The E&P sector’s production of crude oil and natural gas has been declining in recent years due to depleting reserves and discoveries smaller in size. E&P sector’s production flows in 2QFY21 continued to fall with around 6 and 4 percent fall in oil and gas production year-on-year, respectively. Crude oil production during 1HFY21 fell by around 6 percent year-on-year, while gas production declined by 3 percent year-on-year.

Decline in production flows along with falling crude oil prices is a key factor for falling revenues in the E&P sector. Oil prices during 1HFY21 was lower by over 30 percent, year-on-year, and both the E&P giants - Oil and Gas Development Company (PSX: OGGCL) and Pakistan Petroleum Limited (PSX PPL) - saw their topline growth coming down during the 6-month period. OGDCL’s revenues declined by 13 percent year-on-year in 1HFY21 with crude oil and gas production declining by 4 and 6 percent respectively; and PPL’s topline was down by around 12 percent during the same period with oil production stable and gas production down by one percent in 1HFY21. This decline in topline was around 15 and 17 percent year-on-year in 2QFY21 for OGDCL and PPL, respectively.

On the profitability front, OGDCL’s earnings in 1HFY21 fell by around 21 percent year-on-year. Where contracting revenues played its role, the decline in most expenses and particularly exploration expenses (down by almost 50 percent YoY) was offset by almost 50 percent year-on-year reduction in other income due to fall in interest income. Exploration cost was lower in 1HFY21 as three dry wells were incurred against five dry wells in 1HFY20. The decline in exploration expense in 2QFY21 was more pronounced at over 65 percent year-on-year, while the decline in other income was also more significant at almost 90 percent year-on-year.

PPL on the other hand, posted an increase of 7 percent in 1HFY21 profits despite a 12 percent year-on-year decline in topline and lower other income as well. Support to bottomline came from lower exploration and prospecting expenditure that was down by over 73 percent as only one well was declared dry versus five dry wells in 1HFY21. No wells were declared dry in 2QFY21 versus two in 2QFY20. Also decline in other charges for PPL during the period supported earnings, which was due to impairment loss on investment in PPL Asia E&P B.V., along with decline in exchange loss owing to lower exchange rate volatility during the period.

However, what was common between the two E&P companies was the weaker 2QFY21 financial performance, which can also be seen from weaker sequential performance. OGDCL’s earnings in 2QFY21 were lower by 24 percent, while PPL’s profits went down by 17 percent quarter-on-quarter.