Equity Analysis /

Pakistan Petroleum: 3QFY19 results miss on higher exploration expenses

    Saad Ali
    Saad Ali

    Head of Research

    Intermarket Securities
    30 April 2019

    Pakistan Petroleum Ltd (PPL) posted 3QFY19 consolidated NPAT of PKR13.7bn (EPS PKR6.07) which is up 24%yoy but down 16% qoq (lack of exchange gains). This takes 9MFY19 earnings to PKR44.0bn (EPS PKR19.42), up 32% yoy. The 3Q result was below our estimate of PKR6.73/sh. PPL did not announce an interim dividend despite having skipped half-yearly payout and potential cash inflow from recent GoP Energy Sukuk issue.  

    The key deviation from our estimate is the exploration expense of PKR4.9bn. There was only one dry well during the quarter – in Hisal block – the cost of which we had estimated from POL’s 3Q result (also a partner). This could potentially indicate ramp-up of pre-drilling expenses (seismic and geophysical studies). All other line items were broadly in line with our estimates.  

    Key highlights in 3QFY19:

    • Net Sales jumped 31% yoy (down 1% qoq) to PKR40.5bn, where PKR devaluation and higher well head gas prices are attributed (recall Sui’s gas price, based on 2012 PP, is more sensitive to oil prices now). As we pointed out in our E&P Previews report, PPL is the only E&P which was able to contain the decline in production (Gas up 3% qoq to 816mmcfd, Oil flat at 16,143bpd). 
    • Other charges of PKR1.7bn were 2x that of last year as PPL is prudently booking a windfall levy related to three Tal block fields, the gas prices of which are a sub judice matter (even though it is not booking the incremental revenue from the conversion). However, the item fell 21% qoq.
    • Effective tax rate in 3Q came in at 25%, as expected.   

    We have a Neutral stance on PPL and an unchanged TP of PKR191, as we think the stock mostly reflects the recent positives (largely production growth in Adhi and Gambat South; Sui’s new pricing). Key catalysts for PPL include a potential discovery at offshore well Kekra.

    Risks: (i) Buildup of circular debt and more dividend cuts, (ii) sharp depletion in Sui and other mature assets, and (iii) unfavorable decision on conversion of Tal block gas prices.