Lower Oil Prices And Dry Well Costs Squeezed – Pakistan Oilfields Limited

Elixir Securities Pakistan (Pvt) Ltd.

Result announcement: We review the FY15 annual result of Pakistan Oilfields Limited (POL), in which the company reported PAT of PKR8.5bn, translating into EPS of PKR35.76, down considerably by 34% YoY. Earnings during 4Q clocked in at PKR1.1bn (EPS: 4.62), down massively by 61% YoY. The company also announced a final cash dividend of PKR 25.0/share, in addition to interim cash dividend of PKR15.0/share, taking full year payout to PKR40.0/share.

9% lower gas production and 27%/5% decline in realized oil/gas prices constrict top line in FY15

Significant dry well costs, despite lower amortization costs swelled field expenditures

Field and prospecting costs of POL remained downward sticky in FY15, despite severe drop in crude oil prices. Though amortization of development and decom. costs were down considerably by 42% during the period under review (on account of high base effect due to significant amortization pertaining to Domial in FY14), dry holes took a toll on profitability of the company this time around. POL booked dry wells costing PKR4.49bn (per share impact of PKR19 before tax) during FY15, which pertained to unsuccessful efforts at Pindori, Ikhlas and Malgin. As a result, field costs grew by 14% denting operating profit of POL by 34% on a YoY basis during FY15. Other income remained muted declining by 14% YoY owing to 55% YoY decline in dividend income from its associate companies (mainly NRL and APL), exchange gain and gas processing fee. That said, operating cash flows of the company remained robust, as OCF per share during FY15 stood at an impressive PKR55.1/share, which also reflected favorably in the final cash payout.

FY16 earnings outlook

Stock price performance in recent months has closely tracked crude oil prices prevailing in the international market which is not without merit as POL remains most sensitive to oil price movement in our E&P space. Though volatility in oil has increased significantly in recent period, oil prices continue to remain depressed. We have incorporated crude oil of USD50/bbl in FY16, which assumes further decline in average oil price by around 31% during the current year on a yearly basis. With modest 6-8% improvement in hydrocarbon production, earnings of POL are expected to remain muted in FY16 as well. However, investors should find solace in the fact that the scrip is still trading at an implied oil price of around USD40/bbl (a discount of 12-15% from the latest oil prices).

Investment Case; Reiterate BUY: We re-iterate our Buy stance on POL, with June’16 PT (based on reserves based DCF) of PKR476/share. The stock offers an upside potential of 51% to last close (ex-dividend) and an impressive forward FY16E dividend yield of 10.3%. The scrip is trading at FY16 PE and PB of 9.7x and 2.4x, respectively.