Earnings Report /
Pakistan

Pakistan E&Ps – 4Q22 Previews – Tax & TCC fine to trim payout; POL will outshine

  • Super tax will dampen E&P earnings by 34% QoQ to PKR46bn despite topline higher oil prices and PKR devaluation

  • Both OGDC’s and PPL’s payout will be low after mining project Reko Diq was reconstituted but POL will outshine

  • We continue to like E&Ps as gas tariff hike can open up valuations, and prefer POL for near-term attractive yield

Intermarket Securities
16 August 2022
  • The super tax is expected to reduce earning of E&P Universe by 34% QoQ to PKR46bn despite topline rejoicing from higher oil prices and PKR devaluation during the period.

  • Both OGDC's and PPL's payout will be impacted by the tax as well as the fine of USD187.5mn each to TCC as the long-standing dispute of Reko Diq was reconstituted. However, POL will likely emerge with a hefty payout of PKR 50.00/share where Fx gains will overcome super tax impact.

  • We remain positive on the implementation of the gas price hike which will likely open up valuations, preferably OGDC and PPL. We also like POL in the near term as it offers a 12-month dividend yield of 17% and 10%, respectively.

Super tax dampens earnings

E&P sector profitability from IMS Universe is expected to decline sequentially by a massive 34% QoQ to PKR46bn in 4QFY22. Major earnings dampener being the super tax will also chop the payout capacity of companies, which have rejoiced from the c.15% rise in average oil price and c.10% devaluation in PKR during 4QFY22. This trend was also similar for gas revenue where fields are priced on prior 6month average oil prices.

It is pertinent to note that oil output of IMS E&P space declined 5% QoQ, faster than the industry’s 3% drop. On the other hand, gas output remained flat as compared to the industry’s growth of 1% QoQ. This is primarily because the new additions are inadequate to offset the natural decline in mature fields.

POL will emerge with the best payout

Recent cash injections in the Energy sector (mostly IPPs) had partially stalled the buildup, translating into 80-90% recovery rates and meaning certain payouts. However, with earnings being hit by the super tax, another dampener to payout capacity has emerged from the truncated fine of USD900mn to Tethyan Copper Company (TCC) – a JV of Barrick Gold Corporation of Canada and Antofagasta of Chile. Both OGDC and PPL need to settle USD187.5mn as the Reko Diq project is reconstituted.

As per the new arrangement, Barrick Gold will have 50% stake as an operator and the remaining 50% stake will be divided among Balochistan Government – 10% as free-carry, Government of Pakistan – 15% stake and E&P Consortium – 25%. The consortium enlists three state-owned E&Ps, OGDC, PPL and Government Holdings Pvt. Ltd (GHPL).

Perhaps this is not the case with POL which will also benefit from a higher quantum of foreign exchange gain as USD:PKR lost c.10% during the 4QFY22. We expect POL to announce a final DPS of PKR50.00 at 80% payout against a historical average of more than 90%.

Liking for high dividend yield and WACOG maturity

We remain positive on implementation of the gas price hike which will likely open up lucrative valuations of E&P space, preferably OGDC and PPL. We like POL and OGDC in the near term as they offer 12-month dividend yields of 17% and 10%, respectively. While the gas price hike will likely bring us near WACOG implementation, the efficacy of circular debt resolution warrants securitization of outstanding circular debt c.PKR620bn of combined overdue receivables of OGDC and PPL. We believe this step will also call for resolution of PKR120bn overdue amount of revised terms of TFC on OGDC’s books.