PAKISTAN PETROLEUM LIMITED – Analysis of Financial Statements Financial Year 2005- Financial Year 2010

Pakistan Petroleum Limited is one of the oldest and largest E&P companies in the country. The primary activities of the company involve exploration, development and production of Pakistan’s natural reserves of oil and gas.

It was incorporated on 5th June 1950 after the promulgation of the Pakistan Petroleum Production Rules in 1949. PPL inherited all the assets and liabilities of its parent company, the Burmah Oil Company (Pakistan Concessions) Limited and commenced business on 1st July 1952. The company remained under the management control of Burmah Castrol, UK till 1997. After that the government purchased the entire equity interest of Burmah Castrol PLC, formerly Burmah Oil Company.

After June 2004, the Government of Pakistan disinvested around 15% of its equity in the company through an Initial Public Offering (IPO). The Government of Pakistan intends to privatize PPL and IPO was a significant step towards achieving this objective. As at June 2008, the government of Pakistan owned 78.4% stake of PPL, the International Finance Corporation (IFC) had 3.43% of shareholding and the rest 18.17% is free-float. The company is listed on all the three stock exchanges of Pakistan. Karachi Stock Exchange (KSE) rated the PPL as one of the top 25 companies for the two consecutive years 2006 and 2007.

PPL is the second largest exploration and production (E&P) company, both, in terms of production and reserves. PPL has been playing a crucial role in augmenting hydrocarbon resources since 1955. Presently PPL contributes around 25% of the country’s total natural gas production. It is also one of the market leaders in terms of its holdings of exploration area. Out of 242,714sqkms area under exploration in Pakistan, PPL holds the second largest share, more than 22% in joint venture with partners.

PPL is aggressive in exploration but at the same time conservative in selecting drilling sites. It has discovered eight gas and three oil fields. PPL has working interest in 24 exploration blocks, of which eight are PPL operated and the other 14, including 4 off-shore are partner operated. Sui and Kandhkot gas fields are two of the major PPL operated fields where PPL has 100% ownership. In 1952 the company discovered the largest gas reserves at Sui. Within three years (1955) the supply of natural gas to Karachi for industrial and domestic use began through pipelines. Sui caters to about one-fifth of the total gas demand in the country.

In 1959, vital discoveries at Kandhkot gas field and Mazarani fields were made. Crude oil was discovered at Adhi field in 1978 and in 1980 commercial production started at Adhi. In 1990, the Liquefied Petroleum Gas (LPG) and Natural Gas Liquid (NGL) Plan was installed and the production of LPG, NGL and gas from Adhi commenced. In the year 2007, PPL made oil and gas discovery at Mela-1 well (Nashpa Block) and two gas discoveries at Latif-1 (Latif Block) and Tajjal-1 (Gambat Block). In the same year, the first exploratory well Mela-1 at Nashpa Block was completed as oil and gas producer and the Extended Well Test production commenced. Bolan Mining Enterprises (BME) is a joint venture between PPL and the Government of Balochistan for the development, mining, grinding and marketing of barites mineral deposits found near Khuzdar and other minerals in the province of Balochistan. The Company operates a Baryte mine in the Balochistan province.

Reserves

The total natural gas reserves increased from 14,223,214mmscf to 14,304,878mmscf. This was because of an addition in the new reserve of 128,002mmscf due to Nashpa discovery at Nashpa Block, Maramzai discovery at Tal Block, Rehman discovery at Kirthar Block and Latif North-1 discovery in Latif Block. Also, a revision in field recoverable gas estimates of previous reserves at Mazarani field, Makori discovery and Tajjal discovery took place, which was of 46,338mmscf. The net reserves as at June 30, 2010 stood at 3,052,702mmscf.

The oil/NGL original proven reserves decreased from 34,720 thousand barrels to 31,103 thousand barrels. Although there was an increase of oil reserve due to Nashpa discovery at Nashpa block and Maramzai discovery at Tal block, the overall decrease was due to revision in estimates of previous reserve of 6630 thousand barrels. After taking into account production, the net reserves stood at 17940 thousand barrels from 23,383 thousand barrels.

With respect to LPG, there was no addition or revision in the estimates of the original reserves, which stood at 540,120 tonnes. After taking into account the production of 210,544 tonnes, the net reserves were 329,576 tonnes

The daily average production for natural gas, oil/NGL and LPG is 977mmscf, five thousand barrels and 63.14 tonnes respectively.

Drilling The energy sector of Pakistan missed its oil and gas well drilling target in FY’10 as only 38 out of planned 52 wells could be drilled. According to Pakistan Petroleum Service’s (PPIS), the E&P companies carried out only 73 percent of drilling activities ie 20 exploratory wells as against the target of 48 for the year. This is a 55 percent success ratio, an improvement from country’s historical average of 29 percent.

OGDCL drilled the total 17 wells in Sindh whereas Pakistan Petroleum Limited and Pakistan Oilfield Limited relied on joint venture partners. In Khyber Pakhtunkhwa, 2 wells were drilled whereas in Balochistan no new well was drilled. This is basically due to low success ratio resulting in under exploration. On account of skewed exploration programme towards high drilling density in Sindh, the average discovery size was a mere 450 barrels per day and 8.4mmcfd of gas. Among the companies, OGDC made 5 discoveries and benefited from its 28 percent working interest in Maramzai. On the other hand, POL made one discovery (Bela) in its 21 percent share holding in Maramzai. PPL reported no discovery of its own but benefited from Naspha and Maramzai fields.

Security is one of the concerns because of which the drilling activities are focused on existing fields. In Fy’09, 59 wells were appraised/developed as against the target of 50 and only 27 exploratory wells were drilled as against the target of 40.

Production

According to Oil and Gas production report, there was no increase as Pakistan’s oil production, which remained at 707kbpd (thousand barrels per day), and local gas production stands at 4bcfd (billion cubic feet per day).

PPIS (Pakistan Petroleum Information Services) reveals that according to provisional production statistics, local gas production stood at 4bcfd (billion cubic feet per day), reflecting a growth of around 1 percent YoY in 11MFY09, compared with the same period of last year. Local oil production fell by 3 percent in the same period to reach 64kbpd compared with 66kbpd last year.

Oil and Gas Development Company’s (OGDC) combined oil and gas production in the period stood at 195kbpd as against 202kbpd in 11MFY09. Oil production alone posted a decline of 8 percent as it stood at 38.5kbpd versus 41.6kbpd in the same period last year. This fall in production was mainly due to lower oil production from Bobi, Chanda, Kunar, Sono and Buzdar fields. Similarly, the company’s gas production fell to 975mmcfd (million cubic feet per day), a decline of 2 percent YoY mainly led by lower production from Qadirpur and Uch fields.

Pakistan Petroleum Limited (PPL) oil and gas production remained at 158kbpd compared with last year. The gas production witnessed a dip of 0.5 percent YoY and stood at around 954mmcfd in 11MFY10. Although, new production flows from Manzalai, Tajjal and Latif came online during the period, the impact was offset by a natural decline in gas production from Sui field (down 6 percent YoY). On the contrary, PPL’s oil production during this period registered a growth of 9 percent, raising the oil production to 4.5kbpd against 4.1kbpd in the corresponding period last year. Pakistan Oilfields Limited (POL) oil and gas production rose to 11.3kbpd as against 10kbpd in the same period last year, posting a growth of 13 percent YoY. The company’s gas production during the period stood at 45mmcfd (up 17 percent) while average oil production also increased by around 7 percent to 4.2kbpd. The growth in production is mainly attributed to a recovery in oil production from Pindori and commencement of commercial oil and gas flows from Manzalai in 2Q10. The oil and gas production flow from the field is currently hovering around 4,600bpd (barrels per day) and 260mmcfd, respectively.
=============================================================== Product wise break up of sales revenue FY’09 % Change FY’10 Rs In million =============================================================== Natural Gas 53,759 -10.1% 48,304 Gas supplied by Sui Villages 124 -9.7% 112 Internal consumption of gas 120 15.8% 139 Condensate Sales 1,377 139.8% 3,303 NGL (condensate) sales 1,698 9.1% 1,853 Crude oil sales 5,080 -26.3% 3,745 LPG sales 738 61.3% 1,190 ===============================================================
Revenue

The net sales revenue declined from Rs 61,580 million to Rs 59,961 million in FY10 indicating a 3 percent decline. A product wise break up of sales revenue reveals that the natural gas earnings fell by 10.1 percent and gas supplied by Sui villages fell by a further 9.7 percent. Even the crude oil sales fell by a heavy 26.3 percent. Although the internal consumption of gas, condensate sales, NGL sales and LPG sales were in positive, the decline in natural gas, gas supplied by Sui Villages and Crude oil sales caused the overall sales to be in a declining position.

Although the federal excise duty and sales tax remained much of the same during FY’10, overall gas development surcharge increased more than proportionately from Rs 5124 million to Rs 6751 million. This was one of the major causes of the decline in revenue for FY10.

Profitability

The reported profit before taxation for FY10 is Rs 34,612 Million as against the profit before taxation of Rs 40,955 Million for FY09. This is around a 16 percent decline in the profitability of the business. The reason attributed for this decrease is the increase in field expenditures. Field expenditure during the year increased by 39% as compared to the previous year mainly due to acquisition of 2D and 3D seismic data in Nushki, Khuzdar, Sirani, Baska, Mamikhel (Tal) and Nashpa blocks and drilling of exploratory wells Shark-1 in Offshore Indus Block-M, Thar and Makori West-1, which were declared unsuccessful and cost of wells charged to profit and loss account. Amongst this a heavy portion of the increase in cost was due to development and drilling cost of Rs 1478 million incurred at the fire incident at Well 38 of Sui Gas field causing the overall cost to rise from Rs 2024 million to Rs 4222 million.

Another important contributor to increase in overall costs, which lead to a decline in the profitability of the business, is a decrease in the other income for the period. There is a 36 percent decrease in other income for FY10 as compared to FY09. This was caused by a decline in income of term deposits, a decline in profit of stores and spares and a decline in profit of LPG sales.

The gross profit margin of the company has had a declining trend over the past years because the gross profit earned has fallen during all the previous fiscal years. In FY06 the gross profit margin had increased by 36% while in FY07 the increase in gross profit was only by 21%. During FY08 the gross profit grew by 19% as compared to FY07. This has been because over the years the royalties have grown more in proportion to the sales revenue of the company. During FY08 the sales revenue increased by 19% while the royalties payment increased by 21%. After a slight positive result in FY08 and FY09, Pakistan Petroleum Limited had a declining trend in FY10 in profit margin, Return on Assets and Return on common equity due to aforementioned reasons. Although the magnitude is much lower, this is similar to OGDCL’s decline in profitability ratios, indicating that the industry as a whole suffered during FY10.

Liquidity

The liquidity ratios of the company show a mixed picture of working capital management of the business. The liquid funds generated from operating activities contributed to the improvement in the ratio. In FY07, the company managed to catch up with and supersede the industry, thus breaking the trend of lower than average current ratio. PPL had increased its investments in short-term instruments, contributing to the improvement in current ratio during FY07. Also, the company has maintained a lower level of inventory than the other major players in the sector. This reflects company’s strength in asset management as well as the liquidity of its asset portfolio. The large amount of cash balances and short-term investments maintained by the company will also help PPL in financing future exploration activities.

The liquidity position of the company deteriorated during FY08 with a lower quick ratio, after a better liquidity position in FY07. This has been due to a 76% increase in the current liabilities of the company while current assets increased only by 12.7%. Although, in FY09 and FY10, the liquidity position in terms of both the current and the quick ratio improved for the business, it has not yet achieved FY07 level. In FY10, the current ratio and quick ratio both improved showing there are not only adequate current assets for current liabilities but also enough liquid assets for the management of short-term liabilities. At present, company’s 21 billion are tied in company’s inter-corporate circular debt. Therefore, in order to avoid the liquidity crunch for the company, PPL is regularly projecting inflows and outflows on a regular basis. Cash requirements for the year ending 30 June, 2011 for Company operations are forecasted to be adequately financed through internal cash generation without recourse to external financing. The Company follows a conservative investment strategy for placement of its surplus funds to ensure that the investment portfolio of the Company is secured and well-diversified. PPL’s liquidity ratio is very much in line with OGDCL’s liquidity ratios with current ratio of 3.46 and quick ratio of 3.03 for FY10.

Asset management

PPL has performed well in terms of asset management until FY07, exhibiting a positive trend for inventory turnover and DSO over the years. However since FY08, the asset management ratios have been on a declining trend. The sales/equity ratios have declined in the past two years mainly due to a slower increase in sales for the company than its equity. In particular, the sales revenue declined for PPL in FY10 from Rs 77,798 million to 77,211 million in FY09. The reason for this decline in sales was a decline in natural gas sales for the period.

Total asset turnover also shows a declining trend as well in FY’10 because of a decline in sales whereas an increase in fixed assets for the period. The property plant and equipment increased from Rs 34,763 million to Rs 41,695 million in FY10.

Future outlook

As new production flows from Maramzi and Mamikhel coupled with improved production levels appear as expected, the current slowed down production performance of the sector would soon end. Also Qadirpur, Mela, Nashpa and other recent discoveries would ramp up the production profile of the listed E&P companies in the next fiscal year. Moreover, any new discovery in the upcoming months would lead to a potential reserves addition and earnings upside for the sector.

Floods have affected the E&P sector of the country really hard according to which OGDC was one of the most affected companies. For nearly three weeks OGDCL’s major oil producing fields such as Chanda, Mela, Nashpa, Pashakhi have produced well below their original production levels. While Mela and Nashpa are back to their pre-flood production levels, Chanda and Pasakhi are still producing 28% and 19% below their Jun10 levels.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s