Pakistan Petroleum Limited: Investment case contingent on monetization of discoveries – By BMA Research
FY16TD has remained a disappointing period for Pakistan Petroleum Limited (PPL) with the scrip underperforming the KSE100 by 18%, owing to i) 48%YoY decline in average oil price and ii) 23%-24% downward revision in 1HFY16 wellhead gas price of major fields. However, aggressive exploration efforts with five discoveries in FY16TD, contributing 6%-7% to current oil and gas production, led the stock to outperform its comparables by 11% during the same period. Given sluggish outlook on oil prices and expectations of further 4%-7% and 15%-17% downward revision in wellhead gas prices of 2HFY16 and 1HFY17, respectively, near term price performance will remain constrained. However, with +100mmcfd gas output pending in various fields coupled with high profile development projects in TAL and Nashpa, long term outlook of the stock remains strong. In this regard, we expect an incremental 10%-12% oil production in FY17 from Tal Block. In addition, PPL is currently exposed to exploratory drilling in two operated and four JV operated wells. At last closing, we have a ‘Marketweight’ stance on PPL (TP: PKR139/sh), offering a total return of 18%. Further delays in the monetization of new finds amid continued decline from maturing fields will remain a key downside risk to future earnings.
Concerns of wellhead gas prices: Unlike local peers, wellhead gas prices of PPL is relatively more sensitive against volatility in oil prices given 72% of company’s gas output being derived from uncapped gas fields. To note, wellhead gas prices of such fields witnessed a decline of 23%-24% in 1HFY16 while another downward revision of 4%-7% is also expected for 2HFY16 owing to 11% decline in average oil price over the benchmark Jun’15- Nov’15 period. Going forward, we expect average oil price during next benchmark period Dec’15-May’16 to stand lower by 40% at USD30/bbl, setting stage for another 15%-17% decline in wellhead gas prices during 1HFY17 of PPL’s uncapped fields. Thus, weak wellhead gas prices will likely remain a major drag on PPL’s bottomline in near term.
Heavy production inflows in the pipeline: On the exploration front, PPL delivered five successful attempts in FY16TD (including one non-operated) with a cumulative net size of 843bpd and 52mmcfd, representing 6%-7% of current production. Accounting for the recent discoveries coupled with previous finds, PPL now holds ~2,600bpd oil and ~120mmcfd gas production in the pipeline. However, delays in monetization of the aforesaid finds continue to remain a major concern and the key to sustainability in future profitability. As per the latest drilling data disclosed by PPIS, PPL is currently exposed to exploratory drilling in two operated and four JV operated wells. On the development side, we expect PPL to benefit from addition in oil production from Mardankhel-1, Makori East- 5 and Nashpa-6 & 7, expected to cumulatively add another 2.0-2.3kbpd (up 13%-15%) to the current oil production.
By: BMA Capital Management Limited