Pakistan Petroleum Limited (PPL) Monetization of new finds to improve sentiment PPL ‐ BUY Target Price: PKR 209 Current Price: PKR 174 PPL Performance 1M 3M 12M Absolute % 6%
4%
‐16%
Relative to KSE % 3%
6%
‐33%
Bloomberg PPL.PA Reuters PPL.KA MCAP (USD mn) 3,369 12M ADT (USD mn) 3.4 Shares Outstanding (mn) 1,972 PPL: Valuation Estimates (PKR/sh) FY15F FY16F FY17F TP New 20.0 19.5 24.9 209 Old 19.2 19.0 23.4 201 change 3.9% 2.5% 6.2% 3.7% PPL vs. KSE100 Relative Chart PPL
30%
KSE100 Index
20%
10%
0%
‐10%
‐20%
‐30%
Apr‐15
Mar‐15
Jan‐15
Feb‐15
Jan‐15
Dec‐14
Oct‐14
Nov‐14
Sep‐14
Aug‐14
Jul‐14
Jun‐14
May‐14
‐40%
Source: BMA Research Muhammad Affan Ismail, CFA [email protected] +92 111 262 111 Ext: 2058 Friday, May 15, 2015 Despite positive news on the exploration front (4 discoveries in FY15TD), PPL underperformed the KSE‐100 by 30pps FY15TD on account of i) 41% decline in oil prices, ii) expected decline in wellhead gas prices and iii) delays in development of Nashpa and Gambat South fields. Post release of detailed financial accounts, we revisit our investment case on PPL as we upgrade our FY16 and FY17‐FY19 EPS by 2% and 6%, respectively to account for volumetric additions from Mardankhel (w.e.f FY17), Maramzai‐3 (w.e.f FY16) and Kinza‐1 (w.e.f FY16) with a cumulative net addition of 1,200bpd oil and 24mmcfd gas. The upward revision is partially offset by higher than expected exploration expenditure leading to 3%‐4% revision in our field expenditure assumptions. We also upward revise our FY15F EPS by 4% to PKR20.0 as we upgrade our 4QFY15 oil price assumption to USD60/bbl (previous: USD50/bbl). Consequently, our TP is upward revised by 4% to PKR209/sh. Going forward, we believe i) sustainability of oil prices and ii) timely development of exploration finds will remain critical to our investment case on PPL. The company is currently exposed to exploration drilling in five wells at Gambat South (Nasr‐1 and Kabir‐1), Dhok Sultan, Kotri North and Nashpa (JV operated), all located in hydrocarbon rich areas. With potential decline in wellhead gas prices during 1HFY16 on the cards due to 43% lower average oil prices, we believe development of previous finds (Wafiq, Shahdad, Kinza, Adam West and Sharf fields) with cumulative net size of ~76mmcfd (up 10%) may provide some support to the dampening sentiment. Inflated exploration cost depressed 3Q profitability: During 3QFY15, PPL reported below consensus earnings of PKR4.0/sh owing to higher than expected field expenditures (up 26%QoQ). The uptick in field expenditures was driven by 72%QoQ increase in exploration cost to PKR3.2bn due to substantial increase in seismic acquisitions in operated blocks. Consequently, 9MFY15 earnings clocked in at PKR15.2/sh, depicting a decline of 21%YoY. We now expect PPL to post EPS of PKR20.0/sh in FY15 (down 23%YoY) where our 4QFY14 oil price assumption stands at USD60/bbl. In FY16F, 17%YoY lower average oil prices and consequent decline in wellhead gas prices will keep earnings almost flattish at PKR19.5/sh. Aggressive exploration drilling remains the key: During 10MFY15, PPL drilled 7 exploratory wells against the full year FY15 target of 8 wells. The company managed to deliver two successful attempts both at Gambat South blocks, four wells under drilling and one (Shadab X‐1) being declared dry. In addition to aforementioned two discoveries, PPL also announced discovery at two more wells Sharf X‐1 and Adam West X‐1, both wells carried forward from previous year FY14. The cumulative net size of the discovery stood at ~1,500bpd oil (up 10%) and 54mmcfd gas (up 7%). Given the location of ongoing drilling in high impact Sindh (Gambat South and Kotri North) and KPK (Dhok Sultan) regions, we believe exploration outlook of the company remains upbeat. The monetization of previous finds (Wafiq, Shahdad, Kinza, Adam West and Sharf fields) in near term with cumulative net size of ~76mmcfd (up 10%) will provide some support to the dampening sentiment amid potential decline in wellhead gas prices of 1HFY16. Investment perspective: Despite impressive exploration drilling in operated areas, PPL remained under pressure owing to delays in completion of development wells and free fall in oil prices (down 41%FYTD). Though FY16F earnings will depict a flattish trend, we believe completion of development wells in pipeline i.e. Adhi‐23, Adhi‐24, Nashpa‐6 and Makori East‐4 coupled with monetization of previous finds in near term will improve the sentiment. Thus, PPL remains a decent long term ‘BUY’ with a TP of PKR209/sh, offering a total return of 26%. 1