Elixir Securities Limited – Elixir Insight

Karachi, June 14, 2017 (PPI-OT): Pakistan Oilfields Limited – POL: Running out of fuel

Earnings for POL is estimated to grow 87% between FY16 to FY18 primarily on account of 21% growth in volumes over the period from 8.07mn boe to 9.73mn boe.

However earnings are expected to fall in subsequent years as POL’s major fields are expected to exhaust reserves completely. Bottomline will come under pressure as RRR remains less than 100% with no major exploration targets.

Though near term D/Y is likely to remain attractive on account of volumes led growth along with one of the highest non-cash charges (~PKR17/sh), we believe the same does not compensate for the risk to receding valuations on account of low reserve life of 7.26 years. Thus we maintain our Neutral Stance on the stock and recommend gradual exit on price performance.

New Discoveries to Drive Near Term Earnings Growth:

Recent discoveries in TAL block (Makori East-05, Mardan Khel-1, Maramzai-04 and Makori Deep- 1) coming online in FY17 are expected to cumulatively raise POL’s output from 8.069mn boe to 9.728mn boe. The flows from these discoveries would be priced according to 2012 Petroleum Policy resulting in 87% growth between FY16 to FY18 at assumed USD55/bbl oil price in FY18. As such, POL’s 2-year earnings
CAGR of 37% is higher than 34% for Elixir E and P Universe.

Reserves Depletion May Nullify the Earnings Growth in the Longer Run:

Despite expected growth in earnings in near term, POL’s profitability is projected to experience a slump post-FY20 when its major field Makori East is expected to have majorly exhausted out. Resultantly, we estimate POL’s earnings to decline by over 50% between FY20-FY22. We do not expect this situation to be materially different as POL’s unambitious exploration targets do not show intent to fill this gap. In fact, the company’s recent track record shows its Reserve Replacement Ratio (RRR) during the last 4-years remained negative which is a dismal sign for a company facing such a high depletion risk.

Investment Perspective:

POL returned 39% / -10% during FYTD / CYTD outperforming KSE100 Index by 11% during FYTD and underperforming 10% during CYTD. The former was reflective of anticipated improvement in earnings
driven by flows from new discoveries in TAL block and rebound in oil price (up USD7.6/bbl during 1HFY17 to USD54.8/bbl) whereas the latter was a response to volatile and sliding oil prices (down USD8.7/bbl in CYTD to USD46.5/bbl).

Though the stock trades at a cheap FY18 PER of 8.5x (Elixir E and P Universe of 7.7x), it seems expensive accounting for relatively shorter average reserve life of 7.3 years (vs. Elixir E and P Universe’s 12.8 years). Our recommendation is further corroborated by 7% downside to Dec’17 PT of PKR447/share. However the stock remains attractive as a dividend play with FY18 dividend yield of 11.2% which is significantly higher than 10-year PIBs yield of 8.2%. Furthermore, the upcoming FY17 results are expected to be accompanied by a dividend announcement of PKR32/share, which may lead to share price performance and hence an opportunity to exit the stock.

   

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