Baqar HussainAlfalah Securities Limited.
We initiate our coverage on Mari Petroleum Limited, with a Buy Rating and June’16 Target Price of PKR649/share. Though earnings of MARI are expected to remain lackluster during the current year, we eye strong earnings CAGR of 30% during FY17-20. Beyond FY20, though earnings growth is anticipated to slow down, we still expect PAT to improve at a CAGR of 5% during FY21-FY27.
We also highlight that MARI is presently working to enhance its production from Mari gas field, which averaged 582mmcfd/594mmcfd in FY14/FY15. The company is targeting to raise its production by around 60-70mmcfd in order to attract better well head prices ( ↑ around 50%-120%), as per Petroleum Policy 2012 as against applicable PP2001 on Mari field. The company has successfully drilled 2 development wells in the concession while drilling on the 3rd development well is presently underway. However, the additional production will only materialize if the company is able to fetch prices according to PP2012. Though we have not incorporated its impact, we assert that 60-70mmcfd of additional gas attracting PP2012, at oil prices of USD50/bbl, will result in incremental EPS of PKR20 (even if incremental production is also subject to entitlement factor). However, if additional production is not subject to entitlement factor, incremental EPS impact can get as high as PKR37.
Furthermore, it is also pertinent to note that owing to small equity base of the company, the impact of any new find, especially oil-based discovery, will be substantial. We find it relevant to point out that merely 1kbopd additional oil production will result in incremental earnings of around PKR10/share to the company. The impact of recent finds of the company in Hala Block (Fazal X1) and Karak Block (KALABAGH 1A) with cumulative hydrocarbon flow at 890bopd of oil and 28mmcfd of gas is around PKR8/share. These discoveries are incorporated from 4QFY16 in a piecemeal manner.
It is also worth mentioning that the despite hefty improvement in earnings, dividend payout will remain as per the previous policy, which somewhat spoils the charm in the scrip. However, with MARI in the active privatization list of the govt, we would not be surprised if cap on dividend is annulled.
- Well head prices set to grow. Under the previous Mari field pricing agreement, the company was guaranteed fixed return on its equity based on its gas production and the profit and loss account was prepared using a bottom up approach in which all the expenses (such as interest cost, exploratory expenses, opex) were added back to compute net revenues of the company. Resultantly, the realized gas prices of the company remained artificially depressed averaging merely USD0.66/mmbtu during FY09-FY14. Though the company charged its customers (fertilizer plants and WAPDA GENCOs) higher rates (ranging from PKR67/mmbtu to PKR638/mmbtu), the differential in realized prices and prices charged to customers was pocketed by the government in the form of GIDC, GDS, and GST etc. The new pricing mechanism brings an end to the cost plus structure of the company and with market based rates for both gas and oil, fortunes of the company will witness phenomenal improvement in the next 4-5 years, whereby we expect the earnings of the company to grow at a 4 year CAGR of 31% during FY17-FY20 period. Growth in earnings will emanate from 1) uptrend in the entitlement factor, 2) gradual improvement in crude oil prices in which have plummeted massively, and 3) significant jump in income on cash/bank balances.Though the impact of market based gas rates is muted during FY15 and FY16 owing to relatively low entitlement factor (43%/56% in FY15/FY16) coupled with depressed Arab Light prices in the near term, steep ascend in profitability is projected thereafter mainly driven by rising entitlement factor and improvement in crude oil prices assumed (our FY16/FY17/FY18 AL price assumption stands at USD50/57.5/65 per barrel respectively). However, with massive growth in earnings, and capped distribution, accumulated profits and thus the cash balance of the company is expected to grow swiftly, which would further transpire into healthy investment income going forward.
Application of Petroleum Policy 2012 on incremental gas production from
Mari to have massive EPS impact
We also highlight that MARI is presently striving to enhance its production from Mari gas field, which produced gas at an average of 582mmcfd in FY14 and 594mmcfd in FY15. As per Petroleum Policy 2012, the policy will be extended to incremental gas production, subject to meeting the minimum threshold of 10% addition in the gas production during Feb-July 2013, or volumes committed in approved development plan. The company is targeting to raise its production by around 60-70mmcfd in order to attract better well head prices ( ↑ around 50%-120%), as per 2012 Petroleum Policy as against applicable PP2001 on Mari field. The company has successfully completed 2 development wells in the concession while drilling on the 3rd development well is presently underway. However, the additional production will only materialize if the company is able to fetch prices according to PP 2012. Though we have not incorporated its impact, we assert that 60mmcfd of additional gas attracting PP2012, at oil prices of USD50/bbl, will result in incremental EPS of PKR20/share to the company.
Furthermore, it is also pertinent to note that owing to small equity base of the company, the impact of any new find, especially oil-based discovery, will be substantial. We find it relevant to point out that merely 1kbopd additional oil production will result in incremental earnings of around PKR10/share to the company. The impact of recent finds of the company in Hala Block (Fazal X1) and Karak Block (KALABAGH 1A) with cumulative hydrocarbon flow at 890bopd of oil and 28mmcfd of gas is around PKR8/share, which we have incorporated from 4QFY16.
Recommendation
- The scrip offers 33% upside to our June’16 target price of PKR649/share. Though FY16E PE multiple seems a bit stretched, given its impressive 4-year earnings CAGR of 30% going forward, and near term triggers will help stock outperform in the near term compared to its peers, which will see relatively modest earnings growth.
Key valuation methodology & triggers
- June-16 price target: PKR649 based on blended Dividend Discount Model and Reserve based Discounted Cash-flow Methodology.
§ Key upside triggers: Incremental gas production attracting PP2012, production addition from new finds, recovery in oil prices, and annulment of cap on dividends. - Key downside triggers: Further decline in crude oil prices.
Syed Zaki Hussain
