Karachi, June 11, 2018 (PPI-OT): POL: Is it over yet
For a host of reasons, Pakistan Oilfields Limited (POL) has been on the investors’ radar for most part of FY18. This time around, it’s majorly the international oil prices together with consistently lower flows from Jhandial (and hence reserve size estimates) leading us to revise our earnings assumptions and target price. Also, we understand and incorporate 3QFY18 results into our model to better reflect full year profitability. Other minor changes include complete elimination of Makori field from our forecast horizon. Accommodating the said, our EPS estimates for FY18/19F now stand at PkR49.31/73.47 and our target price comes down to PkR676/sh, while we still maintain a hold stance. Going forward, surprise movements in the stock can emerge from 1) success on the ongoing exploratory efforts at Khaur North and Joyamair Deep, though our channel checks suggest lower probability of substantial find at any of the 2 efforts, and 2) a favorable decision by the court on TAL block gas pricing issue. .
Oil price theme takes lead: With a lot going on in the international arena, intl. oil prices have rocketed to their ~3.5yr highs, specially after US’ withdrawal from the JCPOA deal with Iran. In this backdrop, we revise our inputs to US$70/65/bbl for FY19/20F (previously at US$55/bbl throughout the forecast horizon), with a broad level earnings sensitivity of PkR3.7/sh for every US$5/bbl change.
Jhandial continues to disappoint: Flow rates at Jhandial still hover around ~700bpd of oil and ~6.8MMCFD of gas, substantially lower than the initially reported numbers. Our channel checks confirm that this might be an indication towards lower than estimated reserves size. While this does not change our short term outlook where we had incorporated the same flows uptil FY20 (and slight increment thereafter to ~1800bpd and 18MMCFD), we now slash our flow rates estimation for FY25 onwards and continue with the same estimates (~1800bpd/~18MMCFD) throughout our forecast horizon. We take lead from Nashpa and Mardankhel, where appraisal and developmental drilling began shortly after initial flows (after 4 months/1 month prior), but no such traces exist in the case of Jhandial even after ~8 months of initial flows. Based on this, we now incorporate 70% of the OOIP and OGIP as reported in Dec’17 PPIS numbers against 100% initially.
Understanding 3QFY18 results: Building upon its history of surprises throughout the year, the company booked lower than anticipated revenue figures and excess royalty for 3QFY18. With the release of detailed (but unaudited) accounts where the company highlighted reversal of another ~PkR500mn of TAL block revenues during the quarter (totaling ~PkR6.9bn for 9MFY18 against PkR6.4bn uptil 1HFY18) and our discussions with the company management, we conclude that little justification exists for such an adjustment as revenue for the outgoing quarter was already booked at lower gas prices. However, as the company continues to receive higher gas price on the said fields from SNGPL, the royalty it pays (as per the relevant E and P rules and petroleum policy) has to reflect the actual amount received. Also, cash flow statement hints towards the fact that the company received adjustment for higher gas prices (on TAL block fields) for years prior to FY15, and the company paid royalty on this as well ~PkR390mn, as a one-time charge. We highlight that such a practice can continue till the gas pricing issue remains in the court. To reflect this, we also present adjusted EPS if the company books royalty charge on higher gas prices for the last quarter of FY18 as well.
Target depths achieved at Khaur North and Joyamair Deep: As per data from PPIS, the drilling team has reached target depths at both the recently spudded wells, however, our channel checks indicate low probability of hydrocarbons in any of the said fields. Nevertheless, excitement surrounding the pre-discovery notices (as has been POL’s practice) can impact price performance where we highlight that a 100bpd/2MMCFD (with a 5 year reserve life) discovery can push our annual earnings up by PkR1.79/sh and our TP by PkR10/sh.
Investment Perspective: Maintaining our hold stance on the stock, we revise our EPS estimates to PkR49.31/73.47 for FY18/19F and our TP to PkR676/sh. Both the years already incorporate windfall levy from Jhandial but are based on older gas prices for TAL block fields. Also, it is pertinent to highlight here that our TP still incorporates ~PkR105/sh on account of Jhandial’s reserves (at 70% of the reported number), and any further downward revision will lead to a cut in our estimates. However on the positive side, favorable decision by the court on account of TAL block fields can enhance valuations where full year accounts will present a clearer picture of the accounting policies being adopted by the company.