Earnings Report /

Pakistan Petroleum: FY19 results: Very high exploration expenses, offset by large FX gains

    Intermarket Securities
    25 September 2019

    Pakistan Petroleum Ltd (PPL) has posted 4QFY19 NPAT of PKR17.6bn (EPS PKR7.76), up 44% yoy and 28% qoq. This takes FY19 earnings to PKR61.6bn (EPS PKR27.18), up 35% yoy. The FY19 result is better than our full-year estimate PKR26.15. PPL also announced a final dividend of PKR2.0/sh against our expectation of no dividends along with PKR2.0/sh dividend and 10% bonus for preference shareholders.

    While the headline earnings in 4Q is broadly in line, the key deviations from our expectations are very high exploration expenses and higher-than-expected exchange gains.

    Key Highlights for 4QFY19:     

    • Net Sales rose 9% qoq to PKR44.3bn, majorly due to 8% PKR devaluation (on avg basis) while there was no production growth (at 13mmboe) from the previous quarter. There was overall moderate declines in output of Nashpa (oil), Adhi, Sui and Qadirpur; partly offset by growth in Gambat South and Nashpa (gas and LPG).     
    • Exploration expenses of PKR11.7bn came out much higher than our estimate of PKR5.0bn which included dry-well cost of Kekra of about PKR3.5bn and that of Hisal well. We think PPL may have booked the dry-well cost related to Shawa well in Nashpa block (which was however declared dry post result date; OGDC 4Q result did not include an expense related to this well). We await clarity from the management on this item.  
    • High exploration expense was partly offset by higher-than-expected exchange gains. Other income thus came in at PKR8.8bn. 
    • Effective tax rate in 4Q came in at 18% vs average 25% in the previous three quarters.   

    As was the case in results of other E&Ps, PPL’s earnings rose significantly by 35% yoy in FY19, which is majorly attributed to 24% PKR devaluation (on average basis) and 12% higher oil prices. Looking ahead, amid range-bound oil prices and little expected PKR devaluation, PPL will have to pull off greater production growth to post decent earnings growth.

    We have a Buy stance on PPL with a TP of PKR165/sh, where the stock is trading at a forward EV/EBITDA of only 1.7x. Rising circular debt has been a concern, which had also affected drilling activity, because of which we were not expecting a payout. However, a potential Sukuk-II issue by the government to inject money into the energy sector and the recent gas tariff hikes of Sui utilities will likely help in improving PPL’s cash-flow position. We prefer OGDC as our top pick in the space for similar undervaluation as in case of PPL but also a dividend yield of 11%.

    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.