Earnings Report /

Pakistan E&Ps: 1QFY22 results preview

  • Pakistan E&Ps are expected to show a sharp c.30% qoq jump in earnings

  • PKR depreciation will have a bigger role in the earnings growth, more than the 9% qoq higher oil prices

  • We maintain our Overweight stance on the sector. Our top picks are OGDC and POL

Intermarket Securities
18 October 2021

PKR weakness and higher oil prices to elevate earnings

  • Despite flattish to mildly lower production, our E&P Universe is expected to post cumulative net profits of PKR56.4bn for 1QFY22, up 31% qoq and 36% yoy – thanks to higher oil and gas prices and sharp PKR devaluation. Notably, the incremental earnings emanated largely from PKR weakness.

  • As per PPIS data, gas production for all three companies in our coverage rose about 3% qoq, even though some large assets depicted sharp decline. Oil production for OGDC and POL was also higher, but PPL saw a sharp 11% decline in its oil output.   

  • Higher oil prices will revive exploration and drilling activity during FY22. All three E&Ps can add sizable new production from new wells at existing assets. However, we also expect that higher oil prices, coupled with imminent LNG shortage in Pakistan, can exacerbate circular debt buildup. On balance, we maintain our preference for OGDC and POL.

Expected earnings growth for 1Q majorly driven by price factors

Cumulative net profits of IMS E&P Universe are expected to rise by a handsome c.30% qoq in 1QFY22 to PKR56.4bn, where the quarter will be the third consecutive with double-digit earnings growth (qoq). This was mostly driven by higher oil and gas prices, coupled with sizable exchange gains; while production growth across the coverage companies remains chronically slow. Continuation of a few other factors from FY21 will also lift earnings during FY22; notably, (i) reserves upgrade of Sui in June 2021 has reduced amortization expenses for PPL; (ii) improved offtake from Uch-II has moderated production depletion for OGDC, while (iii) the IFRS-16 treatment of Uch-II has increased OGDC’s sensitivity to the exchange rate; and (iv) exploratory expenses have nosedived for PPL and POL.

Hydrocarbon demand has rebounded but supply issues remained

As per PPIS data, average crude oil and gas production rose by 2-3% qoq for our coverage companies, with the exception of PPL’s oil production which fell 11% qoq. Demand side constraints on crude oil production has moderated for most large assets as demand for Furnace oil from the Power sector has rebounded, albeit temporarily, in our view. However, there were supply-side issues with gas during 1Q. Besides Sui’s production which was flat qoq, all other major gas assets of PPL exhibited 10-15% qoq decline. Notably, gas offtake from Kandhkot fell below 100mmcfd compared with its plant’s processing capacity of c.220mmcfd. Output from Nashpa and Tal block fields were disrupted in September because of a leakage in SNGP’s pipeline; these fields are thus also attributed for the soft oil production during the period. Nashpa and Mela also had an annual turnaround in August, while Gambat South stopped production for a week.       

PKR devaluation will have a big role to play

Of the PKR13bn of additional net profits in 1QFY22, compared with the previous quarter (4QFY21), we estimate that nearly PKR3bn emanate from the higher exchange rate, while about PKR8-9bn are exchange gains. Higher crude oil prices (though up 9% qoq) had a relatively milder effect because of lower production from the most “oil-price sensitive” fields (Nashpa, Tal block, and Adhi). On the flip side, PKR devaluation has also considerably lifted Opex for our E&Ps, as field services costs are largely dollarized. Looking ahead, we expect the recent strength in global oil prices and slowdown in circular debt buildup (until end-Sep 2021) to revive exploration and drilling plans for the sector. A major risk is also related; higher oil prices and greater furnace oil consumption for power generation could mean sharper buildup of circular debt hereon, in our view.