Oil: Pakistan Oilfields Limited - Analysis of Financial Statements - Financial Year 2004 - Financial Year 201

Monday, 07 March 2011 10:49

OVERVIEW  : Pakistan Oilfields Limited was incorporated on 25th November 1950. It is a

subsidiary of the Attock Oil Company which holds 53. 9% stake in the company. In 1978, the
POL took over the exploration and production business from AOC and since then it has been
investing independently as well as in the form of joint ventures with other E&P companies for
the search of oil and gas within and outside Pakistan.

{loadposition content_adsense300} The free-float of POL in equity markets stands at around

42. 0%. The company is listed with all three stock exchanges in Pakistan.

Industry background:

The industry of exploration and production of oil and gas had existed in Pakistan even before
the Partition. According to government sources, 66 exploratory wells existed in the country
before its creation. Up-till now, 725 wells have been drilled in the country for the purpose of
exploration. These drilling activities have produced 219 wells, out of which 54 were of oil and
165 were of condensate oil and gas.

It is also said that the success rate of finding a commercially viable well is much higher in
Pakistan than the international success rates. Almost every 3 to 4 drillings there is a find, while
at international level, discovery comes after eight to 10 attempts. The country has so far 960
appraisal wells, which indicates how much potential of oil and gas exists in the area and
whether an area is commercially viable or not.

The Ministry for Petroleum and Natural Resources has so far awarded 119 exploration licenses
to public and private sector companies.

Currently, the country has about 45 rigs from which the country s oil and gas demands are met.
Local gas production is 4 billion cubic feet per day (bcfd) and the oil production is 37,000 barrels
per day (bpd) against the demand of 9-10 bcfd of gas and 77,000 bpd of oil. Without a doubt,
there is an excess demand situation, which will remain so in the foreseeable future. All of these
supplies come from onshore drilling sites, as Pakistan s offshore drilling areas have not seen
much activity till recently.

Operational facts:

POL holds about 10% of the total oil reserves of the country. But it constitutes a greater portion,
ie 13%, of the total oil produced in the country. In FY08, crude oil s sale constituted 57% to the
company s revenues. In FY09, the percentage dropped to 48. 5%. This is mainly due to the fact
that crude prices were unstable and the trend was mostly downwards, which did not send
positive vibes in the industry for higher crude production. Also, due to work-over activities at two
of the company s oilfields (Pindori-3 and Pindori-4), the revenues from crude declined by 27%
to stand at PKR7. 052bn.

The second biggest contributor is gas, which commands around 26% of the revenue. It is worth

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mentioning that in the FY08, the second largest contributor to the revenue was POLGAS (with a
25% contribution to the revenue); however, with the decline in total output and a 17% increase
in GAS production has caused the previous year s order to reverse in FY 09. POLGAS, (a
subsidiary under whose brand name the company markets LPG) is the third biggest contributor
to the revenue, 9% down from FY08 s, making up 23%(PKR 3. 482 billion) of the total revenues.

Solvent Oil comprises 1. 56% of the FY09 revenue, showing a modest rise in terms of
percentage of total revenue. Sulphur and LPG contribute a negligible 0. 34% to the total
revenue. It is apparent that POL is heavily dependent on its oil production for revenues. The
revenue mix for 2010 below shows net sales of the various products. It reinforces the fact that
Pakistan Oilfields Limited is mainly dependent on crude oil, gas and POLGAS for its revenues.
Crude oil contributes 44. 7%, Gas 30% and POLGAS around 23. 7% to the total revenue
Solvent Oil contributes only 0. 7% and Sulphur and LPG combined contribute 1. 2%.

Being a relatively small firm in the E&P sector, POL is less aggressive in its exploration
activities. The exploration activities are mainly carried out in the form of joint ventures unless the
prospects are exceptionally good. The major exploration interests of the company include
Hyderabad, Ikhlas, Gurgalot, Kotra, Tal block and Kirthar South. All the above-mentioned areas,
except Kirthar South, have a low risk profile.

The exploration and production portfolio of POL includes two exploration licenses operated by
POL itself, which are in the Ikhlas and Hyderabad blocks. The former block is located in the
Potwar Basin while the latter is in the Lower Indus Plain. POL has also acquired interests in five
exploration licenses, namely Tal, Gurgalot, Kotra, New Block B, and Nawabshah blocks in joint
ventures operated by MOL, OGDCL and TULLOW.

The production portfolio includes nine developments and production (D&P) leases operated by
the company. All of these leases are in areas located in the Potwar Basin of the Upper Indus
Plain. These fields are Balkassar, Dhulian, Joya Mair, Khaur, Turkwal, Meyal, Minwal, Pariwali
and Pindori. Out of these, Pariwali and Pindori have a major contribution towards the company
s overall production of oil. There are also seven D&P leases held in joint ventures with various
operators. These include the fields of are Chak Naurang (operated by OGDCL), Adhi (PPL),
Dhurnal (OPI), Bhangali (OPI), Ratana (OPI), Sara (TULLOW), and Suri (TULLOW).

Enhanced exploration activities are under progress at TAL Block, Ikhlas, Gurgalot and Margalla
and Margalla North Blocks. It has diverted its exploration activities a little from the Tal block
where significant oil and gas discoveries were announced recently. The Tal block is actually
operated by MOL, and is the block where commercial quantities of hydrocarbons were found
from test wells in the fields of Manzalai and Makori. These discoveries have contributed to POL
s total reserves. Furthermore, POL has also applied for new exploration acreage in Sagri block,
Kirthar South block and Peshawar block.

The major share of oil production for POL comes from four fields, namely Pindori (35% working
interest), Pariwali (82. 5% working interest), Adhi (11% working interest) and Tal block (21. 1%
working interest). In FY07, the production from the Pindori fields had declined temporarily due to

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the excess water injections in the wells. The effect of that event has had deep repercussions for
the company. Its total oil production by sales volumes has seen a decline, which has continued
till FY08 and 1QFY09. However, the relatively higher prices of oil, as well as all other products,
had translated into greater sales figures through the last two financial years, thus offsetting the
effect of a production shortfall. But in FY 09, the company faced tough situations mainly due to
decreased production and falling prices of the Saudi Light crude. The net sales of POL
increased to Rs14. 04 billion in FY09 and 17. 84 in FY10.

For the FY10 POL has been granted two new licenses for exploration in Rajanpur and Dera
Ghazi Khan blocks.

Analysis:

Crude Oil continues to be the major contributor (48. 5%; PKR 7. 052 Billion) to POL s net sales
of PKR. 1454 billion in FY 09. However the contribution of the crude oil to revenue declined by
28% in FY09 (57% of net sales of over PKR 9. 81 billion in FY08). This is due to a 26. 8%
decline in the Crude Oil prices during the year compared to FY08 plus due to work-over
activities taking place at the Pindori 3 and Pindori 4 fields. Natural Gas contributed about 25.
6% to the net sales, while that of POLGAS/CAPGAS amounted to 24% in FY 09. Interestingly,
the sales of Natural Gas showed an improvement of 17% for FY08, while the revenues from
POLGAS/CAPGAS decreased by nearly 9% YOY 2009. The sales of Sulphur declined by 35%
from FY08 to PKR 0. 754 billion, although it forms a very negligible portion of POL s net sales
for FY 09. It is worth noticing that there was an increased in gas price by 36. 9%, POLGAS price
by 15. 7%, solvent oil price by 16. 8% and sulphur price by 72. 3% as compared to last year.
Crude oil sales volumes decreased by 27. 5%, Gas by 14. 3% and POLGAS 25. 0%. The
cumulative effect of products price fluctuation and the decrease in volumes has led to a
decrease of 16. 1% in net sales to Rs 14,047 million.

The profitability ratios for many companies in the industry fell in FY10. However the profitability
of Pakistan Oilfields Limited has slightly increased from 2009 to 2010. The gross profit margin
has increased from 59. 3% to 61. 00%. The ROA has increased to 26. 83% and ROCE to 25.
53%. The profit margin has also increased to 41. 68% from 39. 99% in 2009. So the profitability
has increased in 2010. The increase in gross profit in 2010 is due to the fact that gross profit
has increased by around 31% as compared to 2009. The after tax profit of Pakistan Oilfield
limited has increased by 32% from 2009 to 2010 and there has been no significant increase in
the total assets therefore this increase in ROA is observed. Again net income has increased
and common equity remains same so ROCE has increased in 2010. Despite a turbulent year for
the oil gas sector, Pakistan oilfields limited managed to perform fairly reasonably. In terms of
profitability, the Gross Profit for FY09 registered a sizeable decline of 20% to stand at PKR 8.
41 billion (FY08 PKR 10. 6 billion).

The Net profit for FY09 is PKR 5. 58 billion, which is about 33% down from the previous year s
Rs 8. 412 billion. There are many apparent reasons for the decline in profitability of the
company. During the year, the international oil prices saw considerable fluctuations, the prices
of Arabian light ranging from a low of US $35 to a high of US $141 per barrel amid economic
uncertainty and poor global economic projections. The rupee also ended weaker against

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various foreign currencies, specially the greenback. These external situations, coupled with
27% less crude production this year have adversely affected the profitability. Both ROA and
ROE of the company can be brought up from its current levels to that of its competitors, thus
indicating the untapped potential of POL.

FY09 cost of POLGAS/CAPGAS (ie Purchasing and Transportation costs) fell by 20% as
compared to the same period last year. It must be noted that this cost subsided in FY09 s first
quarter compared to the costs for the same period of previous year, but that was due to fall in
production.

POL s exploration costs continue to rise consecutively for the send year ie FY09. FY08 saw a
dramatic increase of 2 times compared to the same costs in FY07. The trend continues in FY09
and the cost stood at PKR 2. 075 billion, a 100% increment compared to FY08. The major
reason for this substantial increase was the cost incurred in exploration/abandonment activities
at the company s own fields and in other joint ventures such as Adhi, Dhumal, Tal block,
Margalla block, Margalla south block. Growing exploration costs were also seen in the Tal,
Margalla and Margalla south Blocks, which are areas on which POL is currently concentrating
its exploratory activities. Other operating income increased by 46. 7% to Rs 2,041. 9 million.
This increase is mainly due to good returns on bank deposits, dividend income from subsidiary
and associate companies.

In FY10 cash and bank balances make around 33% percent of the total current assets. The
current ratio has increased from 3. 54 in 2009 to 3. 69 in 2010, a slight change over the
previous year. Liquidity position of the company, which had dropped below the industry s
average last year, has declined slightly again. The current ratio has shown a decline of about
15% due to 20% decline in POL s current assets and a 5% decrease in current liabilities the
decrease in current assets being mainly due to the cash at hand which stood at PKR 4. 074
billion, 45% down from FY08 (PKR 7. 5 billion). In FY09 cash and bank balances represented
around 41% of total current assets whereas, cash and bank balances amounted to around 60%
of the current assets. One reason that accounts for the smaller change in current liabilities
during FY 09 is that the company has about 32% less Tax liabilities.

The Inventory Turnover ratio of POL in FY 09 stands at 71. 54. This increase was mainly at the
back of higher stock in trade, which rose by 52% in FY09 to stand at PKR 0. 9591 billion and
stores and spares grew by 21. 52%. The Day Sales Outstanding finished higher this year as
compared to last year, standing at 45. 23 in FY089. The trade debts were slightly higher this
year about 1. 43% from FY08 to stand at PKR 1. 82 billion. The non-proportionate change in net
sales seems to be an important factor in this regard.

The Total Assets Turnover has dropped below 0. 49 in FY09 to 0. 39, primarily due to greater
indulgence in exploration and the work-over activities by the company. This increased the
acquisition of plants and equipment and simultaneously the exploration and evaluation assets of
POL this year, adding to the non-current assets. The asset management ratios too have shown
an upward trend in 2010, the total asset turnover has increased to 0. 48 in 2010. The reason
can be attributed to the increase in sales of 27% in 2010. The sales to equity ratio has
increased to 0. 61 showing that the stock invested is generating more sales per unit as

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compared to 2009. As the receivables turnover has increased the Day Sales Outstanding has
fallen to 45. 12 in 2010.

The Sales to Equity ratio declined further in FY09 at 0. 53. This can be attributed to large
decrease in the net sales of about 15% during the current fiscal year and a modest rise of about
1% in the total Equity. However it has increased to 0. 61 in FY10. This can be attributed to the
increase in sales in FY10 as compared to FY09 by 27%, Equity remains the same.

Overall, the debt ratios relating to POL reflect the fact that the company is largely equity
financed. It was only in FY06, when POL had taken long-term loans that these ratios increased.
Ever since the loans were repaid in FY07, debt ratios have plunged, making POL s debt
management as good as its competitors. In FY09, the debt to assets ratio was 24. 5% as
compared to 22. 08% in the FY08. This is largely on account of increase in total liabilities, which
stood at PKR 8. 952 billion, almost 16% higher than that of FY08. FY09 saw the Times Interest
Earned ratio dropping to new low of 15. 26%, despite the higher amount of debt in that year.
The debt ratios of 2010 also are indicative of the fact that the company is largely equity
financed. The debt to equity ratio for 2010 is 35% and the company has very little debt on its
balance sheet. The debt to asset ratios and long-term debt to equity ratios are 25. 9% and 23.
6% respectively. This has not shown a substantive change from 2009. The year 2010 showed a
commendable increase in TIE to 45. 29. This can be attributed to a 45% decline in finance costs
and increase in EBIT of around 60%.

The Market Performance of POL has been commendable for a long period of time. The
Earnings per Share of the company stood at PKR 23. 59 per share in FY09. This is lower than
the previous year s earning per share of PKR 35. 57. This can be attributed to the lower net
income and the demand for retained earnings for the various explorations and other activities
the company is looking forward to. This year, the company announced an interim dividend of
80% per share ie PKR 8 per share and further recommended a dividend of 100% ie PKR 10 per
share. The cash dividend is higher this year as compared to FY08 s dividend per share of PKR
16 and 20% bonus shares. The dividends per share for FY09 and FY10 have increased to 18
and 25. 5. An increase in dividends per share shows that the company is making good profits.
The book value fell in FY09 and later increased back in FY10 from 109. 65 to 123. 13. The EPS
for 2010 is 31. 44. The price/earning ratio has also increased to 6. 87 in 2010.

Future outlook:

Against all odds, the Pakistan oilfields limited has managed to stay profitable in turbulent times.
The decrease in profitability is primarily attributable to the decrease in production and the
impact of the relatively higher exploration expenditure in this nine-month period, incurred
primarily in Kirthar South, Ikhlas and Margala blocks. This has, however, been offset by a
favourable exchange rate variance between the rupee and the dollar and recognition of revenue
upon the finalization of long outstanding crude oil sales agreements of certain fields.

COURTESY: Economics and Finance Department, Institute of Business Administration,

Karachi, prepared this analytical report for Business Recorder.

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DISCLAIMER: No reliance should be placed on the [above information] by any one for making
any financial, investment and business decision. The [above information] is general in nature
and has not been prepared for any specific decision making process. [The newspaper] has not
independently verified all of the [above information] and has relied on sources that have been
deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of
information do not bear any liability or responsibility of any consequences for decisions or
actions based on the [above information].

Courtesy: Business Recorder

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