Elixir Securities Limited – Elixir Insight

Karachi, February 23, 2018 (PPI-OT): Pakistan Oilfields Limited – Lower Makori East/Mardankhel Reserves Dilute the Valuation Impact of Jhandial

 

Recent field reserves data showed significant hydrocarbon reserves in Jhandial, much higher than our prior estimates. However, decline in hydrocarbon reserves of Makori East and Mardankhel diluted the valuation gains of Jhandial.

 

We estimate that the minor upward revision in reserves of Maramzai and Manzalai are expected to slightly raise reserves life and FY19-21 earnings, however, Makori East and Mardankhel’s lower reserves are expected to lower earnings between FY22-25.

 

We believe FY18F earnings would remain unchanged at PKR66.8 as we opine that reversed/unbooked revenues (related to Tal Block owing to perceived risk of amendment of windfall levy on oil) would likely be booked during the financial year.

 

As a result of diluted impact of change in reserves, our Dec-18 PT largely remains unchanged at PKR582/share (previous: PKR580/share), offering 2% capital downside. POL’s attractive FY18F dividend yield of 11% takes total expected return to 9%. Hold.

 

Jhandial’s Additions Likely Priced In: According to recently updated Pakistan Petroleum Information Services (PPIS) field reserves data, Jhandial field’s oil and gas reserves were reported at 23.9mnbbl (31.2 years) and 291bncft (42.0 years), respectively/ These were significantly higher than our initial estimates of 19.3mnbbl and 169bncft based on average 25 years of reserve life assumption (conservatively taken in line with the lowest average reserve life in the vicinity).

 

The changes in reserve estimates for Jhandial was expected to raise our NAV based valuation for Pakistan Oilfields (POL) by PKR36/share over our base case estimates. However, respective declines in oil/gas reserves of Makori East and Mardankhel by 39%/13% to 19.9mnbbl (3.2 years) / 161bncft (4.9 years) and 64%/63% to 5.4mnbbl (7.4 years) / 116bncft (5.4 years) are expected to dilute the valuation gains of Jhandial. We estimate that the minor upward revision in reserves of Maramzai and Manzalai are expected to slightly raise their reserves life increasing our FY19-21 earnings estimates. However Makori East and Mardankhel’s lower reserves are expected to dampen earnings between FY22-25.

 

Windfall Levy on Oil May Likely be Annulled: We believe FY18F earnings would remain unchanged at PKR66.8/share as we believe PKR3.01bn of gas revenues (reversed in 2QFY18 attributable to enhanced gas prices for conversion of Tal’s Block) and un-booked PKR3.39bn retrospective impact related to the block, would likely be booked during the remainder of financial year. POL, after consulting its legal counsel stated that Supplemental Agreement cannot be changed unilaterally and would challenge the imposition of Windfall Levy on Oil (amounting USD134mn or PKR13.69bn) in the Court of Law. As such, the enhanced gas price incentive of USD63mn or PKR6.40bn would be accounted for after resolution of the matter. The management is confident that the matter will be resolved in their favor, which in our opinion should result in one-off gain of PKR6.4bn (after tax: PKR16/sh). As we speak, the court has asked the companies to maintain “status-quo” on pricing till next hearing, scheduled on 15th March, 2018.

 

Valuation: Our updated reserve number raises our FY19F EPS by 3% to PKR79.3 mainly due to extended reserves life of Maramzai and Manzalai. As a result of diluted impact of Jhandial’s increase in reserves by lower Makori East/Mardankhel reserves, our Dec-18 PT has undergone only a minor increase of PKR2 to PKR582/share, offering 2% capital downside from yesterday’s close. However attractive FY18/FY19F dividend yields of 11%/13% takes total expected return to 9%. Hold.

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