and development expansion plans.
ASSET MANAGEMENT
PPL has performed well in terms of asset management, exhibiting a positive trend for inventory turnover and DSO over the years since FY03. The companys efficiency in inventory management has resulted in its operating cycle being shorter than the industry average. FY08 saw a further increase in the collection period of receivables for PPL and the trade debts continued to mount. Although high DSO is an industry wide trend in the E&P sector but a reduction in the period will improve the companys efficiency and have a positive impact on the companys financial strength.
The turnover of all the companys assets improved during FY08 due to a 21% increase in assets relative to a 19% increase in sales. This shows that the total asset turnover ratio has increase in FY08 due to increase in the increase in investment and production capacity. Although, fewer sales were generated relative to the increase in total asset investment, the company can be expected to improve sales and asset management in the future. The sales to equity ratio increased indicating that the companys asset management has been satisfactory.
DEBT MANAGEMENT
PPL has the lowest level of leverage among the major players in the E&P sector. This is evident in the lower debt ratios of the company compared to the other companies. The debt ratios are low and have been steadily declining over the last few years, indicating that the company is largely equity financed. PPL has not undertaken any long term loans during the past few years. This shows that the company does not rely on loans or other such instruments to finance its growing exploration activities. This trend reflects upon the financial strength of PPL compared to its peers.
Despite the equity financed nature of the company, the financial charges have been mounting and the TIE ratio of PPL has shown a negative trend since the FY06. This may be attributed partly to the increase in assets subject to financial lease in the last one and a half years. However despite the decline, the TIE remains substantially strong. In the FY07, a large portion of the finance cost accrued to the unwinding of discount on decommissioning cost.
FUTURE OUTLOOK
The E&P sector of Pakistan seems to have a positive future outlook as the sectors profit after taxation soared by 55% during the first quarter of FY09. This shows that the sector has had a promising start of the present fiscal year 2009. The profitability of the sector is expected to increase despite the falling oil prices in the international market. Higher wellhead prices under the new pricing policy will help increase the sales revenue and future profitability of the sector. The depreciation of the Pakistani rupee will also helped the sector achieve higher profits as the sectors revenues are priced on an international parity basis.
Along with rising sales revenue, the increase in other income played a major role in boosting the profits during 1QFY09. Other income contributed around 8.5% to PBT in 1QFY09 as compared to 6.7% in the same period FY08. Companys other income grew substantially by 113% to Rs 1.23 billion as the company has over Rs 23 billion in cash and short-term investments which are principally held in term deposits with banks and mutual funds investments along with long-term investments of over Rs 1.8bn mainly parked in PIBs and TFCs.
However, the production for the sector went down during the first quarter of FY09. Production of oil and gas of the sector fell by 8.7 percent and one percent respectively during 1QFY09. Pakistan Petroleums oil and gas production also fell modestly by 2.6 percent and 0.6 percent respectively. The company can be expected to increase production in the future because it is present in major geographical zones of the country. Production from Nashpa, Adhi and Tal block will be major contributors and will help in offsetting expected decline from Sui field.
The oil production of the sector declined due to many factors. Firstly, there were slowdown in production, especially at sites such as Pindori and Adhi. Pindori fields production remains a concern as its average production in the first quarter FY09 fell by a massive 63 percent, averaging just less than 1,400bpd. Second, water cuts were experienced in Dhodak and Kal fields. Along with this, the issues, such as annual turn around jobs, delay in completion of development work (at Chanda-3 well) and mechanical problems (at Mela-1 well) slowed down the sectors oil production.
Although the falling oil prices present a downside risk to the sectors earnings, the weak Pak rupee against the US dollar is expected to make up for it as the sectors revenues are priced on an international parity basis. However, the sectors unabated rise in trade debts is a point of concern as they have risen by 33 percent to Rs 77 billion (June to Sept-08) mainly due to pending payments from refineries, Wapda and gas distribution companies.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].