The overall oil and gas E&P sector is expected to see a decline in profitability during 1QFY25, largely due to lower hydrocarbon production, reduced oil prices, and rising exploration costs. Pakistan Oilfields Limited (PSX: POL) has also reported a steep decline in profitability for the first quarter of FY25, with net profit down 74 percent year-on-year. This significant drop marks the lowest quarterly earnings for POL since the COVID-19 period in 4QFY20.

POL’s net sales decreased by 7 percent year-on-year, driven by several factors: a 10 percent decline in average realized oil prices, a 6 percent reduction in crude output, and a 5 percent appreciation of the Pakistani Rupee. However, sequentially, the company saw a slight 3 percent improvement in net sales due to increased production. Oil and gas production rose on a sequential basis by 8 percent and 13 percent, respectively. The decline in gross profit was also influenced by a rise in operating expenses.

POL’s bottom line was significantly impacted by a sharp surge in exploration costs, up 11 times year-on-year in 1QFY25. This surge was primarily due to the high costs of a dry well located in a geologically complex and challenging area. An optimal increase in exploration expenses would have arrested the decline in the company’s earnings. Other income also declined by 23 percent year-on-year, influenced by reduced cash balances and lower yields on investments.

The company’s inherent risks include heavy reliance on specific blocks, weaker drilling and exploration efforts despite higher expenses, and a lower success rate for exploration wells. Moving forward, any improvement in POL’s financial performance will likely depend on effective cost management, successful exploration activities, and favorable global oil price trends. A research note by Optimus Capital Management highlights a few positives: increased oil and gas production from the Jhandial fields and the expected improvement in reserve life due to a revision in recoverable reserves in a key block.