Equity Analysis /

Pakistan Petroleum: FY 19 analyst briefing takeaways and outlook

    Intermarket Securities
    26 November 2019

    PPL posted NPAT of PKR61.6bn (EPS PKR27.18) in FY 19, which rose 35% yoy, on the back of sharp PKR depreciation and resultant FX gains (modest production growth). This was accompanied by a cash dividend of PKR2.0/sh. 

    Future strategy and outlook 

    Since 2013-14, PPL has focused on conserving its existing production, which predominantly came from mature and depleting fields like Sui. Hence, bulk of the recent development capex focused on arresting the decline in mature assets. For instance, Sui’s natural depletion rate of 7% pa has been contained to about 3% pa. Hereon, they will shift focus to growth through exploration and finding new reserves.

    PPL will also target growth through ramping up its mining operations (Bolan Mining Enterprise), firstly through a 50:50 joint venture with Government of Baluchistan (BLZ) and later tapping into other minerals.

    For FY 20f, PPL has set out the following targets:

    • Maintaining annual production level at 1.0bcfde of production (partly through the following three projects)
    • Commissioning GPF-IV Phase II which will add another 45mmcfd to Gambat South's production
    • Ramp up production from Dhok Sultan from 700bpd oil presently to about 4,000bpd. Due to the associated gas from the field, PPL will first have to arrange pipeline for the field
    • Commissioning production from Behari by July 2020

    PPL’s planned capex for FY 20 is PKR40-45bn, of which PKR20bn will be employed in exploration. The first exploratory well in Block-8, Iraq (Madain) cost about US$28mn. PPL has acquired seismic data of only 300 sq. km out of 6,500 sq. km of land under the lease. PPL intends to drill more wells in the block.

    PPL will target Adhi’s production level to remain at about 10,000bpd oil. Adhi South was recently added to production and is presently producing 700-800bpd of oil.

    On circular debt, PPL has presented options for settlement of its receivables (PKR259bn by end Sep’19) to the government and is hopeful of some resolution in the near future. At the AGM held in Oct’19, management said that they expect to receive a lion’s share in the upcoming PKR200bn Sukuk issue.

    Our view

    We think PPL’s production and capex strategy will enable to maintain production at 1.0bcfde, where upside in oil prices and PKR depreciation will account for most of the earnings growth in near future, in our view. On cash-flows, however, upcoming Sukuk issue and energy sector tariff hikes will help in arresting the circular debt buildup. A full settlement of the outstanding balance of PPL’s receivables may take 2-3 years, in our view. We have a Buy stance on PPL with a TP of PKR142/sh and the reason for our liking is cheap valuations (FY 20f EV/EVITDA of 2.4x), where the key catalyst will be circular debt resolution.