Equity Analysis /

Pakistan Petroleum: Q2 FY 20 preview – Modest trends in production and exploration

    Intermarket Securities
    21 February 2020

    We expect Pakistan Petroleum Ltd (PPL) to post 2QFY20 NPAT of PKR14.5bn (EPS PKR5.33), which will be down 12% yoy but up 1% qoq. This will take 1HFY20 earnings to PKR28.9bn (EPS PKR10.61), down 5% yoy. We do not expect PPL to announce an interim dividend (same as last year) due to persistent drain on cash from rising circular debt.

    Key expectations for 2QFY20 results: 

    • Net Sales is expected flat qoq to PKR42.2bn where a major drag has come from production decline of 3% qoq to 11.8mmboe. Gas production fell 3% qoq to 701mmcfd, majorly due to decline Kandkhot (down 35% qoq, possibly due to lower offtake from Genco-II) and Qadirpur. Sui, however, improved 13% qoq to 390mmcfd of gas. Oil production, on the other hand, rose 3% qoq to 15,000bpd due to rebound in Nashpa and Adhi.
    • Other income is expected 12% qoq lower due to depleting cash balance amid rising circular debt. The yoy estimated decline is sharper at 83% due to lack of exchange gains.
    • We expect exploration expenses to decline 24% qoq with one dry well expense (Nooh well in Hab block) and negligible spend on seismic surveys (besides that by MOL in Tal block).

    We have a Buy stance on PPL with a June 2020 TP of PKR155/sh. PPL is more acutely affected by circular debt buildup than peers, but has better potential to ramp up production from existing fields. The upcoming second GoP Sukuk issue may lead to a large inflow of cash for PPL, as our channel checks suggest that this issue will likely focus on the gas/LNG chain. A greater than PKR50bn share for PPL will ease off cashflow issue materially. PPL’s exploration program has been modestly successful during FY20 so far, where there had been high expectations for an exploratory well Margand, but initial flows from the well did not match market expectations.