pakistan oil gas exploration sector - bma capital

Pakistan Oil & Gas Exploration SectorDeep discounts allay concerns on production decline – Overweight MaintainedOctober 15, 2019October 15, 2019

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Table of ContentsExecutive Summary: Pakistan Oil & Gas Exploration Sector: Deep discounts allay concerns on production decline 3

Oil & Gas Exploration ‐ Insights

E&P companies are a US$ hedge play 5

International Oil prices to drive the way 6

A i l ti t t t dd d l ti 7 Aggressive exploration target to address reserve depletion 7

Strong cash rich balance sheets with expectations of decline in circular debt 8

POL remains most sensitive to oil price swings 9

BMA Oil & Gas Exploration Sector

Oil and Gas Development Company Limited (OGDC) 11

Pakistan Petroleum Limited (PPL) 14

Pakistan Oilfields Limited (POL) 17

2

Executive SummaryPakistan Oil & Gas Exploration Sector: Deep discounts allay concerns on production decline

Pakistan’s Oil and Gas Exploration & Production sector is primed to offer handsome gains. OurRelative performance of E&P companies p p ginvestment case is premised on i) accelerated exploration efforts, ii) a weak PKR against thedollar, and iii) healthy balance sheets. The recently announced divestments of OGDC and PPLby the government dampened market sentiments in these stocks. However, we are of the viewthat these transactions will likely take a while to materialize.

The recovery of oil prices and PKR devaluation in the past 2 years has churned up sector

Relative performance of E&P companies

0%10%20%

KSE100 OGDC PPL POL

y p p y pprofitability registering 3‐yr CAGR of 31% to PKR190bn for BMA E&P Universe that is nowestimated to grow through the next three years at a CAGR of 9%. The uptick shall be a functionof our assumption of a stable oil price environment, increased efforts on exploration that willcounter ongoing reserve depletion and a weak PKR. However, the same has yet to transpire interms of valuations where the sector trades at a weighted average implied oil price ofUSD29/bbl ( t il i f US$59/bbl) ft th t t d b 14% i t 6 th

‐50%‐40%‐30%‐20%‐10%

‐18

‐18

‐18

‐19

‐19

‐19

‐19

‐19

‐19

‐19

‐19

‐19

‐19

USD29/bbl (current oil price of US$59/bbl) after the sector corrected by 14% in past 6‐mths.

Despite the uptick in exploration activity since the past two years, depletion of reserves willneed to be addressed by a substantial find. Current drilling targets are set at 92 wells (120 inFY19) of which 52 wells planned are exploratory. We expect oil production to reside at88/85kbpd for FY20/21E compared to 91kbpd in FY19. Moreover, gas production is likely toregister at 3 803mmcfd in FY20 The sector currently sits on cash heavy balance sheets where

Source: PSX, BMA Research

E&P sector trading at discount to int. oil price

Oct‐

Nov

‐

Dec‐

Jan‐

Feb‐

Mar‐

Apr‐

May‐

Jun‐ Jul‐

Aug‐

Sep‐

Oct‐

register at 3,803mmcfd in FY20. The sector currently sits on cash heavy balance sheets whererobust cash generation continues to remain the key strength given favourable USD/PKR parityand strong margins.

We are Overweight on Pakistan E&Ps with BUY ratings for OGDC, PPL and POL with pricetargets of PKR183/sh, PKR165/sh (adjusted for bonus), and PKR463/sh respectively. Our toppicks are OGDC and PPL due to deep discounts on implied oil price

37

47

3035404550

USD/bbl Weighted avg. implied oil price

picks are OGDC and PPL due to deep discounts on implied oil price.

h

20

1015202530

OGDC PPL POL

BMA Oil & Gas Exploration Sector Universe: Valuation Summary

Ticker Rating TP UpsideEarnings (PKR) P/E (x) Dividend Yield (%)

FY19 FY20F FY21F FY19 FY20F FY21F FY19 FY20F FY21F

OGDC Buy 183 54% 27.5 30.6 34.0 4.7 4.2 3.8 9% 10% 12%

3*adjusted for bonus issue

Source: BMA ResearchPPL* Buy 165 43% 22.7 26.3 26.6 5.0 4.3 4.3 2% 4% 4%

POL Buy 463 17% 59.4 61.6 63.0 6.7 6.4 6.3 13% 13% 13%

Oil & G E l i I i hOil & Gas Exploration ‐ Insights

4

Pakistan Oil & Gas Exploration SectorE&P companies are a US$ hedge play

Macro dynamics dictate sector’s outlook: The domestic Exploration & Production (E&P) sector isArab light prices have been firm of late Macro dynamics dictate sector s outlook: The domestic Exploration & Production (E&P) sector isa clear beneficiary with output pricing pegged to international crude prices in US dollars. Thistranspires the sector revenues to provide a natural hedge from currency movements where anydevaluation of the Pak Rupee proves beneficial for upstream companies.

In the past year alone, the PKR depreciated against USD by 24% that attributed 20% increase inrevenues of the BMA E&P Universe Pakistan’s macroeconomic environment have swiftly changed

Arab light prices have been firm of late

80

100

120

140USD/bbl

revenues of the BMA E&P Universe. Pakistan s macroeconomic environment have swiftly changedfor the better in the past 12 months where we now expect PKR devaluation to be more scatteredand to average annually around 7‐8%. The E&P sector will continue to benefit from this currencymovement.

Absence of large discoveries remains evident: After exhibiting production boost from Nashpa andMakori East in FY14 the past three years have not been very promising for the E&P sector as

0

20

40

60

Dec‐08

Dec‐09

Dec‐10

Dec‐11

Dec‐12

Dec‐13

Dec‐14

Dec‐15

Dec‐16

Dec‐17

Dec‐18

Makori East in FY14, the past three years have not been very promising for the E&P sector asexploration efforts have not resulted in any major discovery of late. Absence of any majordiscovery has resulted in a mere production 3‐yr CAGR of 1% in oil and 2% for gas.

PKR has been weak benefiting E&P sector

Source: Bloomberg, BMA Research

Drilling activity has picked up paceCountry’s average daily oil and gas production

D D D D D D D D D D D

gg y p p p

4000

4200

80,000

90,000

100,000 mmcfdbpd

Oil Gas

6250 53

6780

100

120

Exploratory Development

130

150

170 No. PKR/USD

3600

3800

50,000

60,000

70,000

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

F

FY21

F

26 16 2135

51 48 46 36 45 46

4234

36

62 33 48 36

0

20

40

60

Y10

Y11

Y12

Y13

Y14

Y15

Y16

Y17

Y18

Y19

70

90

110

c‐08

c‐09

c‐10

c‐11

c‐12

c‐13

c‐14

c‐15

c‐16

c‐17

c‐18

5

Source: PPIS, BMA ResearchSource: Bloomberg, BMA Research

FY FY FY FY FY FY FY FY FY FY

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Source: PPIS, BMA Research

Pakistan Oil & Gas Exploration SectorInternational Oil prices to drive the way

International oil price dynamics : Following consistent rise in oil prices in past three years, theGlobal oil production & consumption are at par oil rig count in US has now witnessed a decline to report the lowest rig count of 876, lower by

17% YoY, last seen 30 months ago when crude was trading at USD52/bbl. The persistent riseand then stability of oil prices over the cost curve led the rig count to average at 1,032 rigs in2018, however, the drillers have cut spending on new drilling in a bid to focus on productionfrom existing wells. Resultantly, crude prices wherein both Brent and Nymex have averaged atUSD70/bbl and USD69/bbl in FY19 respectively

Global oil production & consumption are at par

98

100

102

104Global Production Global ConsumptionMn bpd

USD70/bbl and USD69/bbl in FY19, respectively.

Further, the implementation of production cuts by OPEC, imposition of sanctions drying upIran exports, and collapse in Venezuela’s production has helped maintain the output at101mbpd despite global oil demand registering average growth of 1% in the past 2 years.

Geopolitical conflict may dictate the price trend: Although crude has shrugged off the recenttt k S di A th t ff t d l f 5 7 b d (5% f ld d ti ) t t d t

88

90

92

94

96

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3

attack on Saudi Aramco that affected supply of 5.7mn bpd (5% of world production) to trade atUSD59/bbl as of 10th‐Oct’19, a correction of 14% after spiking to a high of USD69/bbl postattack mid‐Sept’19. We believe the demand levels remain unconducive to shore up oil pricesbeyond USD65/bbl and assume USD62/bbl as our forecast for FY20 onwards.

The recovery in oil prices shall remain a function of (i) prospective cut in production fromNorth America ii) aggressive implementation of production cuts from OPEC and iii) decline in

Source: EIA, BMA Research

Rig counts follow international oil prices

2014 2015 2016 2017 2018 2019

North America, ii) aggressive implementation of production cuts from OPEC, and iii) decline inUS rig counts. We further opine that any potential improvement in consumption owing to i)higher demand due to attractive prices of petroleum products and ii) installation of newrefineries may act as impetus to further improve sentiments.

Rig counts follow international oil prices

100120140160

2000

2500

US Rig count Brent (USD/bbl)

US inventories continue to affect global pricesOPEC production share shave off after cuts

{RHS}

Mn bpd Mn bbl USD/bbl

US$/bblNo.

020406080100

0

500

1000

1500

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 40

60

80

100

20

‐10

0

10

20Change in U.S. Crude Oil InventoriesWTI (USD/bbl)

60 75 63 52 65 59

37.37 37.29 35.22

50

100

150 Non‐OPEC Production OPEC Productionp

{RHS}

Mn bbl USD/bbl

6

Jan‐0

Jan‐0

Jan‐0

Jan‐0

Jan‐0

Jan‐1

Jan‐1

Jan‐1

Jan‐1

Jan‐1

Jan‐1

Jan‐1

Jan‐1

Jan‐1

Jan‐1

Source: Baker Hughes, Bloomberg, BMA Research

40‐20

Nov

‐17

Jan‐18

Mar‐18

May‐18

Jul‐1

8

Sep‐18

Nov

‐18

Jan‐19

Mar‐19

May‐19

Jul‐1

9

Sep‐19

60.75 63.52 65.59

02017 2018 2019

Source: Bloomberg, BMA ResearchSource: EIA, BMA Research

Pakistan Oil & Gas Exploration SectorAggressive exploration target to address reserve depletion

Aggressive exploration targets are timely: We anticipate the exploration activity to remainS l t d illi tl k Aggressive exploration targets are timely: We anticipate the exploration activity to remainelevated as i) reserve depletion continues (average reserve life at 10/15 years for oil/gas)while net reserve addition has been minimal, ii) lucrative wellhead gas prices offered underPP12 and iii) rentals for rigs employed for drilling have not increased significantly.

Moreover, the uptick in drilling activity has been noted in KPK and Balochistan region aftercontrol on law and order and improved security has made the deposit rich areas accessible

Select drilling outlook

Well Region E&P exposure

Rangunwari‐01 Sindh OGDC

Dhamach‐01 Sindh OGDC control on law and order and improved security has made the deposit rich areas accessible.This should help materialize the drilling activity, going forward.

As of latest PPIS data available, the drilling activity is concentrated in hydrocarbon rich areas ofSindh and Khyber Pakhtunkhwa (KPK) with 52 exploratory wells planned for FY20 along with 40planned development wells, respectively. By the end of 1QFY20, 3 exploratory wells have beenspud (OGDC: 1 and PPL: 2) while 13 development wells have been spud

Dhamach 01 Sindh OGDC

Pindori‐10 Punjab POL

Thora Deep‐03 Sindh OGDC

Adhi‐34 Punjab PPLspud (OGDC: 1 and PPL: 2) while 13 development wells have been spud.

OGDC emerges as the only player with the largest exposure to ongoing exploratory drilling inthe country accounting for 18 wells out of total 46 in FY19. We expect POL to continue tosolely rely on exploration efforts in high impact Tal Block where the company is currentlydrilling at Balkassar, Pindori, and Makori Deep sites.


OGDC leads oil production of the countryE l ff h

Exploratory efforts over the yearsMARI1% POL

8%

PPL18%

Others27%

Exploratory efforts over the yearsSpudded Wells

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19ExploratoryOGDC 13 7 4 8 5 11 11 9 11 18PPL 0 1 1 2 9 8 12 9 11 4Oth 13 8 16 25 37 29 23 18 23 24

OGDC46%

Others 13 8 16 25 37 29 23 18 23 24Total 26 16 21 35 51 48 46 36 45 46

Appraisal/Development

OGDC 13 14 13 16 11 11 17 13 10 8PPL 1 3 2 4 3 4 10 13 7 7Others 28 17 21 42 36 18 26 22 19 52

7


Source: PPIS, BMA ResearchTotal 42 34 36 62 50 33 53 48 36 67Total wells spud (Exp & App/Dev) 68 50 57 97 101 81 99 84 81 113

Pakistan Oil & Gas Exploration SectorStrong cash rich balance sheets with expectations of decline in circular debt

Cash generation key feature in high interest rate environment: The upstream oil sector hasHi h ti h fl d Cash generation key feature in high interest rate environment: The upstream oil sector hasbeen able to depict strong cash generation backed by i) steady production gains, ii) stable oilprices and iii) reduced burden of circular debt from injection by the government. As of FY19end, total cash and short term investments held by BMA E&P universe net of receivables stoodat PKR134bn.We believe the only hangover on balance sheet looms from mounting circular debt that has

High operating cash flows and capex

80100120140

250300350400

Cash and Cash Equivalent (PKRbn)CAPEX (PKRbn) {RHS}

y g gpiled up despite change of energy mix, albeit it remains tamed where monthly accretion standsat PKR20bn as per sources. Despite that, OGDC and PPL that are most affected by circular debthave payouts at 40% and 8%, respectively, which could increase as the onus of circular debtreduces in coming years.

Circular debt resolution: The pile up circular debt remains a bane to the valuations where the

020406080

050100150200

FY15

FY16

FY17

FY18

FY19

Y20F

Y21F

C cu a debt eso ut o : e p e up c cu a debt e a s a ba e to t e a uat o s e e t ecurrent stock of debt for OGDC and PPL has earmarked levels of over ~PKR280bn and~PKR210bn, respectively. The ruling government has followed suite of the prior to resolve thepileup via settlement through issuance of bonds. In lieu to which, the government issued thefirst Energy Sukuk worth PKR200bn backed by sovereign guarantee.

Latest figures reported as per sources suggest stock of circular debt hovers over PKR1 4tn

Source: Company Accounts, BMA Research

POL offers best yield (FY20F)

F F

Latest figures reported as per sources suggest stock of circular debt hovers over PKR1.4tn.Ministry of Power has therefore made progress on release of another tranche of PKR200bn.However, the issue is yet to be launched till the government can arrange for sovereignguarantee for the issue to back it. We believe the government may be able to issue the secondtranche by end of 3QFY20 where the injection may likely follow disbursal pattern as the firstissue where the recipients were as follows: PSO: PKR 60bn, KAPCO, PKR25bn, HUBCO,

10.1%

13.4%

PKR14bn, among prominent disbursals.

Government divestments of OGDC and PPL : In a bid to appease international donorsincluding International Monetary Fund (IMF) and to meet tight fiscal deficit targets, Pakistangovernment intends to go ahead with divestment of OGDC and PPL (7% and 10% stakerespectively). The overhang on supply concerns may keep upside in check, however, we argue

3.5%

OGDC PPL POL

8

p y g pp y y p p gthat valuations remain conservative as market is yet to price in favorable dynamics for the E&Pplayers. We highlight that these offerings may remain a Neutral event for OGDC and PPL andmay take time to materialize.

Source: PSX, BMA Research

Pakistan Oil & Gas Exploration SectorPOL remains most sensitive to oil price swings

Oil price volatility: Exogenous shocks to international oil prices potentially drive the sectorRevenues to depict a 3 yr CAGR of 11% while output falls O p ce o at ty: oge ous s oc s to te at o a o p ces pote t a y d e t e sectoprofitability outlook to ebb and flow. We highlight that our forecast for international oil pricesis stable at USD62/bbl for FY20 onwards. Within the BMA E&P universe with every USD5/bblincrease/decrease in oil price from our base case assumption, POL’s profitability remains themost sensitive with 9% and 8% change in earnings and target price, respectively. WhereasOGDC is least sensitive to oil price volatility with 6% and 4% change in earnings and targeti

Revenues to depict a 3‐yr CAGR of 11% while output falls

280285290295

450

550

Sales (PKR bn) Production (mn boe) {RHS}

price.

Upside risks outweigh downside on the index heavyweight sector: The decline in productionremains a bane for investors when assessing valuations in the E&P sector, we argue for primevaluations currently offered by the E&P sector post aggressive devaluation, uptick inexploration activity, healthy balance sheets, and cash flow generation coupled with

t’ it t t l i l d bt th t t t b i d i C tl

255260265270275280

150

250

350

FY15

FY16

FY17

FY18

FY19

Y20F

Y21F

government’s commitment to resolve circular debt that are yet to be priced in. Consequently,we reiterate our BUY stance for OGDC, PPL and POL. OGDC and PPL are currently trading atFY20F P/E of 4.2x and 4.3x, respectively.

Source: PPIS, Company Accounts, BMA Research

Sector to churn strong EBITDA in‐line with last three years

F F F F F FY FY

Earnings sensitivity at different oil prices and impact on TPg y

150

200

250

300

400

500NPAT EBITDA USD/bbl

OGDC PPL POL

FY20 FY21 FY22 TP FY20 FY21 FY22 TP FY20 FY21 FY22 TP

50 25.3 28.6 30.4 166 21.8 21.7 21.8 142 49.3 50.1 50.3 376

55 27.3 30.7 32.8 173 23.4 23.7 23.9 152 54.2 55.6 56.2 412

{RHS}

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50

100

0

100

200

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Y16

Y17

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Y19

20F

21F

60 29.2 32.9 35.2 180 25.0 25.7 25.9 161 59.0 61.1 62.1 448

65 31.2 35.0 37.4 187 26.6 27.7 28.0 171 63.8 66.6 68.1 484

70 33.1 37.2 39.8 195 28.1 29.7 30.0 180 68.7 72.1 74.0 520

75 35 1 39 3 42 1 203 29 7 31 6 31 9 190 73 5 77 5 79 8 556

9

FY FY FY FY FY FY2

FY2

Source: BMA Research

75 35.1 39.3 42.1 203 29.7 31.6 31.9 190 73.5 77.5 79.8 556


BMA Oil d G E&P U iBMA Oil and Gas E&P Universe

10

Oil and Gas Development Company Limited (OGDC)Ingredients at disposal to dispel production concerns

OGDC BUY Investment Thesis: Oil and Gas Development Company (OGDC) continues to enjoy a distinctOGDC ‐ BUY

Target Price: PKR 183

Current Price: PKR 129

O t t di h 4 301

Investment Thesis: Oil and Gas Development Company (OGDC) continues to enjoy a distinctadvantage over its peers in terms of i) low risk to production profile amid geographically diversifiedproducing assets, ii) least sensitivity to oil prices amid capped gas fields and a balanced product mix,and iii) vast exposure to exploration assets in Pakistan. FY19 remained a dismal period owing to delayin development projects despite rise in oil prices.

Diversified revenue and production base: OGDC boasts production mix that shields it from majorOutstanding shares: 4,301

Free Float. 15%

MCAP (USDmn): 3,536

1 Y ADTV (USD ) 2 1

Diversified revenue and production base: OGDC boasts production mix that shields it from majorvolatility in crude prices as gas and oil each contribute 45% towards its revenue. Further, thegeographic diversification of major production fields like Adhi, Nashpa, Kunnar, Qadirpur in Punjab,KPK, and Sindh allay risk of any unforeseen production halts.

Largest producer remains aggressive: OGDC remains the largest oil and gas producer of the countrywith throughput of 41kbpd and 1 014mmcfd that make up 45% of oil production and 29% of gas

OGDC vs. KSE‐100

1 Year. ADTV (USDmn): 2.1 with throughput of 41kbpd and 1,014mmcfd that make up 45% of oil production and 29% of gasproduction of the country. We highlight that the company has remained aggressive in drilling targetsset at 30 wells in FY20, up from 21 wells last year with capex set at PKR44bn.

Concerns on reserve replenishment a key area of focus: Going forward, with average success ratioof 37% since FY17, we expect momentum to shift in favour of OGDC with focus on reservereplenishment that should help improve the production base Long term prospects of the stockKSE100 OGDC replenishment that should help improve the production base. Long term prospects of the stockremain enticing given above‐industry 3‐yr earnings CAGR of 10% vs industry CAGR of 8%.

Valuation

We maintain our BUY rating on OGDC with our Jun’20 target price of PKR183/sh using reserve basedvaluation methodology whereby the scrip offers 42% return. With further dividend yield of 10% the‐10%

0%

10%

20%KSE100 OGDC


scrip offers total return of 52%. OGDC is currently trading at a FY20E P/E of 4.2x and implied oil priceof USD20/bbl compared to current oil price of US$59/bbl.

Risks

Key risks to earnings outlook stems from oil price volatility, drilling hazard hampering production andoperations, aggressive pile up of circular debt, and escalation in security incidents.

‐30%

‐20%

Oct‐18

Nov

‐18

Dec‐18

Jan‐19

Feb‐19

Mar‐19

Apr‐19

May‐19

Jun‐19

Jul‐1

9

Aug‐19

Sep‐19

Oct‐19

11

Source: BMA Research operations, aggressive pile up of circular debt, and escalation in security incidents.

Oil and Gas Development Company Limited (OGDC)Graphical Snapshot

OGDC Oil Production (Bpd) OGDC G P d ti (MM fd)OGDC Oil Production (Bpd) OGDC Gas Production (MMcfd)

44,041

41 55442 000

43,000

44,000

45,000 1,107

1,056 1,051 1,060

1,080

1,100

1,120

40,818 40,609 41,278

40,810

41,554

40,371

38 000

39,000

40,000

41,000

42,000

1,022 1,014 1,009

1,032

960

980

1,000

1,020

1,040

1,060

Favourable dynamics to propel topline and marginsCrude oil to remain leading earnings driver

l ( b ) ( )

38,000 FY15 FY16 FY17 FY18 FY19 FY20F FY21F

960 FY15 FY16 FY17 FY18 FY19 FY20F FY21F

{RHS}

40%

45%

50%

200

250

300

350 Sales (PKR bn) Net Margin (%)

60%

80%

100%

Crude Gas Others {RHS}

25%

30%

35%

‐

50

100

150

FY15 FY16 FY17 FY18 FY19 FY20F FY21F0%

20%

40%

FY15 FY16 FY17 FY18 FY19 FY20F FY21F

12


Oil and Gas Development Company Limited (OGDC)Financial Snapshot

Income Statement (PKRmn) FY17 FY18 FY19 FY20F FY21F Key Ratios FY17 FY18 FY19 FY20F FY21FIncome Statement (PKRmn) FY17 FY18 FY19 FY20F FY21F Key Ratios FY17 FY18 FY19 FY20F FY21F

Net sales 171,829 205,335 261,481 309,589 330,935 PE 8.7x 7.0x 4.7x 4.2x 3.8x

Gross profit 95,004 121,480 167,062 207,895 225,450 Earnings Growth 6% 23% 50% 11% 11%

Royalty 18,519 21,971 29,336 34,984 37,396 Dividend Yield 5% 8% 9% 10% 12%

Operating expense 56 585 60 213 63,456 62,995 64,118 Gross Margin 55% 59% 64% 67% 68%Operating expense 56,585 60,213 63,456 62,995 64,118 Gross Margin 55% 59% 64% 67% 68%

Exploration cost 13,269 16,190 12,499 23,135 25,135 Net Margin 37% 38% 45% 42% 44%

Other income 16,020 16,008 32,288 24,117 29,685 Return on Equity 12% 14% 19% 19% 19%

Profit before tax 89,137 112,627 176,599 196,264 215,053 Return on Assets 10% 12% 17% 16% 16%

Profit After tax 63,803 78,736 118,386 131,439 146,152Profit After tax 63,803 78,736 118,386 131,439 146,152

EPS (Rs) 14.8 18.3 27.5 30.6 34.0

Balance Sheet (PKRmn) FY17 FY18 FY19 FY20F FY21F Shareholding PatternBalance Sheet (PKRmn) FY17 FY18 FY19 FY20F FY21F Shareholding Pattern

Non‐Current Assets 284,827 260,619 256,811 344,084 343,274

Current Assets 342,460 405,858 509,786 500,474 585,928

Total Assets 627,287 666,477 766,597 844,559 929,202

Equity 512,984 550,556 625,365 700,892 782,530 OGDCL

Mutual Funds3%

Fis2%

Foreign Investors

6%

Others4%

Equity 512,984 550,556 625,365 700,892 782,530

Non‐Current Liabilities 60,693 60,726 68,588 64,469 64,875

Current Liabilities 53,610 55,195 72,643 79,197 81,797

Total Equity & Liabilities 627,287 666,477 766,597 844,559 929,202 Privatization Commisstion

8%

OGDCL employees empower.

Trust10%

13


GoP67%

8%

Pakistan Petroleum Limited (PPL) Concentrated production priced in

PPL BUY Investment thesis: The investment case on Pakistan Petroleum Limited (PPL) is heavily dependent onPPL ‐ BUY


Current Price: PKR 137 (114.3 ex‐bonus)

Outstanding shares: 2 267

its exploration efforts aimed at countering the natural decline at maturing gas fields. The sizeableshare of Sui fields at 29% in total revenue is likely to remain elevated as efforts are made to ramp upproduction that has been noted a decline over the years.

Stock has been an underperformer: Implementation of higher pricing on the prime field, Sui, hasaccelerated circular debt accretion for PPL igniting a concern for investors. Due to aforementionedOutstanding shares: 2,267

Free Float. 21%

MCAP (USDmn): 1,982

1 Year ADTV (USDmn): 1 3

g gconcerns, FY19 remained a dismal period for PPL as it underperformed KSE100 by 12.8pps despite sixsuccessful exploration attempts.

Dependence on few fields: The long term investment thesis on PPL is contingent on i) managementundertaking high‐risk high‐reward drilling prospects, ii) ramp‐up of production from Gambat Southand Tal, and iii) concentrated production exposure heavily priced in. Near term upside in the stock

PPL vs. KSE‐100

1 Year. ADTV (USDmn): 1.3 and Tal, and iii) concentrated production exposure heavily priced in. Near term upside in the stockmay, however, remain limited due to 68% revenue generated from PPL’s heavyweight Sui, Tal, andNashpa fields.

Sui field to remain at center stage: Development efforts of PPL continue, albeit under tamed capexoutlay, to mitigate reliance and natural depletion of Sui. Absence of a large find may remain evidenton the volumetric front however a weak Rupee and rise in oil prices should continue to drive itsKSE100 PPL on the volumetric front, however, a weak Rupee and rise in oil prices should continue to drive itstopline at a 3‐yr CAGR of 6%.

Valuation

We maintain our BUY rating on PPL with our Jun’20 target price of PKR165/sh using reserve basedvaluation methodology whereby the scrip offers 44% return. With further dividend yield of 4% the

i ff t t l t f 48% PPL i tl t di t FY20E P/E f 4 3 d i li d il i f30%

‐20%

‐10%

0%

10%

20%KSE100 PPL

scrip offers total return of 48%. PPL is currently trading at a FY20E P/E of 4.3x and implied oil price ofUSD37/bbl.

Risks

Key risks to our investment thesis stems from oil price volatility, drilling hazard hamperingproduction and operations, aggressive pile up of circular debt, and escalation in security incidents.

‐50%

‐40%

‐30%

Oct‐18

Nov

‐18

Dec‐18

Jan‐19

Feb‐19

Mar‐19

Apr‐19

May‐19

Jun‐19

Jul‐1

9

Aug‐19

Sep‐19

Oct‐19

14


Pakistan Petroleum Limited (PPL) Graphical Snapshot

PPL Oil P d ti (B d)PPL Oil Production (Bpd) PPL Gas Production (MMcfd)16,360

16,060 16,077 16,324

15,714

15 500

16,000

16,500

872

906

884

920 919

891

880

900

920

940

14,979 14,789

14,500

15,000

15,500

833

800

820

840

860

Gas still remains a major revenue driver Favourable dynamics to propel topline and margins

d h



60%

80%

100%

Crude Gas Others

30%

35%

40%

150

175

200 Sales (PKR bn) Net Margin (%) {RHS}

0%

20%

40%


20%

25%

50

75

100

125

FY15 FY16 FY17 FY18 FY19F FY20F FY21F

15


FY15 FY16 FY17 FY18 FY19 FY20F FY21F FY15 FY16 FY17 FY18 FY19F FY20F FY21F

Pakistan Petroleum Limited (PPL) Financial Snapshot

( ) iIncome Statement (PKRmn) FY17 FY18 FY19 FY20F FY21F Key Ratios FY17 FY18 FY19 FY20F FY21F

Net sales 116,986 126,210 163,890 188,505 193,029 PE 8.7x 6.8x 5.0x 4.3x 4.3x



Operating expense 31,247 33,482 40,152 38,184 39,810 Gross Margin 55% 59% 61% 65% 65%



Profit before tax 48,128 63,437 79,931 99,234 100,406 Return on Assets 33% 35% 35% 33% 29%Profit before tax 48,128 63,437 79,931 99,234 100,406 Return on Assets 33% 35% 35% 33% 29%

Profit After tax 35,678 45,688 61,632 71,470 72,314

EPS (Rs) (adj. for Bonus) 13.1 16.8 22.7 26.3 26.6

Balance Sheet (PKRmn) FY17 FY18 FY19 FY20F FY21F Shareholding Pattern


Current Assets 155,450 174,408 252,557 304,218 346,210

Total Assets 324,283 367,321 458,291 541,820 598,321

E it 216 069 240 392 298 609 363 730 425 161

Individuals4%

Public Sector Cos4%

Others8%

Equity 216,069 240,392 298,609 363,730 425,161



Total Equity & Liabilities 324,284 367,321 458,291 541,820 598,321Non resident Fis

9%

PPL employees empower. Trust

7%

16

GoP68%


Pakistan Oilfields Limited (POL) Earnings prospect from uptick in exploration activity a plus

POL BUY Adapting quickly to the situation: With an underperformance of 570bps against KSE‐100, thePOL‐ BUY


Current Price: PKR 396

O t t di h 284

Adapting quickly to the situation: With an underperformance of 570bps against KSE 100, theearnings print of FY19 registered 48% YoY surge in profitability on account of 29% increase ininternational oil prices. We expect FY20 to deliver gains from sharp devaluation of the Rupee, oilprices at USD62/bbl, slight uptick in oil production for the year (up 2%) to translate into earningsgrowth (up 4% YoY).

Concentrated exploration efforts: On exploration front the company intends to shore up its effortsOutstanding shares: 284

Free Float. 38%

MCAP (USDmn): 717

1 Y ADTV (USD ) 0 70

Concentrated exploration efforts: On exploration front, the company intends to shore up its effortsgoing into FY20 as drilling target has been set at 10 wells that include 3 exploratory wells. Jhandialhas emerged as a big potential block with recoverable oil reserves of 23.5mn barrels. Thus efforts arelikely to be concentrated to the said block.

Earnings trajectory remains positive : While we do not factor in production from Jhandial field todepict bumper growth in oil production and foresee a decline from FY21 onwards POL is set to post

POL vs. KSE‐100

1 Year. ADTV (USDmn): 0.70 depict bumper growth in oil production and foresee a decline from FY21 onwards, POL is set to posta decent 3‐yr FY19F‐FY22F earnings CAGR of 3%.

D/Y to remain strong on steady cash flow generation: POL will continue to offer one of the best D/Yof 10% in the E&P sector. Given rising profitability and relative immunity against circular debt (groupsynergies), cash flow generation of the company will remain strong thus ensuring both timely projectcompletion and maintain payouts The company already reported cash and cash equivalentsKSE100 POL completion and maintain payouts. The company already reported cash and cash equivalentsamounting to PKR38bn. We foresee payout of the company to remain healthy at PKR40/sh andPKR41/sh in FY20F and FY21F, respectively.

Valuation: Based on our reserve based valuation we arrive at Jun’20 TP of PKR463/sh, the stockoffers an upside of 17% coupled with a dividend yield of 13% translating into a total return of 30%. At

t l l th i t d t FY20F d FY21F P/E f 6 4 d 6 3 d i li d il i f‐20%

‐10%

0%

10%

20%KSE100 POL


current levels, the scrip trades at FY20F and FY21F P/E of 6.4x and 6.3x and implied oil price ofUSD47/bbl.

Risks

Key risks to earnings outlook stems from oil price volatility, drilling hazard hampering production andoperations, oil price volatility, and escalation in security incidents.

‐40%

‐30%

Oct‐18

Nov

‐18

Dec‐18

Jan‐19

Feb‐19

Mar‐19

Apr‐19

May‐19

Jun‐19

Jul‐1

9

Aug‐19

Sep‐19

Oct‐19

17


Pakistan Oilfields Limited (POL) Graphical Snapshot

POL Oil Production (Bpd) POL Gas production (MMcfd)POL Oil Production (Bpd) POL Gas production (MMcfd)

6,759

7,297 7,167 7,168

6,900

6 600

6,800

7,000

7,200

7,400

75 77

88 88 89 87

75

80

85

90

95

6,319 6,237

5,800

6,000

6,200

6,400

6,600 71

50

55

60

65

70

75

Favourable dynamics to propel topline and marginsRevenue from oil garners over 51% of total revenue



60%

80%

100%

Crude Gas Others

33%

35%

37%

39%

41%

30

40

50

60 Sales (PKR bn) Net Margin (%) {RHS}

0%

20%

40%


27%

29%

31%

33%

‐

10

20

30

FY15 FY16 FY17 FY18 FY19 FY20F FY21F

18


FY15 FY16 FY17 FY18 FY19 FY20F FY21F FY15 FY16 FY17 FY18 FY19 FY20F FY21F

Pakistan Oilfields Limited (POL) Financial Snapshot

Income Statement (PKRmn) FY17 FY18 FY19 FY20F FY21F Key Ratios FY17 FY18 FY19 FY20F FY21FIncome Statement (PKRmn) FY17 FY18 FY19 FY20F FY21F Key Ratios FY17 FY18 FY19 FY20F FY21F

Net sales 27,280 32,665 43,977 50,032 51,285 PE 11.6x 9.9 6.7 6.4 6.3



O ti 8 384 8 456 10 393 11 962 12 164 G M i 52% 52% 58% 57% 56%Operating expense 8,384 8,456 10,393 11,962 12,164 Gross Margin 52% 52% 58% 57% 56%



Profit before tax 12,412 14,353 24,855 25,762 26,346 Return on Assets 17% 18% 22% 19% 16%

fi fProfit After tax 9,679 11,384 16,872 17,488 17,884

EPS (Rs) 34.1 40.1 59.4 61.6 63.0

Balance Sheet (PKRmn) FY17 FY18 FY19 FY20F FY21F Shareholding Pattern

Banks & Fis7%

Mutual Funds9%

Others7%


Current Assets 22,900 35,943 52,243 67,053 69,499

Total Assets 57,652 70,173 81,496 102,941 106,793

Equity 31,498 32,769 38,071 40,824 43,380

Associated Cos. 53%Individuals

16%

Insurance8%



Total Equity & Liabilities 57,652 70,166 81,490 102,941 106,793

19


Disclaimer

This research report is for information purposes only and does not constitute nor is it intended as an offer or solicitation for the purchase or sale of securities or other financial instruments. Neitherp p p y pthe information contained in this research report nor any future information made available with the subject matter contained herein will form the basis of any contract. Information and opinionscontained herein have been compiled or arrived at by BMA Capital Management Limited from publicly available information and sources that BMA Capital Management Limited believed to bereliable. Whilst every care has been taken in preparing this research report, no research analyst, director, officer, employee, agent or adviser of any member of BMA Capital Management Limitedgives or makes any representation, warranty or undertaking, whether express or implied, and accepts no responsibility or liability as to the reliability, accuracy or completeness of the informationset out in this research report. Any responsibility or liability for any information contained herein is expressly disclaimed. All information contained herein is subject to change at any time withoutnotice. No member of BMA Capital Management Limited has an obligation to update, modify or amend this research report or to otherwise notify a reader thereof in the event that any matterstated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. Furthermore, pastperformance is not indicative of future results.The investments and strategies discussed herein may not be suitable for all investors or any particular class of investor. Investors should make their own investment decisions using their ownindependent advisors as they believe necessary and based upon their specific financial situations and investment objectives when investing. Investors should consult their independent advisors ifthey have any doubts as to the applicability to their business or investment objectives of the information and the strategies discussed herein. This research report is being furnished to certainpersons as permitted by applicable law, and accordingly may not be reproduced or circulated to any other person without the prior written consent of a member of BMA Capital ManagementLimited. This research report may not be relied upon by any retail customers or person to whom this research report may not be provided by law. Unauthorized use or disclosure of this researchreport is strictly prohibited. Members of BMA Capital Management and/or their respective principals, directors, officers and employees may own, have positions or effect transactions in thesecurities or financial instruments referred herein or in the investments of any issuers discussed herein, may engage in securities transactions in a manner inconsistent with the research contained inthis research report and with respect to securities or financial instruments covered by this research report, may sell to or buy from customers on a principal basis and may serve or act as director,placement agent, advisor or lender, or make a market in, or may have been a manager or a co‐manager of the most recent public offering in respect of any investments or issuers of such securitiesor financial instruments referenced in this research report or may perform any other investment banking or other services for, or solicit investment banking or other business from any companymentioned in this research report. Investing in Pakistan involves a high degree of risk and many persons, physical and legal, may be restricted from dealing in the securities market of Pakistan.Investors should perform their own due diligence before investing. No part of the compensation of the authors of this research report was, is or will be directly or indirectly related to the specificrecommendations or views contained in the research report. By accepting this research report, you agree to be bound by the foregoing limitations.

A C i l Li i d d / f i ffili hi h id ki d d k d b i i h h ( ) d i hi h d I h ldBMA Capital Management Limited and / or any of its affiliates, which operate outside Pakistan, do and seek to do business with the company(s) covered in this research document. Investors shouldconsider this research report as only a single factor in making their investment decision. BMA Research Policy prohibits research personnel from disclosing a recommendation, investment rating, orinvestment thesis for review by an issuer/company prior to the publication of a research report containing such rating, recommendation or investment thesis.

Investors should carefully read the definitions of all rating used within every research reports. In addition, research reports carry an analyst’s independent view and investors should ensure careful

Stock Rating

reading of the entire research reports and not infer its contents from the rating ascribed by the analyst. Ratings should not be used or relied upon as investment advice. An investor’s decision tobuy, hold or sell a stock should depend on said individual’s circumstances and other considerations. BMA Capital Limited uses a three tier rating system: i) Buy, ii) Neutral and iii) Underperform(new rating system effective Jan 1’18)with our rating being based on total stock returns versus BMA’s index target return for the year. A table presenting BMA’s rating definitions is given below:

Buy >20% expected total return

Neutral 10% 20% expected total return

20

Neutral 10%‐20% expected total return

Underperform <10% expected total return

*Total stock return = capital gain + dividend yield

Pakistan Stock Exchange BranchRoom 141, Pakistan Stock Exchange,

k h d

Faisalabad Branch:Mezzanine Floor, State Life Building #2,Pl N 833 Li R d

Gujranwala Branch:Office No. 51, “H” Block,Ground Floor, Trust Plaza,Gujranwala

Stock Exchange Branch:Room 141, Pakistan Stock Exchange,

k h dStock Exchange Road, Karachi ‐ 74000Pakistan

Islamabad Branch:104, 1st Floor, 82‐East,Muhammad Gulistan Khan House,

Plot No. 833 Liaquat Road, Faisalabad.

Lahore Cavalry Branch:2nd Floor, 74‐CommercialArea, Main Cavalry Ground,Lahore.

Gujranwala. Stock Exchange Road,

Gulshan‐e‐Iqbal Branch:Commercial Office premises bearing, B‐29 Mezzanine Floor 13/A, Main University Road,

Sialkot Branch:Plot 16‐S‐71/A/1, First Floor,Opposite Christian Memorial Hospital Paris Road, Sialkot.,

Fazel e Haq, Blue Area, IslamabadPakistan

Bahadurabad Branch:Office # 3, Mezzanine Floor,Akber Manzil, Main Bahadurabad

Multan Branch:Office No. 607/A, 6th Floor,The United Mall, Plot No. 74Abdali Road Multan

/ , y ,Gulshan‐e‐Iqbal Karachi.

Lahore Gulberg Branch:Commercial Office No. 402, 7th Floor,Mega Tower 63‐B, Main

p ,

BahadurabadRoundabout, Karachi

Abdali Road, Multan Mega Tower 63 B, Main Boulevard,Gulberg II, Lahore.

Karachi Head Office: Unitower, Level 8, I.I. Chundrigar Road, Karachi – 74000 Pakistan

UAN: +92 21 111 262 111Email: [email protected]

pakistan oil gas exploration sector - bma capital

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