FY21 has mostly been dull for the oil and gas exploration and production sector not only due to low production flows of hydrocarbons continuing into the year, but also weak international crude oil prices during most part of the year. These factors along with exchange losses are likely to define the sector’s profitability in FY21 as can be seen from Pakistan Oilfields Limited’s (PSX: POL) results.

POL’s revenues in FY21 were flattish, declining by one percent year-on-year. Despite the drop in oil and gas production by one and three percent year-on-year, respectively, the negligible decline in POL’s revenues for FY21 were driven by 4QFY21 revenue growth. Where 9MFY21 net sales slipped by 13 percent, the rise of 52 percent year-on-year in 4QFY21 drove revenues for FY21 from double digit growth in oil and gas production and massive increase in oil prices.

Slow growth in expenses including the 65 percent year-on-year decline Exploration and prospecting expenditure for FY21 were support for the annual earnings. But slower exploration prospecting expenditure is a testament to slow drilling and seismic activity, which revived in 4QFY21, resulting in higher exploration costs by 24 percent year-on-year during the quarter.

The support from other income to the bottomline was also lower in FY21 as it tumbled by 66 percent year-on-year due to exchange losses incurred on the company’s financial assets, deposits and investments. However, 4QFY21 was again better as POL recorded 59 percent rise in other income due to exchange gains on these assets and investments.

As a result of a robust 4QFY21 that earned profits higher by 57 percent, POL’s overall earnings for FY21 were down by 18 percent year-on-year; recall that 9MFY21 earnings for POL were down by over 30 percent. The last quarter for POL also saw a final cash dividend of Rs3 per share in addition to Rs2 interim dividend already paid.

Though oil and gas production were up in the last quarter of FY21 – which may drive earnings for the E&P sector in FY21 - much of it was due to already low oil and gas production in 4QFY20. Continued rise in international oil prices along with significant discoveries to drive the weak oil and gas production in the country is what drive earnings for the sector. Also, foreign investment in the E&P sector has been waning, and a revival with improved policies could push up the indigenous hydrocarbon production.