We are upgrading our stance on POL from Neutral to Buy with a new Jun’20 TP of PKR460/sh. This is led majorly by the upgrade of reserves of Tal block by PPIS, which extends the years of future production from Tal’s major fields. We also like POL for its high DY of 13%.
In Tal, increased drilling and exploration could potentially lead to an upside trigger for our production estimates. Moreover, while Jhandial’s production remains low, its outlook can also improve on success of an appraisal well planned for 2QFY20.
Our FY20/21f EPS have been revised moderately. In 1QFY20 results, we expect POL to post an EPS of PKR13.47, down 1% yoy and 33% qoq. Key expectations are 8% qoq decline in both oil prices and production, high exploration expenses and modest other income.
Upgrade to Buy on new reserves
We upgrade our stance on Pakistan Oilfields Ltd (POL) from Neutral to Buy with a new Jun’20 TP of PKR460/sh (PKR415/sh earlier), which is driven by the upgrade of Tal block reserves and future drilling/production guidance. We now expect recent discoveries of Tal block to produce longer (7-8 years) than assumed earlier, based on new reserves estimates of Mardankhel and Maramzai, even though oil reserves of Makori East have been downgraded. However, we have moderately revised our FY20/21f EPS by 3%/2% to PKR60.02/58.33 (based on US$65/bbl oil-price assumption). Also, reserves of Jhandial have not materially altered; and plans of a second well can help to allay production issues at the field. The key attraction for the stock remains its high dividend yield of 13% for FY20f.
Recent discoveries at Tal likely to produce longer
Key changes in reserves of Tal block, as per new PPIS data, are: (i) 19% downgrade of oil reserves of Makori East (ME), (ii) oil reserves of Mardankhel raised by 63% (from Dec’18 estimates), and (iii) overall gas reserves of the block now estimated 9% higher. Despite the downgrade at ME, these are net positive, in our view, because they extend the reserves life of the overall block. For instance, Mardankhel’s production is now expected to last until 2027 (previously 2022). We are also optimistic about the development wells, ME-7 and Mardankhel-4, which are planned for FY20 and can potentially yield an upside trigger to our production estimates. MOL, the operator of Tal, has commenced geological studies in relatively untested part of the block (KOT area); an exploratory well Mamikhel South is also under drilling. Success in these two will be key positives for POL, as Tal is c.66% of revenues (FY19).
Jhandial: Second well can enhance production
Jhandial is presently producing c. 400bpd of oil (1,400bpd initial flow in Oct’18). According to management, increasing the flow rate from the first well might jeopardize the life of the asset. However, POL has planned a second well (appraisal) for 2QFY20, which will be crucial to ascertain the normal production level and hence reserves of the field. In the same vein, POL is also ramping up seismic surveys in Ikhlas block for future exploration. Note that Jhandial is presently 46% of POL’s hydrocarbon reserves; without it, POL’s reserves life is only eight years.
Downside risks: (i) Unsuccessful appraisal well at Jhandial, and (ii) lower offtake by refineries due to furnace oil phase-out.