PAF - KARACHI INSTITUTE OF ECONOMICS AND TECHNOLOGY

CORPORATE FINANCE

COURSE INSTRUCTOR: SIR SIKANDER IQBAL

“FORECASTING SUMMARY OF PAKISTAN PETROLEUM LTD AND

OIL AND GAS SECTOR”

BY

MUHAMMAD SAAD SUHAIL

MB-3-13-58079

PAKISTAN PETROLEUM LTD.

Pakistan Petroleum Ltd is the oldest oil and gas company in the country. It was incorporated on 5th June, 1950 subsequent to the promulgation of the Pakistan Petroleum Production Rules, 1949 with the main objective of conducting exploration, development and production of Pakistan's oil and natural gas resources. PPL inherited all the assets and liabilities of the Burmah Oil Company (Pakistan Concessions) Limited and commenced business on 1st July 1952.

EVENTSCollapsing oil prices have dented value proposition of PPL but not to the extent reflected by battered stock price. Focused on near term earning attrition, we believe investors have underestimated the potential of Gambat South and probable conversion of Sui field pricing mechanism. The development can drastically improve the earning profile of the company that in our base case would shows 4 years earning CAGR of 13%.

KEY POINTS:According to Chairman’s and director’s review, as compared to four discoveries in the corresponding period, five discoveries have been made during the last five years under review; two in Gambat South Block (ninth exploratory well Kabir X-1 and tenth exploratory well Hatim X-1) and one each in Hala Block (fourth exploratory well Fazl X-1), Dhok Sultan Block (first exploratory well Dhok Sultan X-1) and Latif Block (exploratory well Latif South-1).

The sale revenue was increased by 31% to reach a record high level of Rs 78.3 billion. Profit after tax increased to Rs 31.4 billion by 35% over last year translating into all time high Earnings per Share of Rs 26.31. On account of the Company's exceptional performance, the Board recommended a payment of 20 percent cash dividend and 10 percent bonus shares among shareholders in addition to two interim dividends of 50 percent each already paid during the year. This brings total distribution to 120 percent cash dividend and 10 percent bonus for the last financial year (2011)

The Company achieved impressive financial results during 2011-12 due largely to net increase in oil and gas sales volumes, impact of higher international oil prices and depreciation of rupee against US dollar, having profit after tax increasing to Rs 40.9 billion, up by 30 percent over last year, translating into all-time high EPS of Rs 31.13. To pass on the benefit of this achievement to shareholders, the Board recommended a payment of 65 percent cash dividend and 25 percent bonus shares in addition to an interim dividend of 50 percent already paid during the year, bringing total distribution for the financial year 2011-12 to 115 percent cash dividend and 25 percent bonus. (2012)

Company has achieved an impressive growth in its operations both locally and internationally and an exceptional performance was recorded during the year. The Company posted a healthy profit after tax of Rs 41.9 billion for the year 2012-13 translating into Earnings per Share of Rs 25.53. The sales revenue of Rs 102.3 billion for the year was higher by 6.3% compared to Rs

96.2 billion of previous year, resulting in increased profitability of Rs 41.9 billion for the year as compared to Rs 40.9 billion during the previous year. (2013)

Profit after tax was further increased to Rs 51.4 billion, up by 22.5 percent over last year, translating into an EPS of Rs 26.08. The sales revenue of Rs 119.8 billion for the year was higher by 17% compared to Rs 102.3 billion of previous years, resulting in increased profitability of Rs 51.4 billion for the year as compared to Rs 41.9 billion during the previous year. (2014)

This was a tough year for the oil and gas sector as oil prices further decline to 46$/barrel. When oil prices fall, there is a tendency to pull back business operations. PPL have the ability to remain profitable even at low price levels, should take this challenge as an opportunity and continue to invest. The Company’s directors have recommended a final cash dividend on ordinary shares @ 40% to shareholders. During fiscal year 2014-15, PPL drilled nine exploratory wells in company operated areas and made four hydrocarbon discoveries. This success was supplemented by two more discoveries in partner operated blocks, totaling six discoveries during the year. (2015)

REASONS:According to Directors report, the decline in profitability in some years is attributable to falling oil prices and lower oil production. In our view, deviation in earnings from our initial estimates can be tracked to lower gas revenue and higher field expenditures.

EXPECTATIONS:The expected rise in other income may have a positive impact on profitability in upcoming years if they

Revision in Sui field wellhead gas prices, production ramp-up from Gambat South, Naspha, Tal and Adhi Block, new discoveries Recovery in global oil prices to our LT price assumption of US$50/bbl.

Given its current price of PKR 133/share, if they issue ‘BUY’ call for PPL, however price may remain depressed in the near term due to lower than expected results in upcoming years. They may need to revise our full year estimates after accounting. Meanwhile, results should not be taken as an indicator of remaining quarters of 2016, in my view, upcoming year results should be in the range of PKR4-4.25/share at an oil price assumption of USD50/bbl. as per our preliminary estimates.

FORECASTING SUMMARY OF PPL:Following things may impact positive on the Pakistan petroleum ltd.

In just two years, Gambat south is expected to provides traction to PP by delivering 8 discoveries with a cumulative oil and gas production of 114mmcfd and 1953 bpd (14% and 13%% of PPL’s future outlook.

Average discovery in Hadi would have an incremental earnings impact of Rs0.5/sh s on PPL previously from RS 0.3/share

Improved production from Napsha and Shawa, Tolanj and Adhi block have potential to add further to PPL’s growth story.

Sui Pricing revision can substaintially improve its earnings dynamics. Potential revision in the sui pricing mechanism would create considerable room for valuation exapansion in PPL.

OIL AND GAS SECTOR OF PAKISTAN

Pakistan's economy has continuously registered growing energy requirements over the years. The country's energy mix mainly comprises oil, gas, coal and liquefied petroleum. Of these oil and gas contribute 80% of the country's total energy supplies. The country currently meets 16% of the crude oil demand from the indigenous sources and is highly dependent on import of oil and petroleum products. The transport sector is the largest consumer of petroleum products in the country (49%), followed by power generation (42%) and industrial (5%) sectors. Pakistan is among the one of the highest gas dependent economies of the world. The share of gas in the overall energy mix has declined lately emanating from the scarcity of the resource in the country.

KEY POINTS:

Fewer large players dominate the market. Largely same products. Higher barriers to enter the market. Capacity expansions Profitability growing but volatile. Stage of refinery hydro-skimming.

REASON:

There had been no increase in domestic natural gas production in the last 15 years which stood at 4 billion cubic feet per day (BCFD). The demand had jumped to 8BCFD and the government was striving to enhance local production. More than 67 gas discoveries were made but the rate of depletion of older gas reserves was higher than that.

FORECASTING SUMMARY OF OIL AND GAS SECTOR:

Pipeline project worth Rs150bn and will start work on another pipeline costing Rs250bn to provide gas to the consumers. Twenty two per cent of the population receives gas through pipelines whereas 78pc depends on firewood and liquefied petroleum gas (LPG). Government is

seeking powers to regulate LPG prices in order to provide relief to the consumers. LPG consumers are paying 10pc higher prices compared to gas supplied through pipelines.

As an alternative, Pakistan is working with China, as part of the China-Pakistan Economic Corridor project, to build an LNG terminal at the south-western port of Gawadar with a pipeline to connect supplies to Pakistan's existing gas network. The new Gawadar terminal could eventually be connected to pipelines to Iran when the sanctions environment improves

Another good thing is that the LNG deal with Qatar is an important development that should improve Pakistan's energy situation over time. However, inefficiencies and debt in the sector will persist, and energy shortages will remain a key limiting factor to growth.

CONCLUSION:

As new production flows from different areas coupled with improved production levels appear as expected, the current slowed down production performance of the sector would soon end. Other recent discoveries by PPL and other companies would ramp up the production profile of the listed E&P companies in the next fiscal year. Moreover, any new discovery in the upcoming months would lead to a potential reserves addition and earnings upside for the companies and as well as for the whole oil and gas sector.