Earnings Report /
Pakistan

Pakistan Petroleum: 2QFY20 results: Earnings miss on much higher exploration expenses

    Intermarket Securities
    25 February 2020

    Pakistan Petroleum Ltd (PPL) has posted 2QFY20 NPAT of PKR10.0bn (EPS PKR3.71), down 30% qoq and 39% yoy. This takes 1HFY20 earnings to PKR24.4bn (EPS PKR8.98), down 19% yoy. The 2Q EPS is much below our estimate of PKR5.33/sh where higher than expected exploration expenses was the major deviation. There was no interim dividend alongside the results, as expected.

    Key highlights for 2QFY20 results: 

    • Net Sales of PKR43.7bn is up 4% qoq (7% yoy) led by higher oil prices by 4% qoq and 3% higher oil production of 15,000bpd, despite the drag from 3% lower gas production to 700mmcfd. Lower gas output was because of decline in Kandkhot (down 35% qoq, possibly due to lower offtake from Genco-II) and Qadirpur. Sui, however, improved 13% qoq to 390mmcfd of gas.
    • Exploration expenses of PKR10.7bn are significant. PPL booked a dry well cost of PKR5.0bn related to Nooh well (Hab block) which we had expected at PKR2.5bn. The well was drilled in a Frontier block and hence entailed unusually high cost of drilling. Additionally, PPL also wrote off certain wells, previously deemed as discoveries but had commercially unviable production levels. These were the wells in Kotri, Kirsal and Cholistan blocks in addition to Shawa well (Nashpa).
    • Opex of PKR12.9bn is slightly higher than our estimate where higher amortization costs are attributed.
    • Other income of PKR1.6bn came in better than expected despite depleting cash balance amid rising circular debt.
    • Effective tax rate of 25% as expected.

    Although the result is much lower than expected, the drag has come from nonrecurring and non-cash charges, which will likely normalize in the coming quarters. Five dry well costs in a quarter is also unusual for PPL. Otherwise, PPL has demonstrated good ability at stabilizing production of large and critical fields – particularly Sui. The major trigger awaited for the stock is rebound in cash-flow health and dividends. The upcoming Sukuk issue is a key trigger, where we expect the gas chain to receive the lion’s share of the PKR200bn injection. We have a Buy stance on PPL with a TP of PKR155/sh.