23
AHCML Pakistan Oilfields Limited: The infinite potential of exploration
AHCML
Pakistan Oilfields Limited: The infinite potential of exploration
AHCML
POL: Accumulate with PO of PKR507!
We are initiating coverage on Pakistan Oilfields Limited (POL‐KSE) with a price objective of PKR507.00 (NAV based), thereby assigning an ‘ACCUMULATE’ rating.
We believe Pakistan Oilfields Limited offers investors an opportunity to invest in a high dividend yielding and capital growth stock on the premise of sizable production additions from TAL block and healthy dividend payouts history. For the company, declining production from Pindori poses a contentious question on the ‘balance recoverable reserves’ estimates, although revenue dependence has now shifted from Pindori towards other fields i.e. TAL Block. Furthermore, the company is in solid financial position and may capitalize on it with future investment in wildcats.
Analysis
We have arrived at a NAV based value of PKR507 including a portfolio value of PKR24.36 and no exploration value. We have used WACC (16.75%) for discounting the cash flows of the company. POL offers highest dividend yield among its peers. Earnings growth is largely dependent on high international oil prices and PKR depreciation while dividend income from associates also augments the bottom‐line. POL is trading at a discount of 10% to its fair value which requires us to assign an ‘ACCUMULATE’ rating for the stock.
Rising production with sizeable additions in 4QFY13 to come online from TAL Block with particular focus on Mamikhel‐2, Maramzai‐2, Makori East‐2 and Tolanj X‐1. Further enhancements from Pakistan Petroleum Limited operated Adhi field (POL’s stake: 11.00%) are also anticipated. Additionally, revenue from Natural Gas Liquids (LPG, Solvent Oil & Sulphur) is also foreseen as contributing significantly to the company’s top‐line.
We assert our medium‐term forecast of Arab Light Crude of US$105/bbl till 2020 and expect it to increase gradually by 1% over the next 20 years and onward on the premise of sustained demand from emerging economies particularly from China and India in FY13 and beyond while from United States & other Developed Economies in FY15 and beyond.
Three major risks have been indentified ‐ firstly, volatility in international crude oil price which may result in sharp decline in realized revenue manageable through derivatives instruments. Secondly, POL’s heavy reliance on TAL Block which may face abnormal shutdowns if law & order situation worsens in the region, a scenario that could be managed through securing the installations. Lastly, POL’s increased dividend payout policy, compromising on its exploration activity; making the stock less attractive for longer term.
Pak Oilfields Ltd. Brief Snapshot
Sector Oil & Gas
Symbol‐KATS POL
Symbol‐Bloomberg POL:PA
Symbol‐Reuters PKOL.KA
O/Shares (mn) 236.55
Last Traded Day Mar 12’13
Last Price 462.18
Mkt. Cap. PKR (bn) 109.33
Mkt. Cap. US$ (bn) 1.10
Free Float Share (mn) 108.07
Free Float as a % of O/S 46%
Fair Value (PKR) 507.00
Recommendation Accum.
POL v/s KSE 100 Index
AHCML
POL company profile
POL is a subsidiary of The Attock Oil Company Limited (AOC) which was incorporated on Nov 25, 1950. In 1978, POL took over exploration and production business of AOC. Since then, POL has been investing independently and in JVs with other exploration and production companies to explore oil and gas in Pakistan.
In addition, POL also manufactures LPG, solvent oil and sulphur. POL markets LPG under its brand name of POLGAS, as well as through its 51%‐held subsidiary CAPGAS (Private) Limited. POL has a 25% shareholding in National Refinery Limited, which is Pakistan’s only local refinery producing lube base oils and is the single largest producer of high‐quality asphalts.
Attractive: Valuation
We have arrived at a NAV based value of PKR507.00 including a portfolio value of PKR24.36 and no exploration value. POL offers highest dividend yield among its peers in the region. Earnings growth is largely dependent on international oil prices and PKR fluctuation while dividend income from associates also augments the bottom‐line.
Valuation
We have used NAV based valuation to arrive at POL’s fair value of PKR507.00 from its existing 2P oil & gas reserves. The NAV based valuation methodology assumes that the company never increases its existing reserves, so there is no additional CapEx in future years beyond what is required to develop existing reserves. Therefore we have assumed ‘Development Expenditure’ at PKR4.3bn in total for next five years (including FY13) and have incorporated production only from its existing reserves. We have used WACC (16.75%) to discount future cash flows of POL from its reserves.
In addition to above, POL holds strategic interest in its listed associates, Pakistan Refinery Limited (PRL) and Attock Petroleum Limited (APL) which is valued at PKR24.36 per share after applying 25% discount to market price of both the companies. POL’s cash & cash‐equivalents (Net Debt) are valued at PKR37.00 per share.
Furthermore, we have held international crude oil price (Arab Light) constant at US$105/bbl for the medium‐term till year 2020 beyond which a 1% increase on annual basis and PKR to depreciate by 5% on average over the long‐term. The average tax rate of the company is assumed at 25.87% for calculating after tax cash flows.
POL is trading at a discount of 10% to its fair value which requires us to assign an ‘ACCUMULATE’ rating for the stock.
“POL offers highest dividend yield among its peers in the region”
“We have assumed ‘Development Expenditure’ to be PKR 4.3bn in total for the next five years including FY13”
“Equity investments are valued at PKR 24.36 per share after applying 25% discount to market price”
“POL’s cash & cash‐equivalents (NET DEBT) are valued at PKR 37.00 per share”
PKR, Millio
EBIT
Add: Non
Tax Expen
Capex
Working C
Free Cash
Present Va
Enterprise
Net Debt
Market Va
Intrinsic V
Portfolio V
NAV BASE
Enterpr
Source: DataStr
‐
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
on
Cash Charges
se
Capital Changes
flows
alue Of Free Ca
e Value
alue Of Undeve
alue Per Share
Value Per Share
D SHARE VALU
rise Value
ream (Reuters), AHC
FY13E FY1
EV/EBIT
VALU
s
ash flows
eloped Land
e
e
UE
in relation
CML estimates
14F FY15F FY
TDAX EV/D
ATION MAFY13E
17,994.95
2,513.00
(4,655.55)
(1,877.08)
(900.67)
13,074.65
12,482.79
105,545.64
8,733.40
50.00
483.33
24.36
507.69
n to key rat
Y16F FY17F
DACF
ATRIX‐DCFFY14F
22,465.52
2,606.60
(5,812.15)
(1,620.86)
(398.58)
17,240.53
14,096.13
tios:
10.20.30.40.50.60.70.80.90.
100.
EV
F BASED NAFY15F
22,642.0
2,557.65
) (5,857.82
) (1,230.92
48.30
18,159.2
12,715.5
‐00 00 00 00 00 00 00 00 00 00
FY13E F
V/BOE(RESERV
AVFY16
04 18,202
5 2,386.2
2) (4,709.2
2) (944.9
534.8
24 15,469
53 9,276.5
FY14F FY15F
VES) EV/BOE
AH
F FY1
.64 18,44
26 2,255
28) (4,771
90) (774.
85 42.0
.57 15,19
52 7,805
FY16F FY17F
E(PRODUCTION
HCML
7F
3.21
5.92
1.52)
.06)
09
5.64
5.21
N)
05
1015202530354045
POL
0
10
20
30
40
50
60
OGDC
Peer Co
Pakistan Olocal and rFY13 DPS,
Source: DataStr
Net profit among thePakistan Ptheir balan
Source: DataStr
POL
PPL
OGDC
OIL SEA
RCH
P/
OGDC
WPL PPL
POL
Net
omparison
Oilfields Limiteregional peersamong its regi
ream (Reuters), AHC
margins for Pe highest, repretroleum and nce sheets.
ream (Reuters), AHC
OIL IN
DIA
CNOOC
SANTO
S
INPEX
/E RatioOIL IN
DIA
CNOOC
OIL SEA
RCH
ONGC
t Margin
:
d trades on m. Furtherance onal peers. PO
CML estimates
Pakistan Oilfielresenting highOil and Gas D
CML estimates
INPEX
WPL
JPEX
ONGC
ONGC
INPEX
SANTO
S
JPEX
most attractiveto the above,OL is also well p
ds Limited are profitability oevelopment Co
0
2
4
6
8
10
12
0102030405060708090
COOC
Lo
PE multiples,POL offers higpositioned in te
e also among tof Pakistan’s oo. ‐ are highly
POL
PPL
OGDC
WPL
Divi
CNOOC
INPEX
JPEX
OGDC
ong‐Term
trading at 8.1ghest dividenderms of ROE an
the highest inoil & gas explocash rich com
WPL
OIL IN
DIA
CNOOC
ONGC
idend Yie
ONGC
OIL IN
DIA
OIL SEA
RCH
POL
m Debt to
13x on FY13 Ed yield, 11.41%nd ROA among
its peers. Couoration sector mpanies with no
AH
SANTO
S
INPEX
JPEX
OIL SEA
RCH
eld
POL
PPL
SANTO
S
WPL
o Equity
EPS, compared% at current prg its peers.
untry peers arat large. Its po long‐term de
HCML
to its rice on
re also peers ‐ ebt on
AHCML
Sensitivity: Crude price & PKR
High international crude prices and depreciating Pak Rupee have significantly contributed to POL’s top‐line in the recent past. We expect Pak Rupee to depreciate on an average at 5% in our base case scenario and international crude oil price (Arab Light) to remain at US$105 per bbl for the medium term. However, we have also provided the impact of both these variables on expected earnings and on Fair Value of the company.
Sensitivity Table: Crude Oil Price Change & PKR depreciation impact on FAIR VALUE
PKR deprecation
3% 4% 5% 6% 7% Crud
e Price Arab
Light U
S $
115.00 496.84 514.04 532.60 552.65 574.37
110.00 485.02 501.80 519.89 539.46 560.65
105.00 473.20 489.55 507.19 526.26 546.93
100.00 461.38 477.30 494.48 513.06 533.21
90.00 437.73 452.79 469.06 486.67 505.76
Sensitivity: Crude price change impact on EPS (E)
Earnings Per Share
FY13 FY14 FY15 FY16 FY17
Crud
e Price Arab
Light U
S $
115.00 58.36 73.73 74.17 58.46 59.13
110.00 56.29 70.97 71.46 56.64 57.34
105.00 54.23 68.21 68.75 54.81 55.54
100.00 52.16 65.46 66.03 52.99 53.75
90.00 48.03 59.95 60.61 49.33 50.16
Sensitivity: PKR depreciation impact on EPS (E)
Earnings Per Share
FY13 FY14 FY15 FY16 FY17
PKR Dep
reciation 3% 54.23 66.67 65.68 51.31 51.01
4% 54.23 67.44 67.21 53.05 53.25
5% 54.23 68.21 68.75 54.81 55.54
6% 54.23 68.99 70.30 56.61 57.91
7% 54.23 69.76 71.86 58.44 60.33
“We expect Pak Rupee to depreciate on average at 5% in our base case scenario and international crude oil price (Arab Light) to remain at US$105 per bbl for the medium term”
“There is a significant impact of both these variables; Crude oil price and PKR depreciation on expected earnings and on Fair Value of the company”
“APL mainarounaugmline”
“POLincreopera1, Pariw
“POLin adeclin
and NRLtained paynd 84% menting PO
is also asing prodated fields i.Dhulian, Pwali”
faces toughrresting thene from ope
both havyout ratio o
and 46%OL’s botto
focusing oduction fro.e. from BelaPindori an
hest challenge productiorated fields”
Divi
POL AttocPOL bboth 46%, of PKof thexpecPKR5
Size
Pakistfrom produoperagas pPPL ofield: from FurthexistiSadriahas b
We 5,588and enha
Decl
POL foperafieldsdepic
ve of %; m
on m a‐nd
ge on ”
idends fro
holds 25% stack Petroleum Lbenefits from companies harespectively f
KR90.00 per shhe associates ct NRL and A2.00, respectiv
eable addit
tan Oilfields Licompany op
uction from ated JV, POL stproduction in toperated Adhi 82.5% stake)operated field
hermore, POL ng portfolio oal‐1 well is in been completed
expect the c8.56boepd, 6,3FY15, respecncements from
ining produ
faces toughestated fields. Tos dropped fromcting a decline
m associat
ake in NationLimited (APL) strong divide
ave maintainedor FY12. The Care from Capghave announAPL to annouvely for FY13E.
tions: POL
mited’s strategerated fields non‐operatedtake 21.05%) rthe recent pasField (POL sta. POL is also fds i.e. from Belhas started foof fields i.e. acompletion phd at D.G. Khan
company’s to303.03boepd actively, on tm TAL block.
ction from P
t challenge in otal oil producm 4,007boepdof 15.02% (CA
tes!
al Refinery Liand 51% in Cnd income frod payout ratio Company also gas (Pvt) Ltd. Dced any dividnce a divided
productio
gy of heavily rehas significan fields (JVs).emained the mst with quantike: 11.0%) andfocusing on inla‐1, Dhulian, Pocusing on maat Ikhlas Blochase, while 2D and Rajanpur
otal productioand 6,291.91bthe back of
POL operate
arresting prodtion (POL’s Shd in 2008 to 2AGR). Similarly
AH
mited (NRL), apgas (Pvt) Limom APL and Nof around 84received a divDuring 1HFY13dends; howeved of PKR18.00
on profile
elying on prodntly shifted to. TAL Block major source oifiable supportd Pariwali (opecreasing prodPindori and Paking additionsck where drillD seismic acquBlocks.
on to increaboepd in FY13,major prod
ed fields
duction declinehare) from ope2,090boepd intotal gas prod
HCML
7% in mited. NRL as % and vidend 3 none er we 0 and
uction owards (MOL
of oil & t from erated uction riwali. to its ing of uisition
se to , FY14 uction
e from erated n 2012 uction
“Aftecompthe pPindocontecrediestim
“Proddeclin
er severpany was unproduction ori; whichentious queibility of fiemates”
duction fromning”
ral effornable to arredecline fro
h poses estion on theld’s reserv
m Pariwali
dropdeclinprod10.8%
We e2,387respe
Crud
In cruand P2008has dpartnpotenunabthe prod
depic
We eto 1,FY15,
rts est om a he es
is
ped from 25.ne of 10.9% (Cuction also de% (CAGR) over
expect total p7boepd, 1,897ectively, depict
de Oil
ude oil, majorPariwali. In Pin to 219boepd disclosed in itsners have agrntial of the fieble to arrest thecredibility ofuction droppe
cting a decline
expect total cru,784boepd, 1,, respectively,
7mmscfd to CAGR). In case eclined from 1the same peri
production (oboepd and 1,7ting a natural p
r production dndori, productin 2012 reflecs latest annuareed to drill aeld. Despite see decline whicf Pindori’s rd from 1,642b
of 22.32% (CA
ude oil product252boepd anddepicting a na
16.2mmscfd iof Natural Gas102.9Tpd in tood.
wn fields) to 755boepd in FYproduction dec
eclines were wtion dropped fcting a drop ofl accounts thaanother well everal efforts, h poses a conteserves estimoepd in 2008 t
AGR).
tion (own fieldd 1,158boepd tural productio
AH
n 2012 depics Liquids (NGLso 65.0Tpd, dec
further decliY13, FY14 andcline.
witnessed in Pfrom 1,034boef 32.2% (CAGRat at Pindori, tto test the uthe company tentious questmates. In Pato 598boepd in
ds) to further din FY13, FY1
on decline.
HCML
ting a s), LPG clining
ine to FY15,
Pindori epd in R). POL the JV up‐dip is still ion on riwali, n 2012
decline 4 and
“LPGwitnePariw
“NGLto rFY15
“TAL poteprod
productionessed in botwali fields”
Ls productioremain fair”
Block promntial for botuction in fut
n was mainth Pindori an
on is expectely stable b
mises a hugth oil and gture”
Natu
In naPindo3.1m33.4%2008Natuwitnedropperio
We edeclinFY14 declinstabl
Une
TAL prod4QFYin prcomienhaincredepicfrom In NGto 13
nly nd
ed by
ge as
ural Gas & N
atural gas, majori followed by
mmscfd in 2008% (CAGR). In P to 7.3mmscfdral Gas Liquidessed in both ped by 24.9% od.
expect total nne to 12.75mmand FY15,
ne. However e by FY15.
xplored pot
Block promisuction, in futuY13. Significantrogress in theng days in ncements. Toased from 1,1cting CAGR of 18.4mmcfd to
GLs, LPG produ3.73tpd in 2012
NGLs
jor productiony Pariwali. In P8 to 0.6mmscariwali, produd in 2012 depics (NGLs), decliPindori and and 18.6% (C
natural gas prmscfd, 11.58mrespectively, NGLs product
tential: Non‐
ses a huge pure, with signift developmente Block and w
term of botal oil prod139.5boepd in22.3%. Similao 70.5mmcfd uction remaine2.
n declines havePindori, produfd in 2012 dection droppedcting a decline ine in LPG proPariwali fieldsCAGR) respect
roduction (owmmscfd and 10depicting a tion is expect
‐operated JV
potential for ficant productit and exploratiwe expect maboth productduction from n 2008 to 2,5rly total gas pin 2012 depicted fairly flat wi
AH
e been witnesuction droppedepicting a decl from 15.8mmof 17.7% (CAG
oduction was ms where prodively over the
wn fields) to f0.59mmscfd in natural proded to remain
Vs
both oil anon coming onion activities any surprises tion and resnon‐operated
545.2boepd inroduction incrting CAGR of 3ith 13.93tpd in
HCML
sed in d from ine of
mscd in GR). In mainly uction same
urther FY13, uction fairly
d gas line in re still in the serves d JVs 2012 reased 39.8%. n 2008
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total crude o‐operated JVse to Y13”
total Natur(non‐operater increase FY13”
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ude oil, majorori, Makori Eaased from 52cting a CAGRrated by Oceabpd in 2008 to
expect total cruase to 3,030.1, FY14 and uction enhanc
atural Gas and AL Block where5.8mmscfd in ase in LPG proh increased froR of 96.22%.
expect total Ner increase toY13, FY14 an
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r upside was wast, Mamikhel22.7boepd in R of 35.5%. n Petroleum, P32.03bpd in 2
ude oil produc10boepd, 4,22FY15, respe
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oduction was mom 0.1tpd in 2
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witnessed in T & Maramzai2008 to 1,7Production f
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ction (non‐ope21.59boepd anectively stemTAL block.
production upscreased from ng a CAGR of mainly witnesse008 to 1.27tpd
production (nod, 76.20mmscfpectively, stem
AH
TAL Block (Ma) where prod62.7boepd in from Ratana also increaseda CAGR of 72.1
rated JVs) to fnd 4,361.56boemming from
side were witn13.2mmscfd inf 49.57%. For ed from Ratand in 2012 depic
on‐operated JVfd and 72.39mmming from
HCML
nzalai, uction 2012 Field
d from 1%.
urther epd in major
nessed n 2008 NGLs, a field cting a
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“SizaexpecMamMakoflowsMakoManz
“TAL drillinphaseflows
ble addcted to com
mikhel‐2, Maori‐East 2 s from Mori‐East 3, zalai‐10”
Block, ng is in the wherebys are awaite
ditions are online froaramzai‐2 anand furthe
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Manzalai‐1e completiny productiod”
0
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120
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FY08 FY
Prod
uction enhanuction is expec
mising Outlo
tan Oilfields ged in the recproduction frped from 78%uction also droe LPG proports increasing recontribution inexpected to con sizable addikhel‐2, Maramdankhel‐1, Maee continuationtial through am new 3D survoratory wells at
hermore, at Ra
e 4.54%), Ratammscfd of gas akistan Petroleand drilling is e completing pNaurang Sout50% (of targe
Y09 FY10 FY
duction Co
TAL A
ncements fromcted to remain
ook: product
Limited’s procent past (5‐yeom company o in 2008 to 45opped from 58tion remainedeliance on nonn 2008 to 51% ontinue in theditions are emzai‐2 and Maakori‐East 3, on of exploraacquisition, proveys. The JV hat Kot‐1 and Ma
atana (operate
ana‐4 well hafrom Wargal feum, POL stakin progress. Aphase wherebyth‐2 (operatedt depth) has b
Y11 FY12 FY1
ncentratio
Adhi Others
m TAL blockfairly stable by
tion in FY13
oduction profiear period, 200operated fields5% in 2012. Si8% to 9% duri unaffected. T‐operated JVs in 2012. Furthe near future, expected to akori‐East 2 andTolanj‐1 and
ation activity ocessing and inas also plannealgin‐1 (eastern
d by Ocean Pa
as been testedformation. Adke 4.54%) wasAt TAL Block, My production fld by OGDC, PObeen drilled an
AH
13 FY14 FY1
on: Oil
k. However y FY15.
& beyond
ile has signifi08‐12). Contribs in total prodmilarly, share ing the same pThe trend indfor its producermore, this trFY13, FY14 & come online d further flowsd Manzalai‐10and foresee unterpretation od the drilling on part of Tal Bl
akistan Limited
d and is prodhi‐19 well (opes spud‐in on NManzalai‐10 driows are awaitOL stake 15%)nd is expected
HCML
15
NGLs’
icantly bution uction in gas period dicates ction ‐ rend is FY15, from
s from 0. We upside of 398 of two ock).
d, POL
ducing erated Nov 3, lling is ted. At more to be
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contributiods at averagast 5 years”
mining Crudbal econommining energrests in the o
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2
3
4
comp
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on ge
de mic gy oil ns
‐
10,000.00
20,000.00
30,000.00
40,000.00
F
Rev
CRU
pleted in 3QFY
expect total pr8boepd, 6,303ectively despithermore, the uction is expeand FY15, resp
ersification:
ral Gas Liquidributes major ces i.e. gas an) produced frobrand name oed. Total reveduring the l
ribution to drouction mainly f
ernational
national crudeal economic rel producing nadiscuss the pric
bal economy
al economy issteadily gain omies are exppercent in FY14
FY13E FY14F
enue Mix (PKR
DE OIL GA
13.
roduction (oil,boepd and 6,2e a natural prproportion o
ected to increapectively.
revenue fro
ds (LPG, Solveportion in tot
nd crude oil. Pom its operateof POLGAS threnue contributast 5 years. op in FY14 & FYfrom TAL Block
Crude Pric
e prices are lacovery determations determice scenario in l
y: the dema
expected to momentum i
pected to grow4 and FY15 dr
FY15F FY1
Million)
AS POLGAS
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weak prospects of improving tormented financial system. Despite the supportive monetary policy in the developed economies by the central banks; global financial system still remains delicate and controlled budgetary spending might slow the recovery.
Emerging economies have gained major share in global economic growth after financial crisis of 2008 and are expected to grow by 5.5 percent in FY13 and 5.7 & 5.8 percent in FY14 and FY15.
Real GDP growth Forecast 2011 2012 2013E 2014F 2015F
World 2.7 2.3 2.4 3.1 3.3
Euro Area 1.5 ‐0.4 ‐0.1 0.9 1.4
Japan ‐0.7 1.9 0.8 1.2 1.5
United States 1.8 2.2 1.9 2.8 3 Developing Countries 5.9 5.1 5.5 5.7 5.8 East Asia & Pacific 8.3 7.5 7.9 7.6 7.5
China 9.3 7.9 8.4 8 7.9 Europe & Central Asia 5.5 3 3.6 4 4.3
Russia 4.3 3.5 3.6 3.9 3.8
Turkey 8.5 2.9 4 4.5 5 Latin & Caribbean 4.3 3 3.5 3.9 3.9
Brazil 2.7 0.9 3.4 4.1 4 Middle East &N. Africa ‐2.4 3.8 3.4 3.9 4.3
South Asia 7.4 5.4 5.7 6.4 6.7
India 6.9 5.1 6.1 6.8 7
Pakistan 3 3.7 3.8 4 4.2 Sub‐Saharan Africa 4.5 4.6 4.9 5.1 5.2
Source: IMF Growth is maintainable on the back of these countries’ ability to fund large public infrastructure projects in times of waning global demand mainly form developed economies. Leading emerging block BRIC ‐ Brazil, Russia, India and China ‐ is expected to grow by 5.38 percent in FY13 and 5.70 and 5.68 percent in FY14 and FY15.
The main driver will be China which is expected to achieve economic growth of 8.4, 8.0 and 7.9 percent in FY13, FY14 and FY15, respectively followed by India having expected growth rate of 6.1, 6.8 and 7.0 percent in FY13, FY14 and FY15, respectively. High employment growth and increasing consumption and easing of macroeconomic policies continue to boost demand and support investment and growth in these economies.
U.S. liquid fuels consumption fell from an average of 20.8mmbpd in 2005 to 18.6mmbpd in 2012. It is expected that total
“Leading emerging block BRIC, Brazil, Russia, India and China, is expected to grow by 5.38 percent in FY13 and 5.70 and 5.68 percent in FY14 and FY15”
“It is expected that total liquid fuel consumption in US to rise slowly over the next two years to an average 18.8 mmbpd in 2014”
“Global financial system still remains delicate and controlled budgetary spending might slow the recovery.”
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consumption would rise slowly over the next two years to an average 18.8mmbpd in 2014. China’s liquid fuel consumption has increased from 8.5mmbpd in 2009 to 10.2mmbpd in 2012. Global liquid fuel demand is also expected to increase by 0.5 percent annually on average through 2020 helping crude prices to sustain and consolidate at the current levels for the medium term.
World oil demand outlook (mmbbl/day)
2010 2015 2020 2025 2030 2035 OECD 46.8 45.8 45.2 44 42.6 41.1 Developing Countries 35.4 40.8 46.3 51.3 56 60.6 Eurasia 4.8 5.2 5.4 5.5 5.6 5.6 World 87 91.8 96.9 100.9 104.2 107.3
Source: OPEC World Oil Outlook (2012)
Political unrests: The supply function
Unrest in the Middle East remains a major challenge haunting the world crude oil supplies with particular focus on regime change battle in Syria, poor law and order situation in Sudan and increasing sanctions from US and EU, which will restrict Iran’s ability to arrest normal production declines, through investing in wildcats and development wells. Supply disruptions from these countries are not expected to end in the near future and may worsen particularly in the Iranian case.
Good news is coming from Libya, where production has nearly reached the pre‐crisis levels, and Iraq where export infrastructure developments have helped government to increase its production from previous levels. Another major development taking place is in North America where crude production is continuously increasing from U.S. tight oil formations, Canadian oil sands and shale oil & gas resources. Though the investment in these fields is generating interests of many oil producers, however, any quantum jump in crude supplies in the near future is not foreseen. Currently, world liquid fuel supply stands at 89.38mmbpd which is expected to increase on an average rate of 0.5 percent annually through 2020.
World oil supply outlook
(mmbbl/day)
2010 2015 2020 2025 2030 2035
OECD 20 21.8 22.6 23.3 24.1 24.9
Asia 3.7 4 4.3 4.1 3.8 3.6
China 4.1 4.3 4.4 4.4 4.5 5
Eurasia 13.4 13.9 14.3 14.7 15.1 15.5
World 86.5 92 97.1 101.1 104.4 107.5
Source: OPEC World Oil Outlook (2012)
“Global liquid fuel demand is also expected to increase by 0.5 percent annually on average through 2020”
“Unrest in the Middle East remains a major challenge haunting the world crude oil supplies”
“Crude production is continuously increasing from U.S. tight oil formations, Canadian oil sands and Shale oil & gas resources”
AHCML
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World Liquid Fuels Supply and Demand Outlook(million barrels per day)
Supply Demand WTI Arab Light
Sustainable balance: Determining price
Currently, world liquid fuel demand and supply seems fairly balanced with demand at 89.70mmbpd and supply at 89.38mmbpd. But a supply disruption in the short term is also foresighted as Iran, which produces about 5‐6 percent of world oil, faces threat of further sanctions on its exports; which may spark a short term spike in crude prices. We believe the demand supply balance is expected to continue, with minor seasonal and structural supply adjustments, in medium term by end of 2020.
Projections of Oil Prices (2015‐2035) (2010 dollar per barrel)
Projection 2015 2020 2025 2030 2035 IEA 117 127 133 138 145 Energy Ventures Analysis 82 85 89 95 102 INFORUM 92 106 113 118 117 HIS Global Insight 99 73 87 96 98 Purvin & Gertz Advisory 99 104 106 107 107 Energy SEER 94 102 107 111 122 Source: IEA Annual Energy Outlook 2012
We expect Arab Light price to remain range‐bound between US$105 till 2020. Thereafter, we believe, with world economic growth gaining momentum and the resultant surge in energy demand will eventually bolster crude price momentum ‐‐‐ we thus foresee an average annual increase of 1 percent on long term basis after 2020.
“Iran, produces about 5‐6 percent of world oil, faces serious threat of further sanctions on its exports; which may spark a short term spike in the crude prices”
“An average annual increase in crude oil price of 1 percent on the long term basis after 2020 is foresighted”
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A word of caution: understanding risks
Three major risks factors have been indentified; firstly, high volatility in international crude oil price, secondly, POL’s heavy reliance on TAL Block and lastly, POL’s high dividend payout policy.
Managing the uncertainty: volatile crude oil prices
International crude oil prices (WTI) have remained highly volatile during the FY11 and FY12 by escalating to a high of US$110 per barrel in March 2011 then going down to as low as US$80 per barrel in Oct 2011. As most of the POL’s fields are directly linked to international crude oil prices; any sharp decline in these prices will adversely influence the top‐line of the company. Keeping in view this uncertainty, POL’s management might have devised plans built on scenario analysis and through the use of derivative to provide hedge against it. We have also provided the oil price to earnings sensitivity table in the previous sections of the report.
Concentration risk: heavy reliance on TAL block
Pakistan Oilfields Limited production (both oil & gas) is largely dependent on TAL block located near Karak, Kohat and Hangu districts of Khyber Pakhtunkhwa province and some areas of North Waziristan and Orakzai agencies of FATA. Being located in highly volatile region in the context of war‐on‐terror, any production disruptions may result in significant impact on POL’s top‐line due to its smaller size in terms of production diversification as compared to the rest of JV partners. As earlier discussed in the report POL is heavily relying on non‐operated fields for its revenue and TAL block is the biggest among the rest. We discount these risk on the basis of international history of E&P companies usually operate in highly volatile regions, Nigeria, Iraq, Libya etc are few among the many.
“Most of the POL’s fields are directly linked to international crude oil prices. Therefore any sharp decline may hurt its top‐line”
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FINANCIAL STATEMENTS:
PAKISTAN OILFIELDS LIMITED INCOME STATEMENT
PKR (Million) FY11A FY12A FY13E FY14F FY15F
GROSS SALES 27,102.44 30,822.66 31,399.11 38,415.39 37,155.13
SALES TAX (2,151.73) (2,198.60) (2,325.86) (2,845.58) (2,752.23)
NET SALES 24,950.71 28,624.06 29,073.25 35,569.81 34,402.89
OPERATING COSTS 5,537.83 6,262.36 6,635.61 7,707.46 7,117.58
EXCISE DUTY & DEV. SURCHARGE 352.49 317.53 348.88 426.84 412.83
ROYALTY 2,310.47 2,730.54 2,720.34 3,383.13 3,366.98
AMORTIZATION COSTS 1,122.20 1,807.19 1,814.25 1,894.94 1,855.51
(9,322.98) (11,117.63) (11,519.08) (13,412.36) (12,752.90)
GROSS PROFIT 15,627.73 17,506.43 17,554.17 22,157.44 21,650.00
EXPLORATION COSTS (1,075.05) (593.55) (257.51) (245.20) (236.09)
14,552.68 16,912.87 17,296.66 21,912.24 21,413.90
ADMINISTRATIVE EXPENSES 83.10 113.34 106.02 129.75 124.03
FINANCIAL CHARGES 223.93 684.58 691.42 698.34 705.32
OTHER CHARGES 1,104.24 1,286.59 1,556.70 1,972.10 1,927.25
(1,411.27) (2,084.50) (2,354.14) (2,800.18) (2,756.60)
OPERATING PROFIT 13,141.41 14,828.37 14,942.52 19,112.06 18,657.30
OTHER INCOME 1,808.60 2,547.21 2,361.01 2,655.13 3,279.42
PROFIT BEFORE TAX 14,950.01 17,375.58 17,303.53 21,767.19 21,936.72
PROV. FOR TAXATION (4,135.00) (5,522.78) (4,476.67) (5,631.48) (5,675.34)
PROFIT AFTER TAX 10,815.01 11,852.80 12,826.86 16,135.71 16,261.38
EPS 45.72 50.11 54.23 68.21 68.75
EBIT 15,173.94 18,060.15 17,994.95 22,465.52 22,642.04
EBITDA 16,900.75 20,501.14 20,250.44 24,826.93 24,963.59
EBITDAX 17,975.80 21,094.69 20,507.95 25,072.13 25,199.69
AHCML: Estimates
AHCML
PAKISTAN OILFIELDS LIMITED BALANCE SHEET
PKR (Million) FY11A FY12A FY13E FY14F FY15F
EQUITY AND LIABILITIES
SHARE CAPITAL 2,365.46 2,365.46 2,365.46 2,365.46 2,365.46
REVENUE RESERVES 31,048.22 32,847.81 32,664.64 37,630.45 39,335.77
FAIR VALUE GAIN ON A.F.S. INVESTMENTS 9.41 57.97 65.87 72.45 79.70
33,423.09 35,271.24 35,095.97 40,068.37 41,780.92
NON CURRENT LIABILITIES
LONG‐TERM DEPOSITS 487.31 504.45 524.63 545.61 567.44
DEFERRED LIABILITIES 7,710.10 10,504.45 12,226.02 14,177.73 16,145.55
8,197.42 11,008.90 12,750.65 14,723.34 16,712.99
CURRENT LIABILITIES
TRADE AND OTHER PAYABLES 4,045.04 4,465.71 4,644.93 5,395.22 4,982.30
PROVISION FOR TAXATION 1,373.66 1,593.67 1,365.29 1,717.48 1,730.86
5,418.70 6,059.39 6,010.21 7,112.70 6,713.16
TOTAL LIABILITIES 47,039.21 52,339.53 53,856.83 61,904.41 65,207.07
ASSETS
NON‐CURRENT ASSETS
PROPERTY, PLANT & EQUIPMENT 4,257.76 4,163.78 4,169.24 4,175.17 4,181.61
DEV. & DECOMMISSIONING COST 10,568.41 15,687.79 16,282.21 16,257.13 15,692.00
EXPLORATION AND EVALUATION ASSETS 4,810.73 2,883.06 1,904.78 1,183.38 651.44
19,636.90 22,734.63 22,356.22 21,615.68 20,525.05
L.T. INVESTMENTS IN SUBSIDIARY 9,615.60 9,615.60 9,615.60 9,615.60 9,615.60
OTHER L.T. INVESTMENTS 69.68 658.67 658.67 658.67 658.67
LONG‐TERM LOANS AND ADVANCES 20.07 16.27 16.27 16.27 16.27
9,705.35 10,290.55 10,290.55 10,290.55 10,290.55
29,342.25 33,025.18 32,646.77 31,906.23 30,815.60
CURRENT ASSETS
STORES AND SPARES 2,632.49 2,939.31 3,218.27 3,738.12 3,452.02
STOCK IN TRADE 126.41 134.20 137.68 190.54 195.55
TRADE DEBTS 4,343.53 3,006.57 3,198.06 3,912.68 3,784.32
ADVANCES, DEPOSITS & PRE‐PAYMENTS 662.88 601.97 979.53 1,193.27 1,154.88
SHORT‐TERM INVESTMENTS 3,226.55 3,898.91 4,232.69 4,655.96 5,121.55
CASH AND BANK BALANCES 6,705.10 8,733.40 9,443.84 16,307.61 20,683.15
17,696.95 19,314.35 21,210.06 29,998.18 34,391.47
TOTAL ASSETS 47,039.21 52,339.53 53,856.83 61,904.41 65,207.07 AHCML: Estimates
AHCML
PAKISTAN OILFIELDS LIMITED CASHFLOW STATEMENT
PKR (Million) FY11A FY12A FY13E FY14F FY15F
CASH FLOW FROM OPERATING ACTIVITIES
PROFIT AFTER TAX 10,815.01 11,852.80 12,826.86 16,135.71 16,261.38
ADJUSTMENT FOR:
DEPRECIATION ON PROPERTY, PLANT & EQUIPMENT
604.62 633.79 441.24 466.47 466.05
PROFIT BEFORE WORKING CAPITAL CHANGES 11,419.63 12,486.59 13,268.10 16,602.17 16,727.43
EFFECT ON CASH FLOW DUE TO WORKING CAPITAL CHANGES
(666.64) 1,051.59 (1,234.45) (821.85) (417.30)
NET CASH (USED IN)/FROM OPERATING ACTIVITIES
10,752.99 13,538.18 12,033.65 15,780.32 16,310.13
CASH FLOW FROM INVESTING ACTIVITIES
CAPITAL EXPENDITURE (2,965.53) (3,731.51) (62.83) 274.07 624.58
NET (INCREASE)/DECREASE IN OTHER ASSETS 61.76 (585.20) ‐ ‐ ‐
NET CASH FROM INVESTING ACTIVITIES (2,903.77) (4,316.71) (62.83) 274.07 624.58
CASH FLOW FROM FINANCING ACTIVITIES
INCREASE/(DECREASE) IN NON CURRENT LIABILITIES
1,332.19 2,811.48 1,741.75 1,972.69 1,989.65
INCREASE/(DECREASE) IN CURRENT MATURITY OF L.T. FINANCE
INCREASE/(DECREASE) IN FRESH EQUITY (11.66) 48.56 7.89 6.59 7.25
DIVIDENDS PAID (6,505.01) (10,053.20) (13,010.02) (11,169.90) (14,556.07)
NET CASH USED IN FINANCING ACTIVITIES (5,184.48) (7,193.16) (11,260.38) (9,190.62) (12,559.17)
NET (DECREASE)/INCREASE IN CASH & CASH EQUIVALENTS
2,664.74 2,028.31 710.44 6,863.77 4,375.54
CASH & CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
4,040.36 6,705.10 8,733.40 9,443.84 16,307.61
CASH & CASH EQUIVALENTS AT THE END OF THE YEAR
6,705.10 8,733.40 9,443.84 16,307.61 20,683.15
AHCML: Estimates
AHCML
RATIO ANALYSIS FY10A FY11A FY12A FY13F FY14F FY15F
CURRENT RATIO 3.68x 3.27x 3.19x 3.53x 4.22x 5.12x NET WORKING CAPITAL RATIO 0.23x 0.26x 0.25x 0.28x 0.37x 0.42x
CASH RATIO 1.21x 1.24x 1.44x 1.57x 2.29x 3.08x
RECIEVABLES TURNOVER RATIO 8.09x 7.20x 7.79x 9.37x 10.00x 8.94x INVENTORY TURNOVER RATIO 4.96x 6.80x 7.62x 7.17x 7.36x 6.73x
PAYABLE TURNOVER RATIO 3.04x 2.94x 2.61x 2.53x 2.67x 2.46x
CASH CONVERSION CYCLE ‐1 days ‐20 days ‐45 days ‐54 days ‐51 days ‐53 days GROSS PROFIT MARGIN 61.01% 62.63% 61.16% 60.38% 62.29% 62.93%
NET PROFIT MARGIN 41.68% 43.35% 41.41% 44.12% 45.36% 47.27%
DEBT TO EQUITY RATIOS 0.35x 0.41x 0.48x 0.53x 0.54x 0.56x
OPERATING PROFIT MARGINS 55.34% 60.82% 63.09% 61.90% 63.16% 65.81%
TOTAL ASSET TURNOVER RATIO 0.48x 0.58x 0.58x 0.55x 0.61x 0.54x INTEREST EXPENSE RATIO 0.72% 0.48% 1.31% 1.28% 1.13% 1.08%
FINANCIAL LEVERAGE MUTIPLIER 1.35x 1.41x 1.48x 1.53x 1.54x 1.56x
RETURN ON EQUITY 27.17% 35.29% 35.47% 37.09% 43.16% 39.96% AHCML: Estimates
AHCML
Contact:
Head Office: GF‐01, Techno City, Hasrat Mohani Road, Karachi Ph: +92 21 32270808‐13 Fax: +92 21 32270519 Stock Office Room No. 16 Ground Floor, New Stock Exchange Bldg., Stock Exchange Road, Karachi Ph: +92 21 32460867‐ 32460869
Muhammad Ali Khan, Senior Research Analyst [email protected]
Disclaimer
The views expressed in this research accurately reflect the personal views of the AL Habib Capital Markets (Pvt.) Ltd. analyst about the subject securities or issuers and no part of the compensation of the analyst was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views expressed by the analyst in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of AL Habib Capital Markets (Pvt.) Ltd. and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
All rights reserved. The information presented in this report is compiled from sources we believed to be reliable in preparation of this report. However, we do not accept any responsibility for its accuracy and completeness. This report is not intended to be an offer or solicitation to buy or sell any security. AL Habib Capital Markets (Pvt.) Ltd. and its employees may or may not have a position in or with respect to the securities mentioned in this report. In particular, the report takes no account of investment objectives, financial situation & particular needs of investors who should seek further professional advice or rely upon their own judgment before making any investment.
Date of distribution: March 13, 2013
Prices as at: March 12, 2013
