Equity Analysis /

Pakistan Petroleum: Two discoveries with modest flow rates; cut rating to Neutral

    Intermarket Securities
    24 December 2019

    PPL announced two discoveries on PSX, one in Kalat block (Baluchistan) and the other in Latif block (Khairpur, Sindh). Cumulatively, based on the initial flow rates, they will increment PPL’s earnings by about 5% on an annualized basis.

    Margand well in Kalat block, Baluchistan

    We understand that the market had high expectations for this discovery, as it is located in the Baluchistan province which is home to large gas reserves (including that of Sui field). The stated choke size of 64/64 is not optimal, in our view, and hence actual production could be lower than the stated levels. However, PPL has guided that it will try to amplify the production with acid stimulation job. 

    The discovery size notwithstanding, it is a rare find in the frontier areas (relatively less explored in the past) for PPL and should embolden them to ramp up exploration and drilling in that geography in future (enhanced learning curve), which could lead to a material discovery, in our view.

    Bitro-1 well in Latif block, Khairpur

    Again, the stated pressure level of 3116 psi and choke size of 44/64 suggest actual production may be lower than the initial flow rate. Due to proximity to other producing fields (infrastructure around Kadanwari, which is operated by Eni), we think it might be added to production sooner than the above discovery. Other partners in the block include Eni and UEP with about one-third stake each. 

    Cut rating to Neutral

    The stock corrected over 4% in yesterday’s session following the discovery announcements, as the recent rally (up 12% in 1mth) was driven by expectations of a major discovery (did not transpire). Based on the recent rally, we cut our rating on PPL to Neutral while maintaining our TP at PKR148/sh. Key triggers for the company include (i) upcoming Sukuk issue which can potentially lead to meaningful reduction in outstanding circular debt, and in turn could open up cash-flows for payout and greater drilling activity, (ii) potential investment in PPL’s SPO by a foreign Oil & Gas company, where a potentially large strategic investor could bring in unconventional drilling expertise and help PPL in finding more promising assets outside Pakistan. 

    Risks: (i) Sharp decline in mature assets, (ii) PPL’s SPO adding to supply pressures, and (iii) lower oil prices which will affect investor sentiment