Foundation Research Equities

PAKISTAN
29 March 2013
PPL PA
Stock price as of 28th Mar June 13 target Upside/downside Valuation
- Reserve based DCF

Pakistan Petroleum Ltd

N/A
Rs Rs % Rs 179 N/A N/A N/A

Key triggers in 4Q may reduce relative discount; estimates lifted

Event
PPL is entering into an exciting phase with heavy drilling and development
news-flow, concentrated in 4Q, in our view. Likely market excitement on future triggers may serve to reduce discount PPL trades versus its local peers (15% on FY14E P/E). That said, we highlight PPL has intensified its focus on exploration as evident from outcome of latest bidding of exploration leases though the companys efforts to acquire producing/exploration asset have produced mixed results. We have lifted our earnings estimates by 13-15% for FY14-FY15 to build in higher volumes from JV fields and rupee devaluation.

Oil and gas exploration Market cap 30-day avg turnover Market cap Number shares on issue
Year end 30 Jun Total revenue EBIT EBIT Growth Recurring profit Reported profit m m % m m 2012A 96,222 64,529 33.4 40,924 40,924

Rs bn US$m US$m m
2013E 105,682 68,799 6.6 46,784 46,784 2014E 119,623 82,306 19.6 55,968 55,968

293 1.5 3008 1643

2015E 128,780 89,993 9.3 61,195 61,195

Investment fundamentals

Impact
Excitement period ahead: In 4Q, a number of positive triggers may unfold
in PPL which, we believe, are relatively ignored by the consensus. A cursory look on PPIS drilling update highlights that the company is part of at least ten ongoing drillings (two explorations and eight development/appraisal) representing 37% of total industry drillings. Out of these, we believe results on at least one exploration and five development wells may transpire in 4Q (including drilling in Lundali, Nashpa, Manzalai, Sui and Latif) which can offer future upside to our production and earnings estimates. Apart from drilling, PPL may also benefit from progress on a raft of development projects in both operated and non-operated areas. Noteworthy among them are (1) production addition from Tal block (slated for June13), and start of production from Kirthar (tight sand).

EPS rep Rs EPS rep growth %

24.9 30.1

28.5 14.3

34.1 19.6

37.2 9.3

PE rep

7.2

6.3

5.2

4.8

Total DPS Total div yield ROA ROE EV/EBITDA Net debt/equity Price/book

Rs % % % x % x

9.20 5.15 24.0 37.1 3.4 (45.9) 2.3

11.50 6.44 23.2 33.3 3.1 (56.1) 1.9

13.00 7.28 23.5 32.6 2.7 (59.3) 1.6

13.50 7.56 21.9 29.4 2.5 (63.2) 1.3

Exploration focus intensified: We highlight PPL has intensified its focus

on exploration, which is evident from the outcome of latest bidding. PPL has successfully bid for at least ten more exploration leases (EL) with total minimum commitment of US$65mn (~100% of FY12A exploration capex). This will increase number of areas in PPLs portfolio to 45. We think PPL may undertake swapping of EL in future to further diversify its risk which may address market concern on aggressive exploration strategy.

PPL PK rel KSE100 performance

160% 150% 140% 130% 120% 110% 100% 90% KSE PPL

Mixed results on asset acquisition: PPL has recently concluded a deal on

acquisition of M&D Pakistan asset. As per our estimates, size of the deal could range US$80-100mn. M&D Pakistan includes mature producing assets in areas with significant potential of tight gas and exploration leases. We have not incorporated the impact of new assets, however, we highlight that the impact on PPLs near-term earnings estimates is likely to be nominally negative.

Feb-12 Mar-12 Apr-12 May- Jun-12 Jul-12

Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13

Our industry channel checks suggest PPLs bid for acquisition of Tullow
Pakistan & Bangladesh seems to have hit certain snags and stands low chances of materialization.

Source: Bloomberg, Foundation Research, Mar' 2013 (all figures in PKR unless noted)

Analyst
Mohammad Fawad Khan, CFA 92 21 5612290-94 fawad.khan@fs.com.pk

Earnings revision
We have lifted our earnings estimates by 13-15% for FY14-FY15 to build in
higher volumes from JV fields and rupee devaluation. Our preliminary estimates suggest PPLs 3Q earnings may range PKR7.2-7.4/sh

Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the m aterial at the same time. FSL, their respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may have recently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.

Pakistan Petroleum Ltd

March 29, 2013

(9MFY13: PKR20.98: up 7% YoY.)

June-13 price target: N/A as stock is under restriction.

Action and recommendation

2H drilling performance remains critical to future earnings and volume outlook. We believe PPL has the potential to
deliver positive surprises. Results of ongoing drilling campaign may provide much-needed excitement triggers and may help in reducing the discount (15-16% on FY14E P/E, EV/EBITDA) PPL trades versus its local peers.

In the past 12-month, PPLs stock price is up 26% underperforming the broader KSE-100 index by 24%.
Fig 1: Valuation matrix
P/E FY13 FY14 OGDC 7.7 5.9 POL 8.5 6.4 PPL 6.0 5.0 Source: Foundation Research Mar'13 D/Y FY13 4.0% 11.0% 6.7% FY14 7.5% 13.0% 7.6% EV/EBITDA FY13 4.5 3.8 3.1 FY14 3.5 2.8 2.7

Foundation Securities (Pvt) Limited

Pakistan Petroleum Ltd

March 29, 2013

About The Company

Pakistan Petroleum Ltd is the oldest exploration and production company in the country. It was incorporated on 5th June, 1950 subsequent to the promulgation of the Pakistan Petroleum Production Rules, 1949 with the main objective of conducting exploration, development and production of Pakistan's oil and natural gas resources. PPL inherited all the assets and liabilities of the Burmah Oil Company (Pakistan Concessions) Limited and commenced business on 1st July 1952. The Government of Pakistan (GoP) in September 1997 purchased the entire equity interest of Burmah Castrol PLC, formerly Burmah Oil Company, representing 63.91 percent of the Share Capital thereby increasing its holding in the Company to 93.35 percent. Subsequent to June 2004, the GoP has disinvested a portion of its equity in the company equivalent to 15% of the paid up share capital through an Initial Public Offering (IPO). The GoP has made a policy decision to privatize PPL and IPO is a significant step towards this direction. Currently, GoP holds 78.35% of the shares (out of which 9.4% are allocated for BESOS trust), International Finance Corporation (6.09%) and institutional and individual investors (15.56%). The company also operates a Baryte mine in Balochistan province. It produces oil well drilling grade Baryte powder from the mine, which has proven reserves of 1.25 million tones

Foundation Securities (Pvt) Limited