pakistan oil & gas - valuations are heavily discounted, (akd bluetop sep 02, 2015)

1

We reini ate coverage on the Oil & Gas sector and strongly encourage por olio realignment towards this space from a long term perspec ve where valua ons are undemanding. While we are not over-looking the poten al of weakness in share price performance caused by nega ve oil headwinds, the upstream sector (E&P) is overly discounted, in our view. In this regard, sharp decline in oil prices and consequent subdued earnings growth outlook (2%YoY in FY16E with an avg. oil price assump on of US$50/bbl) has opened up valua ons where our oil price simula on suggests that the upstream sec-tor is currently trading at an implied oil price of US$16-18/bbl, an unjus fied steep discount of 58-63% to prevailing Arab Light price. Catalysts spurring share price performance in the medium to long term emanate from swi e ups of recent discoveries along with aggressive explora on as law & order improves in high impact areas. The Oil & Gas sector (upstream and downstream) also offers one of the highest dividend yields (FY16F D/Y avg. 6.5%) amongst regional peers. From a 12m+ investment hori-zon, we like PPL (TP of PkR194/sh), POL (TP of PkR423/sh) and OGDC (TP of PkR175/sh) in the up-stream sector while PSO (TP of PkR457/sh), HASCOL (TP of PkR152/sh - Ex bonus) and APL (TP of PkR620/sh) make the cut in downstream (value enhancers include improving cash flow profile and unique inventory management). Addi onally, immediate diversifica on benefits (low beta, low corre-la on, US$ based topline) makes the Oil & Gas sector an essen al (track index weight) to counter market vola lity, in our view.

PPL: Pakistan Petroleum Limited (PPL) with a Jun’16 target price of PkR194/sh offers an upside of 43% from current price level. Similar to its peers, PPL underperformed the broader market by 30.5% during FY15 on the back of steep 30% decline in the interna onal oil prices in FY15. Backed by incremental produc on (from Gambat South block), the company is es mated to post earnings growth of 9%YoY in FY16E. Presently trading at a FY16E P/E of 7.2x, we have a Buy stance on PPL. Buy!

POL: Pakistan Oilfields Limited (POL) with a NAV based Jun’16 target price of PkR423/sh provides an upside of 25% from current price level. The scrip trades at an FY16E P/E of 8.8x and offers a 1yr E/Y of 11.4% backed by 8%YoY growth in FY16E earnings. Going forward, we es mate POL’s earnings to post a 3yr CAGR (FY15A‐18F) of 14% backed by incremental produc on coming from non‐operated JVs (predominantly Tal block) and aided by addi onal flows from Mardan Khel and Makori East 04. Buy!

OGDC: We reini ate ac ve coverage on Oil & Gas Development Company Limited (OGDC) with a NAV based Jun’16 target price of PkR175/share, offering a 28% upside from current market price. Though we es mate a subdued 3yr forward earnings CAGR of ~4% during FY15A‐FY18F, a sharp fall in market capi‐taliza on (down 33.4%CY15TD) has deviated valua ons rela ve to fundamentals that imply stable earn‐ings. Buy!

PSO: Pakistan State Oil (PSO) with a Jun’16 DCF based target price of PkR457/sh offers a poten al upside of 36% from current price level. With oil prices likely to move in a band of US$40/bbl ‐ US$50/bbl, we believe the worse is over for PSO and forecast the stock to post a 3yr forward (FY16E—19F) earnings CAGR growth of 13%, backed by an avg. 3% per annum increase in the company’s volumes coupled with rela vely lower inventory losses, suppor ng a stronger core earnings base. Buy!

HASCOL: HASCOL provides an upside of 27% against our Jun’16 DCF based target price of PkR152/sh (ex bonus). Our bullish outlook on HASCOL is underpinned by a 3yr earnings CAGR of 26% during CY15E‐CY18F. Proac ve inventory management model that HASCOL has adopted is likely to reap further bene‐fits for the company going forward. The scrip currently trades at a CY16E P/E of 9.4x and offers a D/Y of 5%. Buy!

APL: A ock Petroleum Limited (APL) provides an upside poten al of 17% against our DCF based target price of PkR620/sh. The scrip, offering an FY16E D/Y of 8%, remains one of the highest yielding compa‐nies at the KSE‐100 Index. Being a major asphalt player in the industry, the company is poised to benefit from the construc on of highways/motorways earmarked under the Chinese Pakistan Economic Corri‐dor (CPEC). Accumulate!

Valua ons are Heavily Discounted!

Asad I. Siddiqui

Senior Investment Analyst

Asad.Siddiqui@akdsecuri es.net

September 2, 2015 AKD Equity Research / Pakistan

Important Disclosure: Important disclosures including investment banking rela onships and analyst cer fica on at end of this report. AKD Securi es does and seeks to do business with companies covered in its

research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objec vity of the report. Investors should consider this report as only a single factor in

making their investment decision.

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Bluetop

Pakistan Oil & Gas

Priced on August 28, 2015

KSE-100 Index

34,447 pts

KSE Market Cap

PkR7,459bn (US$74,612mn)

KSE-100 (52 Week Range):

High: 36,228.88pts

Low: 27,774.43pts

12M KSE100 - Avg. Traded Value

PkR 14,927.71mn (US$147.79mn)

12M KSE100 - Avg. Volumes

286.34mn shares

0

115

230

345

460

575

690

805

920

Aug‐14

Nov‐14

Jan‐15

Mar‐15

Jun‐15

Aug‐15

(share mn) (Index)

27,000

28,000

29,000

30,000

31,000

32,000

33,000

34,000

35,000

36,000

Volume (LHS) KSE‐100 Index

Symbol Price Target Price Stance

PPL 135.5 194.0 Buy

POL 337.9 423.0 Buy

OGDC 137.01 175.0 Buy

PSO 335.8 457.0 Buy

HASCOL 143.5 152.0* Buy

APL 529.8 620.0 Accumulate

AKD Universe - Oil Sector Recommendations

*Ex‐Bonus

2

AKD Securi es Limited

September 2, 2015 Bluetop - Pakistan Oil & Gas

The World with oil at US$40-50/bbl 3‐5

Pakistan E&P Sector: Growth reliant on fiscal terms 6‐9

Pakistan OMCs: Improving fundamentals 10‐11

Oil & Gas Exploration Companies (upstream) 12

PPL: Moving from Passive to Active 13‐21

POL: Piggybacking on JV Success 22‐29

OGDC: Exploring New Avenues 30‐38

Oil Marketing Companies (downstream) 39

PSO: Strong Core Earnings Base 40‐45

HASCOL: Continuing Organic Growth! 46‐51

APL: Reaping Benefits of Integration 52‐57

Annexure 58

Disclaimer 59

Page No.

Contents

3



The World with oil at US$40-50/bbl

OPEC and non-OPEC producers are faced with hard choices as interna onal oil prices head towards levels last seen in 2008-2009, during the global financial crisis. On the supply side, sharply lower oil prices are also not discouraging global produc on as supply from explor-ers remains stable while both inventories (up 8%YoY) and domes c produc on (up 10%YoY) are rela vely higher in the US. Li ing of sanc ons on Iran (con ngent upon a success-ful nuclear deal with the P5+1 bloc) crystalizes oversupply concerns (already oversupplied by ~2mn bopd) in the near to medium term, materially weakening the pricing power of KSA and its allies (Qatar, Kuwait, UAE). Recall, Iran’s market share was around 20% during the mid-1970s (before the Iranian revolu on) against its current market share of sub 4%. The demand side of the equa on does not look promising either as global demand is s ll anemic while a near zero interest rate environment spurs investment in alternate energy and conven onal energy projects. We believe days of US$100/bbl oil are a thing of the past as mul ple factors such as: 1) sluggish oil demand from China and EU, 2) heightened US oil produc on and 3) oversupply concerns emana ng from Iran are likely to keep oil prices in the range of US$40-50/bbl in the medium term.

OPEC produc on near historically high levels: In FY15, OPEC pumped an avg. 32.6mn bopd of crude in the interna onal market (only 1% lower against an avg. 33.1mn bopd sold during FY12). However, the main difference between both mes remains the direc on of the com‐modity’s global supply. During FY12, global crude oil supply demand gap was at 0.1mn bopd which has now widened to 2.1mn bopd. Despite the new opera ng environment, the oil cartel is likely to con nue pumping above +30.0mn bopd into the market, in our view (next OPEC mee ng is scheduled in Dec’15). In this regard, Kingdom of Saudi Arabia (KSA), the largest OPEC member, has con nued to pump 9.7mn bopd on average into the market since July’14 with an aim to preserve its market share.

Saudi Arabia’s OPEC market share over the period of me

Source: EIA

0%

10%

20%

30%

40%

50%

60%

Apr‐73

Jan‐75

Oct‐76

Jul‐78

Apr‐80

Jan‐82

Oct‐83

Jul‐85

Apr‐87

Jan‐89

Oct‐90

Jul‐92

Apr‐94

Jan‐96

Oct‐97

Jul‐99

Apr‐01

Jan‐03

Oct‐04

Jul‐06

Apr‐08

Jan‐10

Oct‐11

Jul‐13

Apr‐15

Iran Iraq KSA

Iranian Revolution (1978-1980)

Iran Iraq War (1980-1988)

Iraq lost oper. Badr (1985)

Iraq Kuwait War (1990-1991)

Invasion Iraq by US (2003-2011)

EU embargo Iran (2012-2015)

US Inventory vs. Produc on and Imports

Source: EIA

‐

200

400

600

800

1,000

1,200

1,400

Jan‐1970

Nov‐1972

Sep‐1975

Jul‐1978

May‐1981

Mar‐1984

Jan‐1987

Nov‐1989

Sep‐1992

Jul‐1995

May‐1998

Mar‐2001

Jan‐2004

Nov‐2006

Sep‐2009

Jul‐2012

May‐2015

‐

50

100

150

200

250

300

350

Inventory (mnbbl.) (LHS) Production (mnbbl.) Imports (mnbbl.)

OPEC Produc on levels

Source: EIA

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1‐Jan

‐73

1‐Nov‐75

1‐Sep‐78

1‐Jul‐81

1‐M

ay‐84

1‐M

ar‐87

1‐Jan

‐90

1‐Nov‐92

1‐Sep‐95

1‐Jul‐98

1‐M

ay‐01

1‐M

ar‐04

1‐Jan

‐07

1‐Nov‐09

1‐Sep‐12

1‐Jul‐15

4


September 2, 2015

Don’t mix decline in rig counts with produc on decline: While pace of US oil imports have

tapered off (up 1.1%YoY as of May’15), domes c US oil produc on (including shale concerns)

has stepped up (up 10%YoY as of May’15) to keep oil inventories (up 8%YoY as of May’15)

healthy as advancements in technology (hydraulic fracturing and horizontal drilling) has kept

drilling economically feasible despite lower oil prices. As per latest EIA sta s cs, number of

rigs (579) employed by shale drillers in the US is at a 69 month low in Jul’15 (down 54%YoY)

vs. 1,268 rigs employed in Jul’14. Despite lower rig counts, the US shale oil produc on has

jumped ~16%YoY to 5.58mn bopd vs. 4.81mn bopd back in Jul’14. Upon looking at the incre‐

mental produc on each new well is bringing in, new well oil produc on per rig has also in‐

creased by 44%YoY in Jul’15 to 2.6k bopd (vs. 1.8k bopd in Jul’14) as the oil service industry

con nues to employ more efficient fracturing and lateral drilling technologies. Addi onally,

EIA projects per well shale output to register a growth of 3.4%MoM in Aug’15 and another

2.3%MoM in Sep’15 to 2.7k bopd sequen ally on MoM basis.

Oil in oversold territory? Interna onal oil price (Arab Light) has lost 54% in the past one year

(down 29% from its CY15TD peak) in the backdrop of an anemic demand outlook in an over‐

supply environment. Sta s cally speaking, the sharp vola lity in oil prices (refer to the chart

below) can be expected to con nue in the near term as Arab Light is again headed towards

our Bollinger lower band (‐2 standard devia on; 1 year moving average). The chart below

also implies that vola lity increases (band expands) when the price touches and rides the

bands (+2/‐2 standard devia ons). Addi onally, analyzing the historical distribu on of daily

year on year movement in oil prices (Arab Light) since 1984 indicates Arab Light price to yield

–ve 5%‐0% in the next one year with an event probability of 9.56% (the highest in the proba‐

bility distribu on). Moreover, historical distribu on of the past 40 years suggests a 55%

probability of a period gain (45% probability of period loss) with expecta on of a period gain

Bluetop - Pakistan Oil & Gas

US historical shale rig count and per well produc on (k Bopd)

Source: EIA

‐

200

400

600

800

1,000

1,200

1,400

Jan‐07

Apr‐07

Jul‐07

Oct‐07

Jan‐08

Apr‐08

Jul‐08

Oct‐08

Jan‐09

Apr‐09

Jul‐09

Oct‐09

Jan‐10

Apr‐10

Jul‐10

Oct‐10

Jan‐11

Apr‐11

Jul‐11

Oct‐11

Jan‐12

Apr‐12

Jul‐12

Oct‐12

Jan‐13

Apr‐13

Jul‐13

Oct‐13

Jan‐14

Apr‐14

Jul‐14

Oct‐14

Jan‐15

Apr‐15

Jul‐15

‐

500

1,000

1,500

2,000

2,500

3,000

Rig count (LHS) Production per rig (bopd)

SWF OPEC Member countries

Source: SWF Ins tute

1,215

882

677592

256182 157

66 62 50 40 37

(150)

50

250

450

650

850

1,050

1,250

UAE

Norw

ay

KSA

Kuwait

Qatar

Russia

Kazakhstan

Libya

Iran

Algeria

Brunei

Azerbaijan

(US$bn)

Interna onal Oil Price (Arab Light) - Bollinger Chart

Source: AKD Research

0

25

50

75

100

125

150

175

Aug‐01

Feb

‐02

Aug‐02

Jan‐03

Jul‐03

Jan‐04

Jun‐04

Dec‐04

Jun‐05

Nov‐05

May‐06

Nov‐06

May‐07

Oct‐07

Apr‐08

Oct‐08

Mar‐09

Sep

‐09

Mar‐10

Sep

‐10

Feb

‐11

Aug‐11

Jan‐12

Jul‐12

Jan‐13

Jul‐13

Dec‐13

Jun‐14

Dec‐14

Jun‐15

ARAB LIGHT (US$/BBL) 1YrMovAvg +2Std_Dev ‐2Std_Dev

5

of 14% and expecta on of a period loss of –ve 7% (avg. oil price). However, while history is

skewed in favor of a period gain, a high standard devia on of 26% of our sample period re‐

turns and the prevailing oversupply environment leads us to believe that oil prices are likely

to trade in the range of US$40‐50/bbl in the medium term (39%/29% lower compared to its

one year moving average).



Probability distribu on of oil price movement (Arab Light)


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

‐75%/‐70%

‐65%/‐60%

‐55%/‐50%

‐45%/‐40%

‐35%/‐30%

‐25%/‐20%

‐15%/‐10%

‐5%/0%

5%/10%

15%/20%

25%/30%

35%/40%

45%/50%

55%/60%

65%/70%

75%/80%

85%/90%

95%/100%

105%/110%

115%/120%

125%/130%

135%/140%

145%/150%

155%/160%

165%/170%

175%/180%

185%/190%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Event Probability (lhs) Cumulative Probability

6


September 2, 2015

Pakistan E&P Sector: Growth reliant on fiscal terms

Heavily reliant on natural gas for its energy requirements, the pace of new discoveries has not kept up with demand/consump on in Pakistan, resul ng in deple on of reserves. Em-pirically, the average reserve replacement ra o (RRR) has come off from 100%+ during 1980-99 to 36% during 2010-14. While the security situa on can be cited as a major reason for not tapping high impact areas, we believe that weak fiscal frameworks through succes-sive petroleum policies (with the excep on of the 1994 policy) have failed to adequately compensate companies from a risk-return perspec ve. Consequently, many foreign drillers have overlooked/exited Pakistan for other developing countries.

Pakistan E&P Sector through the sands of me: The upstream sector has witnessed many policy level (economic, commercial) fluctua ons in the last many decades. During the 1950s‐mid 80s, a cost plus ROE formula determined gas well‐head prices (under Pakistan Petroleum (Produc on) Rules, 1949) which was not market reflec ve. From mid‐1980s to 1993, fiscal terms for the sector (more specifically through Petroleum Policies (PP) of 1991/93) improved by determining well head gas prices by applying different percentages to energy equivalent of HSFO. Through PP 1994, the economic terms of the sector were overhauled by linking prices with a crude basket (free cap), less zonal discounts. Following PP 1994, while gas price linkage to oil benchmark was con nued, the reference crude price was capped at US$36/bbl (floor of US$10/bbl) in PP 2001, inferring that well‐head gas prices could not exceed US$2.84/mmbtu. With oil prices hovering around the ceiling level up to 2005, the policy seemed a step in the right direc on. However, post 2005, at the me when oil prices made way towards US$70/bbl (in mid‐2006), economic flaws of the PP 2001 started to emerge. Through PP 2007, the cap was increased to US$45/bbl (note that oil prices reached US$140/bbl by mid‐2008, dilu ng the impact of higher interna onal oil prices for local E&P players). The cap was subsequently raised to US$100/bbl in PP 2009, however, the pricing framework restricted gas well‐head prices rising above US$4.6/mmbtu. Realizing that gas pricing in Paki‐stan needed another overhaul in order to introduce a more economically favorable frame‐work for E&P companies rela ve to opportuni es in other developing countries, the GoP introduced PP 2012 in which a maximum gas price of US$6.0/mmbtu was provided. The in‐


Sindh D&P Leases 117.0 D&P Area (Sq.km) 8,766.12 D&P Leases % 74% D&P Area % 69% Key Gas Fields: Recoverable Reserves (bcf) MARI 2,250 KANDRA 1,858 QADIRPUR 1,289 MARI DEEP 1,104 KANDHKOT 575

Balochistan D&P Leases 9.0 D&P Area (Sq.km) 1192.67 D&P Leases % 6% D&P Area % 9% Key Gas Fields: Recoverable Reserves (bcf) SUI 2,233 UCH 1,742 KPK

D&P Leases 6.0 D&P Area (Sq.km) 744.35 D&P Leases % 4% D&P Area % 6% Key Oil Fields: Recoverable Reserves (mnbbl) NASHPA 152 MAKORI EAST 35 Punjab

D&P Leases 26.0 D&P Area (Sq.km) 1,739.23 D&P Leases % 16% D&P Area % 14% Key Oil Fields: Recoverable Reserves (mnbbl) ADHI (Cond.) 33.95 DHODAK (Cond.) 8.43

Sector’s reserve replacement history

Source: PPIS & AKD Research

Years

Reserves Addition(mmboe)

Production(MMboe) RRR

1980‐84 273 294 93%

1985‐89 708 380 186%

1990‐94 1,382 562 246%

1995‐99 1,247 714 175%

2000‐04 206 948 22%

2005‐09 890 1,358 66%

2010‐14 519 1,446 36%

0

50

100

150

200

250

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

Target

Actual

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Exploratory Development Tota l

7

Historical Henry Hub Gas Prices vs. Policy Prices

Source: Bloomberg & AKD Research


September 2, 2015

efficacy of 2001 Petroleum Policy became clear as fiscal terms within the policy began to trail the rise in global oil and gas prices. As a proxy Henry Hub gas prices were at an average 106% premium to producer prices in Pakistan. This not only limited explora on but also limited the introduc on of technology and advanced drilling techniques to improve recoverable re‐serves. During the same period several global players also exited onshore Pakistan where capped fiscal terms fell short of covering normal explora on and country specific risk.

Energy mix still in favor of gas: With hydrocarbon produc on profile being lted towards gas, Pakistan’s gas produc on over the course of the last 20 years has nearly doubled to ~4.2BCFD in FY12 from ~2.1BCFD in FY94. However, the country’s gas produc on has been declining over the past two years where it was recorded at 4.0BCFD in FY15, down 2.3%YoY. Conversely, Pakistan’s oil produc on touched 99k bopd mark in FY15 (averaging 95.8k bopd in FY15, up 11%YoY) due to development programs to mone ze one of the country’s biggest oil reservoir, Tal Block. Going forward, we expect oil produc on in the country to clock in at 107kbopd with incremental produc on coming in from development projects that are in the pipeline by FY18. In this regard, developments on KPD‐TAY, Tal, Sinjhoro along with Nashpa and Mela fields are likely to lead to produc on ramp up. At the same me, it is believed that the country will add 0.4BCFD gas to the current produc on of 4.0BCFD, which is assumed to be achieved by incremental flows from Gambat South and Uch‐II.

Revenues have higher gas par cipa on as well: Despite enhanced oil produc on raising expecta ons towards a gradual shi in the sector’s revenue mix in favor of oil, the sharp decline in interna onal oil prices has diluted the impact of higher oil produc on where oil revenues of the sector are expected to remain muted at current levels. That being said, on an energy equivalent basis, one mmbtu oil is s ll 2.0x more valuable than one mmbtu of gas due to be er pricing of the former. Going forward, e ups of produc on from Tal Block (Maramzai, Makori East and Mardan Khel), KPD & TAY integrated development project, Sinjhoro, UCH‐II development project, Jhal Magsi development project and Nashpa/Mela LPG plant project are likely to bolster the country’s oil produc on by 12% or by 11.5k bopd by FY18F.

Earning’s growth to remain subdued across FY15A-FY18F: Pakistan’s E&P space is es mated to clock tepid earnings growth of 2%YoY in FY16E due to a rela vely lower oil price outlook (avg. oil price assump on of US$50/bbl). Similarly, the 3yr forward earnings of the sector are forecasted to stay subdued, growing at a CAGR of 5% during FY15A‐FY18F.

E&P sector earnings growth sensi vity to oil price:


Project Expected Production

KPD‐TAY Gas 125mmcfd, Oil 4,100bopd, LPG 410TPD

Sinjhoro Gas 25mmcfd, Oil 1,600bopd, LPG 120TPD

Uch‐II Gas 160mmcfd

Nashpa/Mela

Gas 10mmcfd, Oil 1,120bopd, LPG 340TPD

Gambat South

Gas 162mmcfd, Oil 5,251bopd

Exploration Wells (TD) 936

Appraisal/Dev. Wells (TD) 1,253

Total 2,189

Total Discoveries: 318

Oil 71

Oil & Gas/Gas/Gas Cond. 247

Over All Success Rate 1:2.9

Active Leases 160

Number Of Operators 30 (12 local)

Upstream Oil & Gas Sector:

Sector FY16 FY17 FY18 3yr CAGR

US$30/bbl ‐13% 12% 3% 0%

US$35/bbl ‐9% 12% 3% 1%

US$40/bbl ‐5% 12% 3% 3%

Base Case (US$50/bbl) 2% 12% 3% 5%

US$60/bbl 10% 12% 3% 8% US$65/bbl 13% 12% 3% 9%

US$70/bbl 17% 12% 3% 10%

‐

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Henry Hub Pol icy Prices


US$/mmbtu

8


September 2, 2015

Low btu gas policy yet to weigh in! With gas demand exceeding supply and no incen ves available for explorers to venture into either low btu or ght gas extrac on, the GoP an‐nounced a low btu gas pricing policy in 2012. This move by the GoP was aimed to provide local and interna onal E&P companies with incen ves that would further invigorate their explora on ac vi es and would lead to increase in overall gas produc on coming in from low btu fields. As per the US EIA sta s cs, Pakistan has low btu gas reserves of 2.0 TCF while ght gas reserves stand at 40.0 TCF. This is believed to add another dimension to the focus of

E&P companies working in Pakistan mainly due to rela vely a rac ve pricing provided by the GoP. In this regard, low btu gas policy entails a base price of US$6 per mmbtu for fields producing gas at a heat rate of 450 btu and pricing is formulated to increase by US$0.01 for every one btu decrease in the hea ng rate of gas with price capped at US$8.75 per mmbtu. This price cap is 46% higher than the price offered as per the latest policy for conven onal gas. As for shale/ ght gas (a separate policy is s ll being considered), the GoP has extended gas prices as per the 2009 policy with a 40% premium. While framework of these policies is present, the same has not been implemented in spirit (due to administra ve hindrances) and has kept the E&P companies from unlocking the poten al of low btu and shale gas.

Insulated from macro-economic and poli cal shocks! Macro‐economic shocks such as in‐crease in average infla on or an abrupt hike in the policy rate might be a cause of concern for majority of industries but are non‐events for the Pakistan E&P Sector. The sector is guard‐ed against macro‐economic shocks as costs are dependent on global oil & gas dynamics, while an unleveraged balance sheet makes the sector immune to interest rate changes. In addi on to this, the sector provides the best hedge against the PkR vs. US$ deprecia on as its revenues (either directly or indirectly) are US$ denominated. In a country like Pakistan which is dependent on imported oil, the E&P sector should con nue to receive more incen‐ves as the GoP tries to lessen its dependency on imported energy resources. This also insu‐

lates investors from any poli cal shocks that otherwise may adversely affect the investment environment. With import of hydrocarbons responsible for more than one‐third of Pakistan’s import bill, the GoP’s stance on the policy front should remain posi ve, in our view.

Baluchistan, so far forgo en, but an ace up the sleeve! Baluchistan has produced major discoveries like Sui, Uch and Pirkoh in the 1950s and at present has ~15% share in the coun‐try’s cumula ve gas produc on. Despite an average discovery size of 445mmboe (vs. ~29mmboe Pakistan average), Baluchistan remains one of the least explored areas of Paki‐stan, which is further evident by its low explora on density. The province has significantly



First conflict 1958–59

Nawab Nowroz Khan started a guerrilla war against Pakistan, and were arrested, charged with treason.

-Second conflict 1963–69

Sher Muhammad Bijrani Marri led like‐minded militants into guerrilla warfare by creating their own insurgent bases, with a goal to force Pakistan to share revenue generated from the Sui gas fields with the tribal leaders. The insurgents bombed railway tracks and am‐bushed convoys.

-Third conflict 1973–77

The unrest continued into the 1970s, culminat‐ing in a government‐ordered military opera‐tion in the region in 1973.

Fourth conflict 2004–to date

On 15 December 2005 the inspector general of the Frontier Corps, Major General Shujaat Zamir Dar, and his deputy Brigadier Salim Nawaz (the current IGFC) were wounded after shots were fired at their helicopter in Balochi‐stan Province.

In August 2006, Nawab Akbar Khan Bugti, 79 years old, was killed in fighting with the Paki‐stan Army, in which at least 60 Pakistani sol‐diers and 7 officers were also killed.

Baluchistan Security Timeline

9

Source: Data Stream & AKD Research


September 2, 2015

lower drilling density (1 exploratory well per 6500 sq.km) in comparison to the Pakistan’s drilling density of 1 well (exploratory) per 850 sq.km despite having 33% explora on acreage allocated within it (that translates into 59 blocks out of total 177 blocks offered). This is mainly due to an outstanding security situa on that has historically deterred explora on ac vi es and kept explora on licenses under force‐majeure, in our view.

The Poten al! Current producing fields in the Baluchistan province (Sui, Pirkoh, Uch and Lo ) have SML (Sui Main Limestone), HRL (Habib Rahi Limestone), Ranikot and Pab produc on forma ons. These forma ons belong to late Cretaceous to Eocene age as per the geologic mescale, indica ng that the age of explored parts of Baluchistan is from 50 to 100 million

years. With majority of top 15 largest gas fields in the world belonging to late Cretaceous to Eocene age, we are confident that there is a strong likelihood that immense untapped hydro‐carbon poten al is s ll present in Baluchistan.

The hurdle between the poten al and its realiza on: Security has also been a major stum‐bling block that has kept the government and the explora on companies from realizing the immense poten al that is present in Baluchistan. As men oned above, the province has the lowest explora on density in Pakistan, which is largely due to presence of an ‐state ele‐ments in different regions of the province. Furthermore, difference of royalty compensa on to local stakeholders (e.g. tribal landowners) from explora on companies (of both local and foreign origin) and the government is another bone of conten on for the lack of explora on in the province. In this regard, further problems come in the form of negligence and unequal distribu on of wealth with limited development of earmarked territory .

The Swing Factor: As the government scrambles to improve law & order, we are encouraged with the progress made by the government/law enforcing agencies to address the security situa on and the overall opera ng environment in the country, especially the western region of Pakistan. Our channel checks reveal that at least one major E&P player is set to aggressive‐ly tap the western region for hydrocarbons. Successful headway on this front can act as a posi ve surprise for the sector with others following suit and can result in a swi rera ng for the E&P sector, in our view.

Pakistan upstream against regional peers: The free fall in interna onal oil prices and conse‐quent melt down in share price performance has opened up valua ons in the sector where the Pakistan E&P space is more a rac vely priced against its regional (Asian) as well as MSCI FM peers. At current price, Pakistani E&P’s are trading at a P/E of 7.1x (discount of 35% against the region). The sector also offers the highest compara ve dividend yield of 6.3% (premium of 1.9ppts against our region sample). Addi onally, the Pakistan E&P sector pro‐vides a natural hedge against PkR devalua on (revenues are US$ linked), enabling the sector to counter currency vola lity.


Mkt Cap EV/EBITDA EPS Growth DY

Name Country (USDmn) EV (x) 2015 2016 2017 TTM 2016 Forward (%)

Cnooc Ltd. China 53,231 59,691 3.4 8.2 14.16 9.76 11.03 7.91 7.14 5.43

Oil & Natural Gas Corp Ltd. India 31,522 31,307 6.3 11.8 8.62 7.54 10.40 14.20 (19.74) 3.10

Ptt Explor. & Prod Public Co. Thailand 8,964 9,409 2.0 n.a 13.35 10.77 (0.13) 6.20 (63.14) 4.02

Oil & Gas Development Co.Ltd Pakistan 5,665 5,441 3.2 6.8 6.49 5.71 20.82 17.88 (29.57) 3.54

Oil India Ltd. India 4,255 4,163 7.8 11.2 8.53 7.81 12.43 14.73 (15.79) 4.44

Cairn India Ltd. India 4,128 2,118 2.8 20.7 n.a n.a 7.70 n.a (81.99) 4.21

Kazmunai gas Exploration Prod. Kazakhstan 3,119 (539) 1.3 n.a n.a n.a (11.39) n.a (75.18) n.a

Pakistan Petroleum Ltd. Pakistan 2,566 2,256 3.3 7.6 6.67 5.98 24.73 17.41 (30.59) 5.57

Pakistan Oil fields Ltd. Pakistan 769 663 n.a 8.0 7.88 6.62 29.38 29.62 n.a 9.14

Bode Energy Equipment Co‐A China 527 627 n.a 142.6 53.80 41.94 4.44 13.79 n.a ‐

P/E(x) ROE

Oil & Gas Companies Rela ve Valua ons:

Geologic timescale is a system that deals with stratigraphy (study of rock layers and different layering) that is used to describe the timings of different events such as origin of different life forms and extinction of some of them that have taken place throughout the earth’s history).

10


September 2, 2015

Pakistan OMCs: Improving fundamentals

Fundamentals of the Pakistan Oil Marke ng Companies (OMCs) are slated to improve on the back of: 1) slowdown in circular debt buildup (improving cash flow profile) while a one-off circular debt payment by the govt. (similar to FY13) cannot be ruled out, 2) volumetric growth (MS & HSD) inline with GDP, underpinned by big cket infrastructure connec vity projects (earmarked under CPEC) and 3) forecasted stability in oil prices (keeping inventory losses materially low). On the flip side, heightened currency vola lity can inflate FX losses. In this backdrop, we forecast the sector to post a 3yr earnings CAGR of 14% during FY16E - FY19F. The sector has remained lackluster since the start of 2015 as it underperformed the broader market by 7.2% and is currently trading at a forward FY16F P/E of 7.8x, a 10% dis-count to the KSE-100 Index. We advocate taking exposure in the sector from a medium to long term investment horizon where we recommend taking posi ons in PSO (TP: PkR457/sh), HASCOL (TP: PkR182/sh) and APL (TP: PkR620/sh).

How volumes look going forward? With big cket infrastructure connec vity projects ear‐marked to become part of the macro‐economic canvas, demand for petroleum products is also expected to improve. In this regard, construc on of highways (~2,442km) under the China Pakistan Economic Corridor (CPEC) are expected to improve road access which should resultantly trigger growth in trade ac vi es and simultaneously POL demand. While this would shape the long term volume outlook for the OMC sector, rela vely be er sales of both High Speed Diesel (HSD) and MS (Motor Spirit) is poised to improve the near term vol‐ume outlook of the sector (mul plier effect of underlying economic ac vi es and 26% growth witnessed in motor vehicles on the road since FY12). In this regard, HSD sales have crossed the 7mn ton barrier in FY15, a er a period of 4 years (7%YoY growth in FY15 – high‐est in 7 years). Moreover, increased u liza on of MS (Motor Spirit) due to Compressed Natu‐ral Gas (CNG) load management and reduced price differen al between MS and CNG is driv‐ing the MS volume outlook where sales in FY15 reached 4.7mn, up 21%YoY. With improve‐ment shown during FY15, we forecast Pakistan’s petroleum products sales to grow at a 3yr CAGR of 3% (5.1% excluding FO sales) due to more grounded posi ve expecta ons (avg. GDP growth forecast of 4.9% coupled with a 4yr auto sales CAGR of 25%) amid heightened CNG outages. This volumetric growth is expected to be primarily supported by MS sales (forecasted to grow at a 3yr CAGR of 10%) and HSD (expected to grow at 3yr CAGR of 2%) while FO sales are likely to remain flat between 8.0‐9.0mn tons.

Petroleum products sales projec on:


('000Tons) FY14A FY15A FY16F FY17F FY18F

FO 9,525 9,247 9,247 9,247 9,247

HSD 6,907 7,363 7,511 7,661 7,814

MOGAS 3,864 4,691 5,160 5,676 6,244

JP 801 813 842 871 902

Others 228 249 254 259 264

Total 21,325 22,363 23,013 23,714 24,470

Petroleum products sales and sales growth trend

Source: OCAC

0

2,000

4,000

6,000

8,000

10,000

12,000

FY05

FY07

FY09

FY11

FY13

FY15

MS HSD FO

('000tons)

‐20%

‐10%

0%

10%

20%

30%

40%

50%

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

MS HSD FO

Source: OCAC & AKD Research

11


September 2, 2015

Earnings growth intact! On the back of declining oil prices, performance of the OMC sector during FY15 has been something to forget primarily due to sizable inventory losses. That said, with oil prices expected to soon find the bo om and therea er stabilize in the interna‐onal market, risks of steep inventory losses remain minimal, in our view. Similarly, PkR’s

movement against the US$ is now also es mated to remain in check, therefore, offse ng currency risk. Our economist, Muneeba Shoaib forecasts avg. PkR deprecia on of 2.3% vs. US$ during the next three years. Moreover, we believe an improved liquidity situa on would discourage requirements for excessive borrowing which coupled with a low interest rate environment is likely to provide impetus to the sector’s earning profile. Going forward, backed by volumetric up ck, we forecast OMC sector’s earnings to grow at a CAGR of 14% across FY16E‐FY19F.

Our view on the circular debt: There has been minimum policy headway on resolu on of circular debt besides a slowdown in accre on due to lower interna onal oil prices. The long‐er this issue con nues to remain outstanding, the longer industry assets would remain ed up and away from being put to more produc ve uses. In this regard, the industry has suffered in terms of heightened financial charges and lack of product availability. We are encouraged by recent government ini a ves to resolve this issue (u lity tariff hikes to nar‐row the gap between cost of genera on and billing). However, in the short term, to effec‐vely improve the liquidity profile of the energy chain, the government should consider an‐

other cash injec on amoun ng to~PkR250‐300bn (a la mode Jun’13). Our view is under‐pinned by: 1) lower interna onal oil prices, where we feel the price of oil in the interna onal market is likely to trade in the band of US$40‐50/bbl, therefore, keeping the probability of accelerated monthly circular debt build‐up at a low and 2) it would simultaneously send out a posi ve signal to poten al par cipants in the upcoming priva za on of DISCOs (note that priva za on of 3 DISCOs is slated to take place during FY16). Moreover, it would also set the stage of further planned private investments in the genera on space, especially for the ex‐pected incoming joint Chinese investments.

Infla on linked margins? Yes please! Another posi ve trigger for the sector can arise in the form of linkage of margins on MS and HSD with annual CPI, therefore, making OMC margins infla on adjusted. If approved by the ECC, this move can support the sector’s earnings growth. That said, we a ach a low probability to it taking center stage any me soon due to addi onal infla onary pressures it might create. Recall, previously a er appoin ng PIDE (Pakistan Ins tute of Development Economics) back in Sep’13, the GoP increased OMC mar‐gins on MS and HSD in Nov’14 a er a gap of 13 months where it cited higher prices during the aforemen oned period as the key reason for delaying the increase.

OMCs sensi vity to infla on linked margins



FY16F FY17 FY18

OMC Sector Earnings growth 65% 14% 13%

Infla on Adjustment Earnings growth 78% 24% 21%

PSO Earnings Growth* 92%* 15% 15%

PSO Earnings Growth with Infla on Adjusted* 109%* 25% 24%

HASCOL Earnings Growth 38% 17% 15%

Hascol Earnings Growth with Infla on Adjusted 51% 28% 24%

APL Earnings Growth 26% 13% 6%

APL Earnings Growth with Infla on Adjusted 30% 17% 12%

* Base effect due to high inventory losses in FY15

12



Oil & Gas Exploration Companies (Upstream)

13



PPL: Moving from Passive to Active Buy Price‐PkR135.35; Target Price‐PkR194; Upside to Target Price 43%

We are ini a ng coverage on Pakistan Petroleum Limited (PPL) with a target price of

PkR194/sh, offering an upside of 43% from current price level. Similar to its peers, PPL un-

derperformed the broader market by 30.5% during CY15TD on the back of a steep 30%

decline in interna onal oil prices in FY15 and is presently trading at an implied oil price of

US$18/bbl, at an unjus fied 58% discount to the prevailing crude oil (Arab Light)

price. Backed by incremental produc on (from Gambat South block), the company is es -

mated to post a 3yr earnings CAGR (FY15A-18E) of 8.5% at an avg. oil price assump on of

US$50/bbl. In addi on to this, e-in of recent successful discovery at Mardan Khel and

Makori East 04 in the Tal block should con nue to augment the company’s oil produc on

profile. The company has cumula ve reserves of 690mmboe (69.5 mmbbl oil and 3.6 TCF of

gas) with a remaining reserve life of 13yrs. Presently trading at a FY16E P/E of 7.2x, we

have a Buy stance on PPL.

PPL: Valua on Snapshot

Gambat South the new fron er! Up ll now, PPL has made 6 discoveries in Gambat South

block (where PPL with a 65% stake is also the operator) amoun ng to a cumula ve

~162mmcfd of gas flows while oil flows are at 5,251bopd. In addi on to these flows, the

company is likely to get gas prices for this par cular block upgraded to PP2012 (Petroleum

Policy 2012) where maximum wellhead gas price of fields in this block will be around US$6/

mmbtu. Upon commerciality, this should augment PPL’s earnings by PkR5.25/sh (~30.0% of

FY15A earnings). With commercial produc on from Shahdad (located in Gambat South) likely

to commence shortly, PPL’s annualized earnings can receive another boost of PkR0.91/sh or

by 5% of FY15A earnings. Furthermore, fresh flows from this block should address produc on

decline of the Sui gas field. In addi on to this, commercial produc on from Kinza, Sharf and

Faiz are likely to come online by end FY16.

Shi in produc on mix in favor of oil: PPL’s topline has historically been gas heavy due to a

higher par cipa on (83% in FY09) of gas produc on. That being said, the company’s gas pro‐

duc on has lately been on a declining trend where it has posted a nega ve 5 year (FY09‐14)

CAGR of 3%. Deteriora on in gas produc on is primarily due to weak produc on from PPL’s

100% owned and operated fields, predominantly Sui, due to a natural decline. Conversely,

KSE100 Index vs. PPL


(0.40)

(0.30)

(0.20)

(0.10)

‐

0.10

0.20

0.30

0.40

Aug‐14

Sep‐14

Oct‐1

4

Nov‐1

4

Dec‐14

Jan‐15

Feb‐15

Mar‐1

5

Apr‐15

May‐15

Jun‐15

Jul‐15

Aug‐15

KSE100 PPL

Stock Price Performance

FY14A FY15A FY16F FY17F FY18F

EPS (PkR) 26.1 17.4 18.9 22.4 22.2

EPS Growth 23% ‐33% 9% 19% ‐1%

Dividend yield 7% 6% 6% 7% 7%

PER (x) 5.2 7.8 7.2 6.0 6.1

EV/EBIDTA (x) 3.6 5.2 4.7 4.4 4.3

ROE 28% 17% 17% 18% 16%

ROA 22% 13% 13% 14% 13%

Source: Company Reports & AKD Research

PPL Gambat South EPS Impact: Wells Oil (bopd) Gas (mmcfd) EPS Impact (PkR/sh)

Faiz X‐1 2,215 20 1.15

Kinza X‐1 2,100 12 0.93

Sharf X‐1 199 42 1.19

Wafiq X‐1 400 58 1.08

Shahdad X‐1 337 30 0.91

Total 5,251 162 5.25


KATS Code PPL

Bloomberg Code PPL.PA

Price PkR 135.35

Market Cap (PkRmn) 266,872

Market Cap (US$mn) 2,566.07

Shares (mn) 1,971.72

3M High (PkR) 174.39

3M Low (PkR) 125.27

1Yr High (PkR) 231.81

1Yr Low (PkR) 125.27

3M Avg Turnover '000 1,079.92

1 Yr Avg Turnover '000 1,372.97

3M Avg DT Value (PkR000) 166.68

3M Avg DT Value (US$000) 1.60

1Yr Avg DT Value (PkRmn) 250.94

1Yr Avg DT Value (US$mn) 2.41

Stock Performance 1M 6M CYTD

Absolute (%) ‐8.5 ‐11.0 ‐23.3

Rel. Index (%) ‐6.2 ‐25.9 ‐30.5

Absolute (PkR) ‐12.6 ‐16.7 ‐41.2

14



PPL’s oil produc on during the same period registered a CAGR growth of 25%, owing to phe‐

nomenal produc on growth exhibited by Tal block where PPL is a non‐opera ng JV partner.

Over the course of the past 5 years (FY09‐14), PPL has seen its topline grow at a CAGR of 15%

which is primarily due to exploits of Tal block becoming visible on the company’s topline. This

is further evident by the por on of revenues occupied by Oil which have increased to 42% in

FY14 from 17% in FY09. At the same me, gas based revenue share in the topline has tapered

off to 52% in FY14 from 83% in FY09. In this backdrop, we es mate the company’s bo om

line to post a 3yr CAGR of ~9% during FY15A‐18F. Moreover, with every US$5/bbl increase in

the price of crude oil, earnings CAGR for PPL further improves by 1.17% during FY15A‐18F.

PPL: Sensi vity with Oil Price

Exploring the unexplored: PPL has recently struck ght gas reserves at Rizq‐1 exploratory

well in Kirthar block. In this regard, since the ght gas policy is linked to the 2009 policy, the

field is in line to receive gas pricing at US$6/mmbtu. That said, we feel commercial produc‐

on from this field is likely to commence in 2QFY16. PPL has a 30% stake in the field which is

operated by PGNiG, a Polish firm, and we expect exploita on on this front to take place once

a new ght gas policy is formally formulated.

PPL: Exploratory drilling progress

PPL: Developmental drilling progress

Tal block to remain precious! With the successful discovery of Mardan Khel‐1 and Makori

east‐04, in Tal block, cumula ve crude oil produc on from this block is likely to ramp up to

24k bopd, up ~20% from current levels (20k bopd), transla ng into an earnings impact of

PkR0.5/sh on PPL (~3.0% of FY15A earnings). Going forward, produc on from this block is

likely to increase to 30k bopd, however, due to lack of clear guidance from the operator we

have not incorporated incremental flows in our model . PPL stands to be amongst the key

beneficiaries of any produc on enhancements coming from Tal block as it has a 27.7% work‐

ing interest in the JV.

Valua on and investment perspec ve: PPL’s earnings growth will primarily hinge on incre‐

mental produc on and PkR deprecia on against the US$ going forward, as oil prices are ex‐

pected to stabilize at current levels. In this regard, backed by commercial produc on of re‐

cent discoveries, we expected PPL’s bo omline to register a 3yr CAGR of ~9% during FY15A‐

FY18F. At present, the scrip trades at a FY16E P/E of 7.2x and provides an upside of 43%

EPS (PkR) FY16 FY17 FY18 TP 3yr CAGR

US$30/bbl 16.0 19.3 19.2 163 3%

US$35/bbl 16.7 20.0 19.8 170 5%

US$40/bbl 17.4 20.7 20.5 177 6%

Base Case (US$50/bbl) 18.9 22.4 22.2 194 9%

US$60/bbl 20.2 23.9 23.6 205 11%

US$65/bbl 20.9 24.7 24.3 212 12%

US$70/bbl 21.6 25.6 25.3 220 13%


Operator MOL

Other Partners PPL; OGDCL; GHPL; POL

Daily Average Production:

Manzalai 70 MMscf gas; 828 bbl cond.

Makori 2.2 MMscf gas; 76 bbl oil

Makori East 63 MMscf gas; 14,663 bbl oil

Mamikhel 34.40 MMscf gas; 1,233 bbl cond.

Maramzai 98 MMscf gas; 3,700 bbl cond.

Well Concession PPL Stake % of target achieved Partners Status

Dhok Sultan X‐1 Dhok Sultan 75% 87% GHPL Drilling in Progress

Nasr X‐1 Gambat South 65% 94% GHPL and AROL Tes ng

Kabir X‐1 Gambat South 65% 100% GHPL and AROL Tes ng

Fazal X‐1 Hala 65% 92% ENI Drilling in Progress

Well Concession PPL Stake % of target achieved Partners Status

Adhi‐24 Adhi 39% 98% OGDC and POL Drilling in Progress

Adhi‐23 Adhi 39% 70% OGDC and POL Drilling in Progress




15



against our NAV based target Price of PkR194/sh (NAV of developed assets at PkR157/sh

while the value of explora on op on is at PkR37/sh). Buy!

Result review: In‐line with a 30%YoY decline in oil prices in FY15, PPL’s topline declined by

13%YoY in FY15 despite a 24%YoY up ck in the company’s oil produc on. During the period

under review, the company’s NPAT declined by 33%YoY to PkR34.3bn (EPS: PkR17.4) vs.

NPAT of PkR51.4bn (EPS: PkR26.1) in FY14. On a quarterly basis, the company’s bo omline

eased off by 45%QoQ to PkR4.3bn (EPS: PkR2.18) in 4QFY15 vs. NPAT of PkR7.8bn (EPS:

PkR3.96) in 3QFY15. Sharp decline in 4QFY15 profitability is primarily due to 24%QoQ in‐

crease in company’s field expenditures. Key highlights of the FY15 result include: 1) 28%YoY

increase in field expenditure, 2) gross and opera ng profits declining by 31%YoY each, and 3)

~1.9x increase in other opera ng expense which rose to PkR7.6bn in FY15.

PPL: FY15 Result review

Risks to Thesis

Higher than an cipated decline in Sui: Sui remains amongst the company’s key earnings

assets and any sharp decline in the flow from the field would nega vely impact PPL’s earn‐

ings profile.

Regulatory risk: Any possible changes in the regulatory framework can undermine earnings

outlook.

Prolonged slump in interna onal oil prices: A prolonged slump in interna onal oil prices will

be detrimental to the company’s bo om line as well a drag on aggressive explora on ac vity

in the coming years.

Pullback in PkR vs. US$: Having its revenues denominated in US$, any posi ve movement in

the PkR against US$ would nega vely impact the company’s earnings profile.

Cash flow risk: The outstanding circular debt issue keeps PPL’s assets ed up and away from

being put to more produc ve uses.

PkRmn FY15 FY14 YoY 4QFY15 3QFY15 QoQ

Net Sales 104,377 119,811 ‐13% 23,792 22,774 4%

Field Expenditures 42,059 32,817 28% 13,612 11,007 24%

Royal es 12,213 14,301 ‐15% 2,781 2,612 6%

Opera ng Profit 50,105 72,694 -31% 7,399 9,155 -19%

Other Income 7,569 6,381 19% 1,521 2,017 ‐25%

Other Charges 7,951 4,103 94% 3,200 552 480%

Finance Cost 554 426 30% 139 138 1%

PBT 49,170 74,547 ‐34% 5,582 10,482 ‐47%

Tax 14,916 23,129 ‐36% 1,276 2,673 ‐52%

PAT 34,253 51,417 -33% 4,306 7,809 -45%

EPS (PkR) 17.37 26.08 2.18 3.96


16

Source: Company Reports



PPL Lease Map

17



PPL: Chart Bank I

Gas Produc on Share

Product wise Revenue Growth

Oil Produc on Share

Revenue Mix

Oil Produc on Growth

0%

20%

40%

60%

80%

100%

120%

FY13A FY14A FY15A FY16F FY17F FY18F

Crude Oil Gas Others

‐40%

‐20%

0%

20%

40%

60%

80%


Crude Oil Gas Others Total

0%

15%

30%

45%

60%

75%

90%

105%

FY12A FY13A FY14A FY15A FY16F FY17F

Fully owned leases Operated JV leases Non‐operated JV leases

‐40%

‐20%

0%

20%

40%

60%

80%

100%


Fully owned leases Operated JV leases

Non‐operated JV leases Total

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%



‐35%

‐25%

‐15%

‐5%

5%

15%

25%

35%

45%




Gas Produc on Growth

18



PPL: Chart Bank II

Arab light vs. PPL Realized Gas Prices

Arab light vs. PPL Realized Oil Prices

EBITDA/BOE (PkR)

EBITDA vs. EBITDA Margins

ROE vs. ROA

60%

62%

64%

66%

68%

70%

72%

74%

76%

78%

‐

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000


EBITDA (PkR mn) EBITDA Margin (RHS)

30

40

50

60

70

80

90

100

110

‐

20

40

60

80

100

120

FY13A FY14A FY15E FY16F FY17F FY18F

Arab light (US$/bbl)

PPL Realized Oil Price (US$/bbl) (RHS)

1.8

1.9

2.0

2.1

2.2

2.3

2.4

‐

20

40

60

80

100

120

FY13A FY14A FY15E FY16F FY17F FY18F


PPL Realized Gas Price (US$/mcf) (RHS)

‐

10

20

30

40

50

60

70


Gas (mmboe) Oil (mmboe)

Produc on Mix (mmboe)

‐

200

400

600

800

1,000

1,200

1,400

1,600


EBITDA/BOE (PkR)

0%

10%

20%

30%

40%

50%

60%


ROE ROA

19



PPL: Key Oil & Gas Assets

Revenues vs. Produc on - Adhi

Revenues vs. Produc on - Sawan

Revenues vs. Produc on - Kandhkot

Revenues vs. Produc on - Makori East

Revenues vs. Produc on - Qadirpur

Revenues vs. Produc on - Manzalai

Revenues vs. Produc on - Sui

Revenues vs. Produc on - Maramzai

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

10,500

11,000

FY14A FY15A FY16E FY17E FY18E

8.10

8.30

8.50

8.70

8.90

9.10

9.30

9.50

9.70

Revenue (LHS) Kandhkot (mmboe)

15,000

17,000

19,000

21,000

23,000

25,000

27,000

29,000

31,000

33,000

35,000


22.00

23.00

24.00

25.00

26.00

27.00

28.00

Revenue (LHS) Sui (mmboe)

‐

2,000

4,000

6,000

8,000

10,000

12,000


1.95

2.00

2.05

2.10

2.15

2.20

Revenue (LHS) Adhi (mmboe)

2,000

2,200

2,400

2,600

2,800

3,000

3,200


1.60

1.65

1.70

1.75

1.80

1.85

1.90

1.95

2.00

2.05

2.10

Revenue (LHS) Qadirpur (mmboe)

4,500

5,000

5,500

6,000

6,500

7,000

7,500


2.00

2.20

2.40

2.60

2.80

3.00

3.20

Revenue (LHS) Sawan (mmboe)

2,000

2,500

3,000

3,500

4,000

4,500

5,000


1.05

1.15

1.25

1.35

1.45

1.55

1.65

1.75

1.85

1.95

2.05

Revenue (LHS) Manzalai (mmboe)

8,000

9,000

10,000

11,000

12,000

13,000

14,000


1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

3.30

3.50

Revenue (LHS) Makori East (mmboe)

4,500

5,000

5,500

6,000

6,500

7,000

7,500


2.20

2.30

2.40

2.50

2.60

2.70

2.80

Revenue (LHS) Maramzai (mmboe)

20



PPL: Annual Databank Shareholding Pattern


* As of Jun ‐ 2014 Annual Report

Category %

Govt of Pakistan 67.51

Associated Companies 7.35

Banks, DFI, NBFIs 1.07

Priva za on Commission 3.55

Valua on Mu ple

Year End Jun-30 FY14A FY15A FY16F FY17F FY18F

EPS (PkR) 26.1 17.4 18.9 22.4 22.0

EPS Growth 22.6% ‐33.4% 8.5% 18.9% ‐2.0%

BVS (PkR) 92.3 101.1 112.4 125.9 139.1

P/BVS(x) 1.5 1.3 1.2 1.1 1.0

PER (x) 5.2 7.8 7.2 6.0 6.2

CFS (PkR) 15.2 26.3 22.4 23.3 26.5

ROE 28.3% 17.2% 16.8% 17.8% 15.8%

ROA 21.8% 12.8% 13.2% 14.1% 12.7%

DPS (PkR) 9.6 8.5 7.5 9.0 8.8

Dividend yield 7.1% 6.3% 5.6% 6.6% 6.5%

Payout Ra o 36.7% 48.9% 40.0% 40.0% 40.0%

Sales growth 17.1% ‐12.9% ‐23.0% 17.2% 0.1%

Gross profit margin 60.7% 48.0% 56.3% 57.8% 57.8%

Net profit margin 42.9% 32.8% 46.3% 46.9% 45.9%

PAT growth 22.6% ‐33.4% 8.5% 18.9% ‐2.0%

Income Statement

(PkR mn) FY14A FY15A FY16F FY17F FY18F

Net sales 119,811 104,377 80,368 94,190 94,300

Royalty and Field Expenditure 47,118 54,272 35,109 39,742 39,803

Gross profit 72,694 50,105 45,258 54,448 54,497

Opera ng Expenses 4,103 7,951 3,441 4,051 3,857

Opera ng Profit 68,591 42,154 41,817 50,398 50,640

Financial charges 426 554 421 421 421

Other Income ‐ net 6,381 7,569 9,639 10,961 9,846

Profit before tax 74,547 49,170 51,035 60,937 60,065

Taxa on 23,129 14,916 13,862 16,729 16,749

Net Profit 51,417 34,253 37,173 44,208 43,316

Balance Sheet

(PkR mn) FY14A FY15E FY16F FY17F FY18F

Current assets 82,749 94,683 90,236 94,698 101,618

Long term assets 153,594 173,130 191,659 218,973 240,460

Total assets 236,343 267,814 281,895 313,671 342,078

Current Liabili es 21,741 35,306 24,672 27,511 27,516

Long term Liabili es 32,685 33,096 35,508 37,920 40,332

Total Liabili es 54,426 68,403 60,180 65,431 67,848

Paid up capital 19,717 19,717 19,717 19,717 19,717

Reserves and Unappropriated Profits 162,200 179,694 201,998 228,523 254,512

Total Equity 181,917 199,411 221,715 248,240 274,230

Total equity and liabili es 236,343 267,814 281,895 313,671 342,078

Cashflow Statement


Cashflow from opera ons 31,833 51,806 44,150 45,908 52,197

Cashflow from Inves ng Ac vi es (25,702) (31,471) (32,299) (31,981) (33,014)

Cashflow from Financing Ac vi es (19,020) (16,760) (12,869) (15,683) (15,326)

Net change in cash (12,891) 3,575 (1,018) (1,756) 3,856

Beginning cash balance 6,184 2,276 5,851 4,833 3,077

Ending cash balance 2,276 5,851 4,833 3,077 6,933

21



PPL: Quarterly Databank


Valua on Mul ples Year End Jun-30 4QFY2014 1QFY2015 2QFY2015 3QFY2015 4QFY2015

EPS (PkR) 6.76 6.94 4.29 3.96 2.18

EPS growth 15.1% 2.7% ‐38.3% ‐7.6% ‐44.9%

PER (x) 5.0 4.9 7.9 8.5 15.5

ROE 29.3% 28.0% 17.9% 16.6% 9.0%

ROA 22.6% 21.5% 13.4% 12.4% 6.0%

BVS (PkR) 92.3 99.2 96.0 95.5 101.1

P/BVS (x) 1.5 1.4 1.4 1.4 1.3

CFS (PkR) 16.1 8.5 12.7 17.9 26.3

P/CFS (x) 8.4 15.9 10.6 7.6 5.2

Sales Growth 1.8% 0.1% ‐13.3% ‐15.2% 4.0%

NPAT Growth 15.1% 2.7% ‐38.3% ‐7.6% ‐44.9%

Gross Margin 57.6% 60.0% 55.8% 40.2% 31.1%

Opera ng Margin 57.6% 60.0% 55.8% 40.2% 31.1%

Net Margin 43.1% 44.2% 31.5% 34.3% 18.0%

Effec ve tax rate 26.6% 30.4% 37.1% 25.5% 22.9%

Profit & Loss Accounts

(In PkRmn) 4QFY2014 1QFY2015 2QFY2015 3QFY2015 4QFY2015

Net Sales 30,945 30,967 26,844 22,774 23,792

Royalty 3,636 3,686 3,134 2,612 2,781

Gross Profit 17,819 18,567 14,983 9,155 7,399

Other Charges 1,135 1,035 3,164 552 3,200

Financial Charges 106 138 139 138 139

Profit Before Tax 18,161 19,674 13,432 10,482 5,582

Taxa on 4,831 5,986 4,981 2,673 1,276

Net Profit 13,330 13,688 8,451 7,809 4,306

Balance Sheet

(In PkRmn) 4QFY2014 1QFY2015 2QFY2015 3QFY2015 4QFY2015E

Long Term Assets 153,594 156,327 160,874 164,884 173,130

Current Assets 82,749 98,030 91,190 87,038 94,683

Total Assets 236,343 254,357 252,064 251,922 267,814

Long Term Liabili es 32,685 33,226 34,908 36,676 33,096


Total Liabili es 54,426 58,752 62,795 63,717 68,403

Share Holders' Equity 181,917 195,605 189,268 188,205 199,411

Total Liabili es & Equity 236,343 254,357 252,064 251,922 267,814

Cash flow Statement


CF from opera ons 31,833 16,802 25,113 35,286 51,806

CF from inves ng ac vi es (25,702) (2,270) (10,769) (14,757) (31,471)

CF from financing ac vi es (19,023) (27) (14,844) (20,839) (16,760)

Net chg. In cash & equiv. (12,892) 14,505 (501) (310) 3,575

Cash & Equiv. At beg. 34,518 21,626 21,626 21,626 21,315

Cash & Equiv. At end 21,626 36,131 21,125 21,315 24,890

22



POL: Drilling benefits from JV Success Buy Price‐PkR337.9; Target Price‐PkR423; Upside to Target Price 25%

We reini ate ac ve coverage on Pakistan Oilfields Limited (POL) with a NAV based target price of PkR423/sh, providing a poten al upside of 25% from current price level. The scrip trades at a FY16E P/E of 8.8x and offers a 1yr E/Y of 11.4% backed by a 8%YoY growth in FY16E earnings. Out of the three predominant explorers, POL has been the worst affected in FY15, mainly due to its oil skewed topline (oil revenues made up 62% of the company’s total revenues in FY14). Similar to its peers, POL is trading at an implied oil price of US$16.5/bbl, an unjus fied steep 62% discount to interna onal oil prices (Arab Light). Go-ing forward, we expect this discount to narrow as produc on visibility from exploratory wells flow through (due to POL’s rela vely small produc on base, oil discoveries should have a significant impact on the company’s earnings profile). In this backdrop, we es mate POL’s bo om line to grow at a 3yr forward CAGR of 14%, which is backed up by incremen-tal produc on coming from non-operated JVs (predominantly Tal block aided by addi onal flows from Mardan Khel and Makori East 04).

POL: Valua on Snapshot

Improving revenue stream: POL’s revenues have grown by a 5‐year CAGR (FY09‐14) of 20% while earnings have grown at a CAGR of 18% during the same period. Though oil volumes were ~31% of POL’s total produc on (in mmboe terms) in FY14, they contributed 62% to total revenue, giving POL high oil price par ality. Moreover, due to its rela vely smaller pro‐duc on base, POL has been the biggest beneficiary of 25% oil produc on growth from Tal block in FY15 (21% working interest), which had raised the company’s produc on by 10%YoY to 6.6k bopd in FY15. However, the company’s gas produc on eased off by 8%YoY to 71.25mmcfd during FY15 due to absence of produc on from Domail, its operated JV. Currently, POL’s own operated fields have 22% or 1.4k bopd share in the company’s total oil produc on of 6.6k bopd while 66% of total oil produc on comes from MOL operated Tal block. The company’s total recoverable hydrocarbon reserves stand at 83.9mmboe with a reserve life of ~11yrs.

Own explora on ac vi es rather non-existent: At present, the company has one develop‐ment well, Balkassar B‐7A spudded and is in the process of considering a re‐entry in Sadrial well (Ikhlas Block operated by POL with 80% share). In addi on to that, currently there are

KSE100 Index vs. POL



(0.50)

(0.40)

(0.30)

(0.20)

(0.10)

‐

0.10

0.20

0.30

0.40

Aug‐14

Sep‐14

Oct‐14

Nov‐1

4

Dec‐14

Jan‐15

Feb‐15

Mar‐15

Apr‐15

May‐15

Jun‐15

Jul‐15

Aug‐15

KSE100 POL


EPS (PkR) 54.5 35.8 38.6 50.5 52.4

EPS Growth 19% ‐34% 8% 31% 4%

Dividend yield 13% 12% 10% 13% 14%

PER (x) 6.2 9.4 8.8 6.7 6.4

EV/EBIDTA (x) 4.9 6.6 5.7 4.5 4.2

ROE 35% 24% 25% 30% 29%

ROA 23% 15% 17% 20% 20%


POL: Volume Performance


‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY14A FY15F FY16F FY17F FY18F

‐5%

0%

5%

10%

15%

20%

25%

30%

POL Oil production (bopd)

Oil production Growth

66.0

68.0

70.0

72.0

74.0

76.0

78.0

80.0

82.0


‐10.0%

‐5.0%

0.0%

5.0%

10.0%

15.0%

POL Gas Production (mmcfd)

Gas production Growth


Absolute (%) ‐3.5 5.1 ‐10.9

Rel. Index (%) ‐1.1 ‐9.9 ‐18.1

Absolute (PkR) ‐12.2 16.3 ‐41.4

KATS Code POL

Bloomberg Code POL.PA

Price PkR 337.93


Market Cap (US$mn) 768.62

Shares (mn) 236.55


3M Low (PkR) 305.58



3M Avg Turnover '000 370.74

1 Yr Avg Turnover '000 498.11





23



three wells spudded in which POL is a non‐operated JV partner. These wells are operated by MOL, and all three are exploratory wells (MGN‐01 well in Margala North block, Tolanj South‐01 and Makori Deep‐1 in Tal block). Out of these three, target depth of MGN‐01 04 has been reached where it is currently under tes ng phase. Therefore, any posi ve developments from these wells are likely to spur stock price performance.

POL: Developmental drilling progress

3yr forward earnings to grow at a CAGR of 14%: Underpinned by an avg. annual oil produc‐on growth of 5% per annum in the next three years, we forecast POL’s 3yr forward earnings

to post a CAGR of 14%. Growth in oil produc on is expected to emanate from Tal block in the form of successful e‐up of produc on from Mardan Khel and Makori East 04, which is likely to make up for the decline in produc on from other assets in Tal block. Having oil lted reve‐nues, a US$5/bbl increase in interna onal oil price (we have assumed oil prices at US$50/bbl across our projec on horizon) would improve the 3yr forward earnings CAGR by 1.50%. The company’s gas volumes, however, are likely to get tapered off by an avg. 3% per annum, pri‐marily triggered by off plateau produc on from Mamikhel D&P. That said, a major boost to forward earnings should come from enhanced LPG produc on, which has already risen by 97%YoY during FY15. We expect Tal blocks’ produc on to ramp up to 28k‐30k bopd (not in‐corporated in our model due to lack of operator guidance) from its current level of 20k bopd (24k bopd upon realiza on of produc on flows from Mardan Khel and Makori east 04).

POL: Sensi vity with Oil Price

Valua ons & Investment Perspec ve: Our NAV based target price of PkR423/sh provides a poten al upside of 25% from current price level. The scrip trades at a FY16E P/E of 8.8x and offers a 1yr E/Y of 11.4% backed by 8%YoY growth in FY16E earnings. POL also offers a FY16E D/Y of 10% which is not only the highest within the E&P space but is amongst the highest on offer at the KSE. At present, POL is trading at an implied oil price of ~US$16.5/bbl, which is at a discount of 62% to the prevailing crude oil price. In this regard, we feel that further suc‐cessful news on the explora on front is likely to be a price catalyst going forward.

Result review: Owing to a slide in interna onal oil prices during FY15, POL posted NPAT of PkR8.5bn (EPS of PkR35.8) in FY15 vs. NPAT of PkR12.9bn (EPS: PkR54.5) posted in the same period last year, down 33%YoY. POL’s bo omline could have been further dragged down had it not been for: 1) 13.2%YoY increase in volumetric oil sales in FY15 to 6.4k bopd owing to enhanced flows from Tal block and 2) 97%YoY increase in LPG produc on which supplement‐ed the company’s bo omline. Also, the company expensed out 2 dry holes (Pindori‐9 and Malgin) due to which the earnings profile of the company received another hit of PkR2.7bn in the form of increased explora on costs (up 2.8x YoY to PkR4.7bn) during the review period.

POL: FY15 Result review



US$30/bbl 31.3 41.1 42.6 375 6%

US$35/bbl 33.1 43.5 45.1 387 8%

US$40/bbl 34.9 45.8 47.5 399 10%

Base Case (US$50/bbl) 38.6 50.5 52.4 423 14%

US$60/bbl 42.2 55.2 57.3 447 17%

US$65/bbl 44.0 57.5 59.8 459 19%

US$70/bbl 45.9 59.9 62.3 471 20%


Well Concession POL Stake % of target achieved Partners Status

Balkassar B‐7A Balkassar 100% 3% None Drilling in Progress


(PkRmn) FY15 FY14 YoY 4QFY15 3QFY15 YoY

Net Sales 30,881 35,540 ‐13% 6,477 6,481 0%

Opera ng Profit 16,267 19,009 -14% 2,992 2,839 5%

PAT 8,459 12,886 ‐34% 1,092 2,020 ‐46%

EPS (PkR) 35.8 54.5 4.6 8.5

24



Risks to Thesis Regulatory risk: Any possible changes in the regulatory framework can undermine earnings

outlook.

Reserve concentra on: Majority of the company’s reserves are concentrated in Tal block

where any downgrade in reserves can substan ally hurt the company’s reserve life.

Prolonged slump in international oil prices: A prolonged slump in international oil prices

will be detrimental to the company’s bottom line as well a drag on aggressive exploration

activity in the coming years.

Pullback in PkR vs. US$: Having its revenues denominated in US$, any positive movement

in the PkR against US$ would negatively impact the company’s earnings profile.

25



POL: Chart Bank I

Gas Produc on Share


Oil Produc on Share

Revenue Mix



0%

20%

40%

60%

80%

100%

120%


Crude Oil Gas POLGAS Others

‐40%

‐20%

0%

20%

40%

60%

80%


Crude Oil Gas POLGAS Others Total

0%

15%

30%

45%

60%

75%

90%

105%


Fully owned leases Operated joint ventures leases

Non‐operated joint ventures leases

‐30%

‐20%

‐10%

0%

10%

20%

30%




0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%


Fully owned leasesOperated joint ventures leasesNon‐operated joint ventures leases

‐35%

‐25%

‐15%

‐5%

5%

15%

25%

35%

45%




26



POL: Chart Bank II

Arab light vs. POL Realized Gas Prices

Arab light vs. POL Realized Oil Prices

EBITDA/BOE (PkR)


ROE vs. ROA

45%

50%

55%

60%

65%

70%

‐

5,000

10,000

15,000

20,000

25,000



30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

‐

20.0

40.0

60.0

80.0

100.0

120.0



POL Realized Oil Price (US$/bbl) (RHS)

2.6

2.7

2.8

2.9

3.0

‐

20

40

60

80

100

120



POL Realized Gas Price (US$/mcf) (RHS)

‐

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00




‐

500

1,000

1,500

2,000

2,500

3,000


EBITDA/boe (PkR)

0%

10%

20%

30%

40%

50%

60%

70%


ROE ROA

27



POL: Key Oil & Gas Assets

Revenues vs. Produc on - Maramzai


Revenues vs. Produc on - Manzalai

Revenues vs. Produc on - Meyal


Revenues vs. Produc on - Dhulian

Revenues vs. Produc on - Mamikhel

Revenues vs. Produc on - Pariwali

‐

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


0.95

1.05

1.15

1.25

1.35

1.45

1.55

Revenue (PkRmn) (LHS) Manzalai (mmboe)

‐

500

1,000

1,500

2,000

2,500

3,000

3,500


‐

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Revenue (LHS) Mamikhel (mmboe)

‐

1,000

2,000

3,000

4,000

5,000

6,000


0.95

1.15

1.35

1.55

1.75

1.95

2.15

Revenue (LHS) Maramzai (mmboe)

‐

2,000

4,000

6,000

8,000

10,000

12,000


‐

0.50

1.00

1.50

2.00

2.50

3.00


‐

500

1,000

1,500

2,000

2,500

3,000

3,500


0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66


‐

100

200

300

400

500

600

700

800

900


0.26

0.26

0.26

0.26

0.26

0.27

0.27

0.27

0.27

Revenue (LHS) Dhulian (mmboe)

‐

200

400

600

800

1,000

1,200

1,400

1,600


0.42

0.42

0.43

0.43

0.44

0.44

0.45

0.45

0.46

0.46

0.47

Revenue (LHS) Meyal (mmboe)

‐

500

1,000

1,500

2,000

2,500


0.40

0.45

0.50

0.55

0.60

0.65

0.70

Revenue (LHS) Pariwali (mmboe)

28



POL: Annual Databank


Valua on Mul ple


EPS (PkR) 54.5 35.8 38.9 50.9 52.9

EPS Growth 19.0% -34.4% 8.9% 30.6% 3.9%

PER (x) 6.2 9.4 8.7 6.6 6.4

BVS (PkR) 148.8 143.5 148.5 163.5 174.4

P/BVS(x) 2.3 2.4 2.3 2.1 1.9

CFS (PkR) 90.2 50.8 57.8 64.4 67.3

P/CFS (x) 3.7 6.6 5.8 5.2 5.0

ROE 37% 25% 26% 31% 30%

ROA 22% 15% 16% 20% 20%

DPS (PkR) 45.0 40.0 35.0 45.8 47.6

Dividend yield 13% 12% 10% 14% 14%

Payout Ra o 83% 112% 90% 90% 90%

Sales growth 23% -13% -14% 23% 2%

Gross profit margin 53% 53% 56% 59% 59%

Net profit margin 36% 27% 35% 37% 38%

PAT growth 19% -34% 9% 31% 4%

Income Statement


Net sales 35,540 30,881 26,650 32,804 33,329

Opera ng Expense 16,530 14,614 11,713 13,520 13,718

Gross profit 19,010 16,267 14,937 19,284 19,611

Explora on and Admin Expense 1,832 4,868 1,166 1,186 1,188

Opera ng Profit 17,178 11,399 13,771 18,098 18,423

Financial charges 654 987 778 778 778

WPPF 1,140 486 689 905 921

Other Income ‐ net 1,826 1,563 1,247 1,417 1,700


Taxa on 4,319 3,031 4,431 5,887 6,023

Net Profit 12,890 8,459 9,120 11,945 12,400

Balance Sheet


Current assets 21,099 16,253 16,157 20,354 22,165

Long term assets 36,770 39,804 40,131 40,322 40,423

Total assets 57,869 56,056 56,288 60,676 62,588


Long‐term Liabili es 14,339 14,339 14,339 14,339 13,589

Total Liabili es 22,673 22,100 21,168 21,999 21,324

Paid up capital 2,365 2,365 2,365 2,365 2,365

Reservesand Unappropriated Profits 32,829 31,589 32,753 36,310 38,897

Total Equity 35,196 33,956 35,120 38,677 41,264

Total equity and liabili es 57,869 56,057 56,288 60,676 62,588

Cashflow Statement





Net change in cash 3,577 (5,082) 1,338 2,396 1,578



Shareholding Pattern

Category %

Associated Co. 52.86

Banks, FI 16.43

Mutual Funds 5.10

Insurance co. 7.17

Individual 12.01

As per annual report 2014

29



POL: Quarterly Databank


Valua on Mul ples

Year End Jun-30 4QFY2014 1QFY2015 2QFY2015 3QFY2015 4QFY2015

EPS (PkR) 11.77 17.62 4.99 8.54 4.62

EPS growth ‐13% 50% ‐72% 71% ‐46%

PER (x) 7.2 4.8 16.9 9.9 18.3

ROE 32% 53% 14% 26% 12%

ROA 19% 28% 8% 14% 8%

BVS (PkR) 148.8 133.9 138.9 132.4 148.5

P/BVS (x) 2.3 2.5 2.4 2.6 2.3

CFS (PkR) 77.1 20.3 38.7 54.0 57.8

P/CFS (x) 4.4 16.7 8.7 6.3 5.8

Sales Growth 12% 5% ‐18% ‐21% 2%

NPAT Growth ‐13% 50% ‐72% 71% ‐46%

Gross Margin 47% 61% 55% 45% 46%

Net Margin 30% 42% 15% 31% 17%

Effec ve tax rate 28% 26% 25% 27% 28%



Net Sales 9,363 9,845 8,078 6,418 6,540

Royalty 896 918 643 528 521

Opera ng expenses 4,104 2,965 2,979 3,033 3,027

Gross profit 4,364 5,962 4,457 2,856 2,992

Other income 201 830 110 419 204

Explora on & prospec ng exp 286 288 2,799 18 1,625

General and administra on exp 52 38 39 43 20

Finance cost 221 497 25 275 190

Workers' profit par cipat. fund 151 367 127 157 ‐165

Profit before taxa on 3,854 5,602 1,578 2,784 1,526

Taxa on 1,069 1,435 398 764 434

NAPT 2,785 4,167 1,180 2,020 1,092

Balance Sheet


Long Term Assets 36,771 37,738 36,032 36,522 40,422

Current Assets 21,098 21,665 20,923 19,919 20,753

Total Assets 57,869 59,403 56,955 56,441 61,175



Total Liabili es 22,673 27,728 24,100 25,113 18,830



Cash flow Statement


CF from opera ons 18,248 4,791 9,154 12,781 13,679

CF from inves ng ac vi es (4,276) (1,660) (882) (2,025) (7,270)

CF from financing ac vi es (10,624) (4,065) (7,673) (11,243) (9,698)

Net chg. In cash & equiv. 3,348 (934) 598 (487) (3,289)

Cash & Equiv. At beg 7,478 11,058 10,899 10,826 10,340

Cash & Equiv. At end 10,826 10,124 11,497 10,340 7,051

30



KSE100 Index vs. OGDC



(0.50)

(0.40)

(0.30)

(0.20)

(0.10)

‐

0.10

0.20

0.30

0.40

Aug‐14

Sep‐14

Oct‐1

4

Nov‐1

4

Dec‐14

Jan‐15

Feb‐15

Mar‐1

5

Apr‐15

May‐15

Jun‐15

Jul‐15

Aug‐15

KSE100 OGDC


EPS (PkR) 28.8 20.6 21.0 23.7 23.7

EPS Growth 37% ‐29% 2% 13% 0%


PER (x) 8.9 8.0 7.8 7.0 7.0

EV/EBIDTA (x) 6.5 5.4 5.1 4.5 4.3

ROE 31% 20% 18% 18% 17%

ROA 25% 16% 16% 16% 15%

So


OGDC: Exploring New Avenues Buy Price‐PkR137.01; Target Price‐PkR175; upside to Target Price 28%

We reini ate ac ve coverage on Oil & Gas Development Company Limited (OGDC) with a NAV based Jun’16 target price of PkR175/share, offering a 28% upside from current market price. While we es mate a subdued 3yr forward earnings CAGR of ~4% during FY15A-FY18F, a sharp fall in market capitaliza on (down 33.4% CY15TD) has deviated valua ons rela ve to fundamentals that imply stable earnings. In this regard, oil price simula on indi-cates that the stock is presently trading at an implied oil price of US$17.5/bbl, an unjus -fied 59% discount to prevailing crude oil (Arab Light) price of US$42.9/bbl. Poten al of new discoveries (success ra o of ~1:4 in finding producing assets in the last 5yrs) par cularly in the backdrop of rela vely improved opera ng environment (security, road access, etc) in the Western region of Pakistan can be a source of significant upside risk in the medium to long term. Currently trading at a FY16E P/E of 6.8x, we have a Buy stance on OGDC.

OGDC: Valua on Snapshot

So medium term earnings growth… OGDC is gas‐intensive (80%+ of total produc on),

where its gas produc on grew at a 5‐year CAGR (FY09‐FY14) of 3% as volumes rose from

1,001mmcfd in FY09 to 1,173mmcfd in FY14. However, growth in oil produc on has not kept

pace with gas as oil volume growth has remained flat in the last 5 years while at the same

me, the company’s bo omline grew at a CAGR of 17% underpinned by higher oil prices.

Going forward, despite our es mated 3yr produc on CAGR of ~4%, we expect earnings

growth CAGR to so en to ~4% due to lower oil prices. Note that we have taken US$50/bbl as

our long term Arab light price assump on, whereas with every increase of US$5/bbl in the

interna onal oil price, OGDC’s 3yr forward earnings CAGR improves by 1.2% across our in‐

vestment horizon.

OGDC: Sensi vity to Oil Price

...Aggressive drilling ultimately improves earnings potential: OGDC has close to 41% share

in the country’s oil production while its share in gas is close to 31%. The company has 68

exploration licenses in its portfolio, highest by any company in the sector. OGDCL's total bal‐

ance recoverable reserves as of 1HFY15 stood at 927mmboe (198 million barrels of oil and

5.65 TCF of gas), with an avg. reserve life of 13yrs. Compared to its start of year drilling tar‐

gets (19 exploratory/appraisal wells and 16 development wells), OGDC has only spudded 25

wells in total (14 exploratory and 10 development wells) in FY15. The company has historical‐

ly missed its drilling targets owing to multiple reasons which include: 1) unstable security


EPS (PkR) 28.8 20.3 20.1 21.6 22.6

EPS Growth 37% ‐30% ‐1% 7% 5%


PER (x) 4.8 6.8 6.8 6.4 6.1

EV/EBIDTA (x) 3.6 4.6 4.4 3.9 3.6

ROE 31% 19% 17% 17% 16%

ROA 25% 16% 15% 14% 14%



Absolute (%) ‐12.4 ‐24.8 ‐33.4

Rel. Index (%) ‐10.0 ‐39.8 ‐40.7

Absolute (PkR) ‐19.3 ‐45.1 ‐68.9

KATS Code OGDC

Bloomberg Code OGDC.PA

Price PkR 137.01


Market Cap (US$mn) 5,666.06

Shares (mn) 4,300.93


3M Low (PkR) 127.84




1 Yr Avg Turnover '000 813.54







US$30/bbl 17.3 18.5 19.4 155 ‐1%

US$35/bbl 18.0 19.3 20.2 160 0%

US$40/bbl 18.7 20.2 21.0 165 1%

Base Case (US$50/bbl) 20.1 21.6 22.6 175 4%

US$60/bbl 21.5 23.1 24.2 185 6%

US$65/bbl 22.3 23.9 23.9 189 7%

US$70/bbl 23.0 24.6 25.8 194 8%

31



situation, 2) local hurdles and 3) absence of road networks amongst others. That said, we

believe things are slated to change on the exploratory front due to weakness in the cost of

rigs (in line with the steep fall in international oil prices) and encouraging headway made in

stabilizing security situation, especially Baluchistan. In this regard, a marked improvement in

Baluchistan’s overall security situation has been noticed as stakeholders attempt to iron out

differences. As a result, bullish exploration/drilling activities can also be expected from OGDC

going forward where such a move could provide upside to estimates with exploration in

higher impact areas. Given the company’s impressive success ratio of nearly 1:4 in finding

producing assets (in the past 5yrs), this factor can be a source of significant upside risk in the

medium to long term.

OGDC: Exploratory drilling progress

OGDC: Exploratory drilling progress

Asset mone za ons in FY16-17! With a significant number of development projects ex‐

pected to come online in the upcoming fiscal year, OGDC’s next two years’ earnings are es ‐

mated to improve by an avg. ~4%YoY despite keeping oil price stable (our long term oil price

es mates avg. US$50/bbl). These projects include: 1) Sinjhoro phase II, expected to bring in

addi onal 25mmcfd of gas and 1.6k bopd (full year earnings impact: PkR0.89/sh or 4.4% of

FY15A earnings), 2) Phase II of KPD‐TAY project is also going as per planned meline with

expected flows of 4.0k bopd and 125mmcfd gas (full year earnings impact: PkR2.92/sh or

14.4% of FY15A earnings) and 3) Uch‐II project, which even though is running behind sched‐

ule, is es mated to add PkR1.16/sh (annualized) to the company’s earnings (5.7% of FY15A

Well Concession OGDC Stake % of target achieved Partners Status

Nashpa X‐5 Nashpa 56% 95% PPL and GHPL Drilling in Progress

Kup‐1 Kalchas 50% 92% Mari and Tullow Sidetracking

Lo Deep‐1 Lo 100% 88% None Working on Stuck String

Surqamar‐1 Gurgalot 66% 63% POL and GHPL Sidetracking

Shawa‐1 Nashpa 56% 46% PPL and GHPL Drilling in Progress

TAY E‐1 TAY 77.5 100% GHPL Drilling in Progress

Well Concession OGDC Stake % of target achieved Partners Status

Nashpa‐6 Nashpa 56% 69% PPL and GHPL Drilling in Progress

Kunnar Deep‐10 Kunar 100% 90% None Drilling in Progress

Suleman‐2 Khewari 77.5% 69% GHPL Drilling in Progress

Soghri‐2 Soghri 100% 22% None Drilling in Progress

Source: PPIS, AKD Research

Source: PPIS, AKD Research

OGDC Historical drilling ac vi es

Source: PPIS & Company Reports

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Target Actual Target Actual Target Actual Target Actual Target Actual Target Actual

FY10 FY11 FY12 FY13 FY14 FY15

Exploratory Development Total

32




earnings). In addi on to these, recent discoveries in the company’s own operated fields that

include Jarwar, Palli Deep, Jand and Soghri coupled with a non‐operated JV, Mardan Khel and

Makori East 04 in Tal block are es mated to drive its 3yr forward gas and oil produc on

CAGR of 5% (vs. 5% in the previous 3 yrs) and 4% (vs. 3% in the previous 3 yrs), respec vely.

Valua ons & Investment Perspec ve: While we es mate a subdued 3yr forward earnings

CAGR of ~4% during FY15A‐FY18F, a sharp fall in market capitaliza on (down 33.4%CY15TD)

has deviated valua ons rela ve to fundamentals that imply stable earnings. We have a Buy

stance on OGDC with a NAV based Jun’16 target price of PkR175/share, offering a 28% up‐

side from current market price.

Result Review: Marred by oil price decline, where interna onal oil prices came off by 30%

YoY, OGDC posted a NPAT of PkR87.2bn (EPS: PkR20.29) in FY15, down 30% against NPAT of

PkR123.9bn (EPS: PkR28.81) posted in FY14. That said, on QoQ basis the company’s NPAT

eased off by only 4.5% to PkR19.3bn (EPS: PkR4.48) in 4QFY15 against PkR20.2bn (EPS:

PKR4.69) posted in 3QFY15. Apart from sliding oil price, the key highlights of the FY15 result

remained: 1) 33%YoY increase in explora on and prospec ng costs owing to higher explora‐

on as well as seismic ac vity, 2) 9x YoY increase in income from associate and 4) 3.2ppts

YoY increase in effec ve taxa on in FY15 vs. FY14.

OGDC: FY15 Result Review

PkRmn FY15 FY14 Chg% 4QFY15 3QFY15 Chg%

Net Sales 210,625 257,014 ‐18% 47,932 44,049 9%

Opera ng Expenses 78,658 80,941 ‐3% 21,497 16,473 30%

Gross Profit 131,967 176,073 -25% 26,435 27,576 -4%

Other Income 20,230 19,240 5% 4,658 4,956 ‐6%

Other Charges 22,621 20,759 9% 6,523 5,270 24%

Finance Cost 2,550 2,204 16% 649 658 ‐1%

PBT 127,025 172,350 ‐26% 23,920 28,395 ‐16%

Tax 39,776 48,435 ‐18% 4,678 8,217 ‐43%

PAT 87,249 123,915 -30% 19,243 20,178 -5%

EPS (PkR) 20.29 28.81 4.47 4.69

OGDC incremental flow time line:

Project Expected Completion Expected Production EPS Impact

KPD‐TAY Phase II by Feb’16 Gas 125mmcfd, Oil 4,100bopd, LPG 410TPD PkR2.92/sh

Sinjhoro Phase II by Jan'16 Gas 25mmcfd, Oil 1,600bopd, LPG 120TPD PkR0.89/sh

Uch‐II Main Project by Jan'16 Gas 160mmcfd PkR1.16/sh

Nashpa/Mela May’17 Gas 10mmcfd, Oil 1,120bopd, LPG 340TPD PkR0.60/sh


33



Risks to Thesis

Regulatory risk: Any possible changes in the regulatory framework can undermine earnings

outlook.

Execution risk: OGDC has a poor record of meeting drilling targets which increases downside

risk from production delays and cost overrun.

Security concerns: Security has been on an improving trend in high impact areas of the coun‐

try. That said, any breakdown in the current talks between security forces, the GoP, tribal

leaders and the companies would lead to heightened security threat and in effect discourage

exploration activities in high impact areas (Baluchistan and KPK) and simultaneously degrad‐

ing the company’s reserve base expansion.

Pullback in PkR vs. US$: Having its revenues denominated in US$, any positive movement in

the PkR against US$ would negatively impact the company’s earnings profile.

Cash flow risk: The outstanding circular debt issue keeps OGDC’s assets tied up and away

from being put to more productive uses.

Source: Company Reports

OGDC Lease Map

34



OGDC: Chart Bank I

Gas Produc on Share


Oil Produc on Share

Revenue Mix


0%

20%

40%

60%

80%

100%

120%


Crude Oil Gas Others

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%


Crude Oil Gas Others Total

0%

20%

40%

60%

80%

100%



‐40%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%


Fully Owned leases Operated JV leases


0%

20%

40%

60%

80%

100%



‐35%

‐25%

‐15%

‐5%

5%

15%

25%

35%

45%





35



OGDC: Chart Bank II

Arab light vs. OGDC Realized Gas Prices

Arab light vs. OGDC Realized Oil Prices

EBITDA/BOE (PkR)


ROE vs. ROA

60%

62%

64%

66%

68%

70%

72%

74%

76%

‐

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000



30.0

40.0

50.0

60.0

70.0

80.0

90.0

‐

20.0

40.0

60.0

80.0

100.0

120.0



OGDC Realized Oil Price (US$/bbl) (RHS)

2.0

2.3

2.5

2.8

3.0

3.3

3.5

3.8

4.0

‐

20.0

40.0

60.0

80.0

100.0

120.0



OGDC Realized Gas Price (US$/mcf) (RHS)

‐

50

100

150

200

250

300

350

400

450




‐

50

100

150

200

250

300

350

400

450


EBITDA/BOE (PkR)

0%

10%

20%

30%

40%

50%

60%


ROE ROA

36



OGDC: Key Oil & Gas Assets

Revenues vs. Produc on - Uch


Revenues vs. Produc on - KPD


Revenues vs. Produc on - Nashpa

Revenues vs. Produc on - Dakni

Revenues vs. Produc on - Qadirpur

Revenues vs. Produc on - Bhit & Badhra

‐

10,000

20,000

30,000

40,000

50,000

60,000


0.95

5.95

10.95

15.95

20.95

25.95

Revenue (LHS) KPD (mmboe)

‐

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


17.00

17.50

18.00

18.50

19.00

19.50

20.00

20.50

21.00

21.50

22.00

22.50

Revenue (LHS) Qadirpur (mmboe)

‐

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000


0.95

2.95

4.95

6.95

8.95

10.95

12.95

14.95

16.95

Revenue (LHS) Uch (mmboe)

‐

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000


6.00

6.50

7.00

7.50

8.00

8.50

9.00

Revenue (LHS) Nashpa (mmboe)

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


‐

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50


‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


1.75

2.25

2.75

3.25

3.75

4.25

Revenue (LHS) Dakhni (mmboe)

‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000


1.80

2.00

2.20

2.40

2.60

2.80

3.00

3.20

3.40


‐

2,000

4,000

6,000

8,000

10,000

12,000


1.90

2.40

2.90

3.40

3.90

4.40

Revenue (LHS) Bhit & Badhra (mmboe)

37



Shareholding Pattern OGDC: Annual Databank


Category %

Govt of Pak 74.97

OGDCL Employees 10.05


Mutual Funds 0.72

General Public:

a. Local 0.73

b. foreign 12.63

* As of Jun ‐ 2014 Annual Report Valua on Mul ple


EPS (PkR) 28.81 20.29 20.11 21.56 22.58

EPS Growth 36.5% ‐29.6% ‐0.9% 7.2% 4.7%

PER (x) 4.76 6.75 6.81 6.35 6.07

BVS (PkR) 92.0 104.5 117.0 130.3 144.2

P/BVS(x) 1.5 1.3 1.2 1.1 0.9

CFS (PkR) 22.0 22.8 23.8 22.9 25.0

P/CFS (x) 6.2 6.0 5.8 6.0 5.5

ROE 31% 19% 17% 17% 16%

ROA 25% 16% 15% 14% 14%

DPS (PkR) 9.25 7.75 7.68 8.24 8.63


Payout Ra o 32% 38% 38% 38% 38%

Sales growth 15% ‐18% ‐15% 7% 1%

Gross profit margin 69% 63% 68% 68% 70%

Net profit margin 48% 41% 48% 48% 50%

Income Statement


Net sales 257,014 210,625 180,031 192,519 194,416

Royalty & Opera ng Expense 80,941 78,658 57,128 61,033 57,731

Gross profit 176,073 131,967 122,902 131,486 136,685

Explora on & Admin Expense 11,688 15,935 9,204 9,744 9,359

Opera ng Profit 164,385 116,031 113,698 121,742 127,326

Financial charges 2,204 2,550 2,251 2,251 2,251

WPPF 9,071 6,686 6,575 7,045 7,375

Other Income ‐ net 19,240 20,230 20,360 21,822 22,910


Taxa on 48,435 39,776 38,741 41,539 43,486

Net Profit 123,915 87,249 86,491 92,730 97,124

Balance Sheet


Current assets 194,160 209,894 221,980 250,514 272,802

Long term assets 302,073 335,217 362,271 390,167 423,797

Total assets 496,233 545,112 584,250 640,681 696,599


Long‐term Loans 52,516 52,766 53,016 53,266 53,516

Total Liabili es 100,561 95,523 81,214 80,339 76,238

Paid up capital 43,009 43,009 43,009 43,009 43,009

Reserves and Unappropriated Profits 352,662 406,579 460,028 517,332 577,351

Total Equity 395,671 449,588 503,037 560,341 620,361

Total equity and libili es 496,233 545,112 584,250 640,681 696,599

Cashflow Statement





Net change in cash (2,301) 13,482 10,424 7,483 (12,346)



38



OGDC: Quarterly Databank


Valua on Mul ples


EPS (PkR) 7.67 6.58 4.54 4.69 4.47

EPS growth 39% ‐14% ‐31% 3% ‐5%

PER (x) 4.5 5.2 7.5 7.3 7.7

ROE 33% 27% 19% 19% na

ROA 27% 22% 15% 15% na

BVS (PkR) 92.0 98.5 97.5 100.2 ‐

P/BVS (x) 1.5 1.4 1.4 1.4 na

CFS (PkR) 11.7 6.6 9.5 13.5 ‐

P/CFS (x) 11.7 20.8 14.4 10.1 #DIV/0!

Sales Growth 4% ‐3% ‐16% ‐19% 9%

NPAT Growth 39% ‐14% ‐31% 3% ‐5%

Gross Margin 64% 67% 64% 88% 32%

Net Margin 49% 44% 36% 46% 40%

Effec ve tax rate 22% 32% 41% 29% 20%



Net Sales 66,652 64,396 54,248 44,049 47,932

Royalty 7,742 7,416 6,105 4,963 5,253

Opera ng expenses 15,580 13,213 12,920 11,023 15,779

Transporta on charges 565 615 419 487 464

Gross profit 42,765 43,152 34,804 38,600 15,412

Other income 4,956 6,280 3,941 5,269 3,696

Finance cost 446 612 631 658 649

Profit before taxa on 42,162 41,580 33,130 28,395 23,920

Taxa on 9,186 13,270 13,612 8,217 4,678

Profit for the year 32,976 28,310 19,518 20,178 19,243

Balance Sheet


Long Term Assets 302,073 307,568 323,210 337,070 302,073

Current Assets 194,160 209,400 198,312 197,768 194,160

Total Assets 496,233 516,969 521,522 534,838 496,233



Total Liabili es 100,561 93,509 102,199 103,939 95,523



Cash flow Statement


CF from opera ons 50,390 28,281 40,913 58,234 98,068

CF from inves ng ac vi es (25,468) (7,606) (22,828) (37,210) (51,504)


Net chg. In cash & equiv. (2,301) 11,724 (2,461) (9,195) 13,482

Cash & Equiv. At beg 42,414 40,114 40,114 40,114 30,919

Cash & Equiv. At end 40,114 51,837 37,653 30,919 44,401

39


September 2, 2015


Oil Marketing Companies (Downstream)

40



PSO: Strong Core Earnings Base Buy Price‐PkR335.8; Target Price‐PkR457; Upside to Target Price 36%

We reini ate coverage on Pakistan State Oil (PSO) with a Jun’16 DCF based target price of PkR457/sh, offering a poten al upside of 36% from current price level. A er an impressive performance in FY14, PSO took a hit form sharply declining interna onal oil prices (down 30%YoY) in FY15, leading to a double whammy of: 1) lower oil prices transla ng into re-duced FO prices, which has narrowed realized margin (recall, FO margin contributes nearly 50% towards the company’s gross profit) and 2) high inventory losses. In addi on to this, incremental build-up of circular debt (albeit at a slower pace) has kept penal income re-ceived from IPPs on the lower side. However, with oil prices likely to move in a band of US$40/bbl to US$50/bbl, we believe the worse is over for PSO and forecast the stock to post a 3yr forward earnings CAGR of 13% during FY16F-FY19F. Earnings catalysts include: 1) avg. 3% per annum increase in the company’s volumes and 2) minimum inventory losses in the light of stable forecasted interna onal oil prices.

PSO: Valua on Snapshot

Will oil prices remain here? With a rather sluggish global GDP growth outlook dampening commodity prices, sustainability of oil prices is a func on of whether OPEC decides to curb supply. In this regard, we have earlier discussed that with US shale oil produc on s ll on the higher side, OPEC might have been unsuccessful in its strategy of driving out shale oil produc‐ers. As a result, oil prices are expected to trade in a range of US$40/bbl to US$50/bbl in the medium term. In this backdrop, markdowns on inventory are likely to be minimal going for‐ward, suppor ng our outlook for stronger core earnings growth.

MS and HSD to lead now: With FO prices down by 42.1% to PkR44,625/ton at the end of FY15 against PkR60,792/ton (avg.) in FY14, the company’s earnings profile is hinged on MS and HSD sales going forward. In this regard, given a so oil price outlook transla ng into low‐er product prices, we expect the company to register volumetric sales growth of 10% per annum for MS across the next three years (vs. avg. 18% per annum growth in the previous three years). Addi onally, backed by an expected increase in economic ac vity, HSD sales are likely to grow by 2% per annum across the next three years (vs. avg. –ve 1% per annum growth in the previous three years). Moreover, PSO’s market share has declined to 56% dur‐ing FY15 from 61% in the same period last year owing to a 12%YoY reduc on in the compa‐

KSE100 Index vs. PSO



(0.15)

(0.10)

(0.05)

‐

0.05

0.10

0.15

0.20

0.25

0.30

Aug‐14

Sep‐14

Oct‐1

4

Nov‐1

4

Dec‐14

Jan‐15

Feb‐15

Mar‐1

5

Apr‐15

May‐15

Jun‐15

Jul‐15

Aug‐15

KSE100 PSO

FY14A FY15E FY16F FY17F FY18F

EPS (PkR) 80.3 23.0 44.1 50.6 58.1

EPS Growth 73% ‐71% 92% 15% 15%


PER (x) 4.2 14.6 7.6 6.6 5.8

EV/EBIDTA (x) 8.5 15.4 10.5 8.9 8.3

ROE 28% 7% 13% 14% 14%

ROA 6% 2% 4% 5% 5%


Par cipa on of MS and HSD in Gross profitability


15%

19%

33%

28% 27% 28%

33%

27%24%

33% 34% 33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY13A FY14A FY15E FY16F FY17F FY18FMS HSD

KATS Code PSO

Bloomberg Code PSO.PA

Price PkR 335.75


Market Cap (US$mn) 877.10

Shares (mn) 271.69


3M Low (PkR) 321.39

1Yr High (PkR) 408.05 1Yr Low (PkR) 321.39


1 Yr Avg Turnover '000 1,300.08






Absolute (%) ‐7.8 ‐2.8 ‐6.2

Rel. Index (%) ‐5.4 ‐17.7 ‐13.4

Absolute (PkR) ‐28.3 ‐9.5 ‐22.2

41



ny’s FO sales against a 2%YoY reduc on experienced by the industry. Going forward, we be‐lieve PSO’s market share is likely to remain between 56%‐58% where major impetus should emanate from MS and HSD sales as unlike FO, these products are not exposed to circular debt.

Is circular debt payment in the pipeline? With the upcoming priva za on of DISCOs, one off complete or par al payment of the carried forward stock of circular debt cannot be ruled out. Our discussion with the IMF leads us to believe that the IMF a aches high priority to Pakistan curtailing the monthly buildup of circular debt. That said, it does not discourage a one‐ me circular debt payment as it aims to infuse much needed liquidity into the energy chain. However, without addressing the underlying reason of circular debt buildup (due to outstanding gap between genera on cost and billed amount and issues in T&D) a one‐ me payment will likely not go a long way in curtailing or resolving this issue. Recall during the tail end of FY13, the incoming gov’t injected PkR330bnn (US$3.3bn) across Pakistan’s energy chain with an aim to reduce circular debt. However, circular debt climbed back to PkR500bn levels one year a er the liquidity injec on. That said, given the present decline in interna‐onal oil prices, the avg. monthly buildup of circular debt has slowed down to PkR9.0bn

(during FY15) against PkR43.0bn in FY14. Keeping all these factors in mind, we believe a par‐al circular debt payment would visibly improve the liquidity dynamics of Pakistan’s energy

chain, albeit for a short term.

Valua on and investment perspec ve: PSO offers a poten al upside of 36% against our Jun’16 DCF based target price of PkR457/sh. At current levels the scrip trades at a FY16E P/E of 7.6x which is s ll at a 32% discount when compared to the company’s P/E mul ple during FY04‐FY07, however, this period is also credited with an absence of circular debt. That said, with circular debt buildup to avg. PkR9.0bn/month in FY15 vs. PkR43.0bn/month in FY14, we believe the scrip s ll remains a contender for upward re‐ra ng in the backdrop of increasing demand of MS and HSD.

Risks to Thesis Inventory risk: PSO has a rela vely weaker inventory management system and is resultantly

exposed to the risk of sharp inventory losses in the event of adverse oil price movements.

Currency risk: Being the biggest importer of petroleum products, PSO is con nuously ex‐

posed heightened currency risk.

Liquidity risk: The company is exposed to circular debt (although it has slowed down) which

has created liquidity woes for the company.

Interest rate risk: PSO relies heavily on bank borrowing to finance its opera ons and is ex‐

posed to adverse movements in the interest rate environment.

42



PSO: Chart Bank I

MS Market Share and Volume (Sales)

HSD Market Share and Volume (Sales)

Total White Oil Sales

FO Market Share and Volume (Sales)

Total Black Oil Sales

5,600

5,800

6,000

6,200

6,400

6,600

6,800

7,000

7,200


62.0%

64.0%

66.0%

68.0%

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

FO Volume (000 tons)

FO Market Share (RHS)

3,550

3,600

3,650

3,700

3,750

3,800

3,850

3,900

3,950


46.0%

48.0%

50.0%

52.0%

54.0%

56.0%

58.0%

HSD Volume (000 tons)

HSD Market Share (RHS)

‐

500

1,000

1,500

2,000

2,500

3,000

3,500


45.8%

46.5%

47.3%

48.0%

48.8%

49.5%

50.3%

51.0%

51.8%

MS Volume (000 tons)

MS Market Share (RHS)

11,500

12,000

12,500

13,000

13,500

14,000

14,500


54.0%

56.0%

58.0%

60.0%

62.0%

64.0%

66.0%

PSO Volume (000 tons)

PSO Market Share (RHS)

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


Total White Oil

5,600

5,800

6,000

6,200

6,400

6,600

6,800

7,000

7,200


Total Black Oil

PSO Total Market Share and Volume (Sales)

43



PSO: Chart Bank II

PSO Net Profit Margins

PSO Gross Margins

PSO ROA

EBITA vs. Margins

PSO EV/EBITDA

‐

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000


2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

3.7%

3.9%

4.1%

EBITDA EBITDA Margin

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%


0%

5%

10%

15%

20%

25%

30%


0%

1%

2%

3%

4%

5%

6%

7%


‐

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00


PSO ROE

44



PSO: Annual Databank Shareholding Pattern


Valua on Mul ple

Year End Jun-30 FY14A FY15E FY16F FY17F FY18F

EPS (PkR) 80.3 23.0 44.1 50.6 58.1

EPS Growth 72.6% ‐71.3% 91.7% 14.7% 14.9%

Sales Growth 8.0% ‐28.2% ‐13.7% ‐0.1% 8.1%

Gross Margin 3.1% 2.3% 3.5% 4.0% 4.1%

EBITDA Margin 3.7% 2.7% 3.7% 4.1% 4.2%

Net Profit Margin 1.8% 0.7% 1.6% 1.9% 2.0%

PER (x) 4.2 14.6 7.6 6.6 5.8

ROE 27.8% 7.4% 12.9% 13.6% 14.2%

ROA 5.9% 1.8% 4.2% 5.0% 5.5%

CFS (PkR) (209.4) (105.5) 85.2 84.3 42.2

P/CFS (x) (1.6) (3.2) 3.9 4.0 7.9

BVS (PkR) 289.4 309.4 341.0 371.6 409.6

P/BVS(x) 1.2 1.1 1.0 0.9 0.8

DPS (PkR) 10.0 7.5 15.0 20.0 20.0

Dividend yield 3.0% 2.2% 4.5% 6.0% 6.0%

Payout Ra o 12.5% 32.6% 34.0% 39.5% 34.4%

Income Statement


Net Sales 1,187,639 852,418 735,458 734,404 793,660

COGS 1,150,815 832,496 709,538 704,988 761,364

Gross Profit 36,824 19,922 25,919 29,416 32,296


Opera ng Profit 24,621 12,034 16,130 19,249 21,732

Other Income 2,167 2,107 2,180 2,258 2,341

EBITDA 43,568 23,198 27,309 30,452 33,068

Financial and other charges 9,544 11,457 8,406 8,910 8,464

Taxa on 11,151 4,262 5,640 6,467 7,428

Net Profit 21,818 6,253 11,985 13,742 15,784

Balance Sheet


Current Assets 313,514 292,962 225,314 216,854 230,831

Fixed Assets 5,903 5,534 5,162 4,784 4,398

Other Assets 52,734 52,739 52,743 52,748 52,753

Total Assets 372,151 351,234 283,218 274,387 287,982


Long‐term Liabili es 5,184 5,598 6,046 6,530 7,052

Other Liabilites 5,184 5,598 6,046 6,530 7,052

Share Holders Equity 78,621 84,049 92,637 100,945 111,296

Tot.al Liabili es & Equity 372,151 351,234 283,218 274,387 287,982

Cash Flow Statement


Cash from Opera ng Ac vi es (57,326) (28,660) 23,150 22,916 11,476

Cash from Inves ng Ac vi es 760 355 (907) (957) (1,007)

Cash from Financial Ac vi es 63,682 25,661 (25,896) (22,434) (10,434)

Net chg. In cash & equiv. 5,596 (14,842) (3,652) (474) 35

Cash & Equiv. At beg. of the year 5,227 20,607 5,765 2,112 1,638

Cash & Equiv. At end of the period 9,119 5,765 2,112 1,638 1,673

Category %

Govt of Pakistan 25.51

NIT & ICP 15.55

Mutual funds 14.67

Insurance Co. 8.03

General Public:

a. Local 14.6

b.Foreign 8.24

As per annual report 2014

45



PSO: Quarterly Databank


Valua on Mul ples

Year End Jun 30 3QFY2014 4QFY2014 1QFY2015 2QFY2015 3QFY2015

EPS (PkR) 13.3 8.9 19.3 ‐3.5 ‐3.8

EPS growth ‐55.0% ‐32.8% 116.8% ‐118.3% 8.4%

PER (x) 6.3 9.4 4.3 (23.8) (21.9)

ROE (annualized) 18.8% 12.3% 25.3% ‐4.6% ‐5.0%

ROA (annualized) 3.8% 2.6% 5.3% ‐1.0% ‐1.3%

BVS (PkR) 281.9 289.4 304.8 308.1 307.8

P/BVS (x) 1.2 1.2 1.1 1.1 1.1

CFS (PkR) (377.9) (211.0) (181.1) (223.2) (46.8)

P/CFS (x) (0.9) (1.6) (1.9) (1.5) (7.2)

Sales Growth ‐18.2% 28.9% ‐9.7% ‐25.0% ‐20.2%

NPAT Growth ‐55.0% ‐32.8% 116.8% ‐118.3% 8.4%

Gross Margin 2.6% 2.3% 4.0% 0.4% 0.9%

Opera ng Margin 2.6% 0.5% 4.0% ‐0.8% ‐0.7%

Net Margin 1.4% 0.8% 1.8% ‐0.4% ‐0.6%

Effec ve tax rate 35.0% 35.1% 33.1% 58.5% 36.6%



Net Sales 249,545 321,775 290,435 217,853 173,930

COGS 243,054 314,494 278,820 216,959 172,286

Gross Profit 6,491 7,281 11,615 894 1,644

Opera ng Exp 1,047 5,516 998 2,679 521

Opera ng Profit 7,538 1,766 10,616 -1,785 1,123

Other Income 3,038 2,071 3,273 3,472 2,590

Other Charges 1,851 ‐2,022 4,371 733 305

Financial Charges 2,141 2,131 2,674 3,267 2,741

NPBT 5,537 3,728 7,842 -2,314 -1,640

Taxa on 1,937 1,309 2,599 ‐1,354 ‐600

NPAT 3,600 2,418 5,243 -960 -1,041

Balance Sheet


Long Term Assets 57,736 58,637 58,975 62,226 64,041

Current Assets 318,668 313,514 335,700 307,910 249,798

Total Assets 376,404 372,151 394,674 370,136 313,839



Total Liabili es 299,829 293,530 311,867 286,425 230,226



Cash flow Statement


CF from opera ons (102,674) (57,326) (49,208) (60,640) (12,709)

CF from inves ng ac vi es (272) (760) 9 (23) (186)

CF from financing ac vi es 67,602 63,682 30,465 33,628 (10,070)

Net chg. In cash & equiv. (35,344) 5,596 (18,734) (27,035) (22,964)

Cash & Equiv. At beg. 3,523 3,523 9,119 9,119 9,119

Cash & Equiv. At end. (31,820) 9,119 (9,615) (17,916) (13,845)

46



HASCOL: Continuing Organic Growth! Buy Price‐PkR119.58 (ex‐bonus); Target Price‐PkR152; Upside to Target Price 27%

We ini ate coverage on HASCOL with a Buy ra ng where the scrip provides an upside of 27% against our DCF based Jun’16 target price of PkR152/sh (ex bonus). In CY15TD, the scrip has gained 93%, outperforming the broader market by 86.4%. Our bullish outlook on HASCOL is underpinned by a 3yr earnings CAGR of 26% during CY15E-CY18F backed by an average 11% per annum growth in volumes in the next 3 yrs. The volumetric growth model that HASCOL has effec vely adopted is likely to con nue suppor ng a robust core earnings outlook. The scrip currently trades at a CY15E P/E of 9.4x owing to lack of exposure in cir-cular debt as compared to other bigger players in the industry.

HASCOL: Valua on Snapshot

Winning big: HASCOL’s effec ve inventory management system has enabled the company to grow its market share by 5 folds to +5% in CY14 from 1% in CY11, consequently making in‐roads in an otherwise saturated OMC industry. This improvement in volumetric sales has con nued in 1HCY15 as well where Hascol increased POL volumes by 80%YoY (HSD: +46%YoY, Mogas: +51%YoY and FO: +124%YoY) leading to market share accre on in 1HCY15 (5.5%+ now vs. 1% in 2011). We es mate the company’s cumula ve 3yr forward volumes to grow by 11% per annum on avg. where majority of the boost should come from: 1) increased de‐mand for MS given increased load management of CNG and low price differen al between MS and CNG, 2) overall increase in the economic ac vity which should support HSD demand, 3) increasing demand from the power sector, especially when interna onal oil prices are at mul year lows and 4) retail network expansion.

Circular debt? Not a problem! Although circular debt has remained outstanding and has staged a comeback (reaching PkR550‐PkR600bn as per news reports two years a er the Go‐P’s PkR330bn cash injec on into the energy chain), demand of FO from IPPs is likely to re‐main on the higher side as the GoP scrambles to address chronic power brownouts. In this regard, HASCOL would be beneficial on two fronts: 1) increased demand of FO and 2) pre‐dominantly cash based contracts which negates circular debt becoming a feature of its busi‐ness.

Increasing its physical presence: The company is making strides in the right direc on where it has expanded its retail outlet network (from 210 at end‐Dec'13 to 250 at present with a target to reach 300 outlets by the end of current year). We believe this move should drive MS and HSD sales going forward. Addi onally, the company has strong supply chain manage‐ment exper se where loca on of storage capaci es separates the winners from the losers in the oil marke ng business, In this regard, HASCOL has recently commissioned a new storage facility at Machike (Sheikhupura District) and the company is now in the process of com‐ple ng its Daulatpur depot. In addi on to this, HASCOL has also set its sight on a similar pro‐ject in Mehmoodkot (land already acquired), Sahiwal and Tarrujaba. We believe these ini a‐ves should play a major role in HASCOL’s business model and should help the company fur‐

ther cement its volumetric growth story. In this regard, Mehmoodkot’s storage capacity of 6,750 metric tons should take the company’s cumula ve storage capacity to 33,800 metric tons from 27,050 metric tons presently.

Investment in PRL: HASCOL has acquired a 13.72% stake in PRL and now stands with the likes of PSO and SHEL which also have strategic stakes in the company. We believe this move will create synergies for the company where it should benefit from a rela vely stable supply of

KSE100 Index vs. HASCOL



‐20%

0%

20%

40%

60%

80%

100%

Aug‐14

Sep‐14

Oct‐14

Nov‐14

Dec‐14

Jan‐15

Feb‐15

Mar‐15

Apr‐15

May‐15

Jun‐15

Jul‐15

Aug‐15

HASCOL KSE‐100 Index


CY14A CY15F CY16F CY17F CY18F

EPS (PkR) 7.8 12.7 17.7 22.0 25.7

EPS Growth 64% 116% 40% 24% 17%


PER (x) 20.3 9.4 6.7 5.4 4.7

EV/EBIDTA (x) 7.8 6.4 5.0 4.3 4.0

ROE 21% 30% 29% 27% 24%

ROA 4% 8% 10% 11% 11%


Absolute (%) 15.0 55.8 93.6

Rel. Index (%) 17.3 40.8 86.4

Absolute (PkR) 18.7 51.4 69.4

KATS Code HASCOL

Bloomberg Code HASCOL.PA

Price PkR 143.45

Market Cap (PkRmn) 12,997 Market Cap (US$mn) 124.97

Shares (mn) 109


3M Low (PkR) 110.97

1Yr High (PkR) 143.45 1Yr Low (PkR) 67.70

3M Avg Turnover '000 891.81 1 Yr Avg Turnover '000 1,659.57

3M Avg DT Value (PkR000) 109.34 3M Avg DT Value (US$000) 1.05



47



FO and also free up the company’s credit lines (used for product import). HASCOL should con nue to be the country’s second largest fuel importer behind PSO.

Valua ons & investment perspec ve: HASCOL provides a poten al upside of 27% against our Jun’16 DCF based TP of PkR152/sh (Ex‐bonus). On the back of a 81%YoY increase in 1HCY15 profits, the scrip has outperformed the broader market by 86.4% in CY15TD. Going forward, we believe, volumes hold the key for HASCOL where we forecast the company’s volumetric sales to grow at an avg. of 11% per annum over the course of the next three years leading to a 3yr forward earnings CAGR of 26% during CY15E‐CY18F.

Result review: Despite a 72%YoY increase in overall sales to 620k tons in 1HCY15 vs. 360k tons in the same period last year, HASCOL’s topline remained fla sh at PkR36.4bn in 1HCY15 vs. PkR35.6bn in the corresponding period. Sta c nominal sales are due to 30%YoY decrease in the interna onal oil prices which led decline in domes c prices levels of the petroleum products. During the period under review, the company’s gross margin bolstered by 1ppt to 3.8% vs. 2.8% in 1HCY14, due to be er margins on OMC products (HSD and Diesel). In 1HCY15, the company posted a bo omline of PkR572mn (EPS: PkR5.3) vs. NPAT of PkR316mn (EPS: PkR2.9) in 1HCY14, up 81%YoY. Sequen ally, the company’s earnings eased by 12%QoQ, which is mainly due to 20ppts higher effec ve tax rate in 2QCY15.

HASCOL: Result review: 1HCY15

Risks to Thesis Trading risk: The company has a rela vely efficient inventory management system. That said,

exposure to PkR/US$ and oil price movements is a risk to its inventory management system

as the company becomes a sizable player in the OMC industry

Slow paced growth: HASCOL’s business model revolves around capturing market share and

increasing volumes. Overall slowdown in volumes can hurt the company’s earnings profile in

this scenario.

Increased compe on: Realizing the importance of storage capacity, smaller players are

aggressively looking to build up storage capaci es which can lead to increased compe on

for market share.

(PkR mn) 1HCY15 1HCY14 YoY 2QCY15 1QCY15 QoQ

Sales 36,427 35,560 2% 17,057 19,370 ‐12%

Cost of Sales 35,034 34,554 1% 16,281 18,753 ‐13%

Gross Profit 1,393 1,006 38% 776 616 26%

Selling and Dist. Exp 438 378 16% 269 169 59%

Admin Exp. 179 124 44% 119 59 101%

Other Income 106 59 79% 34 72 ‐52%

Other Exp. 32 13 142% (13) 44 ‐129%

EBIT 850 550 55% 435 415 5%

Finance cost 106 95 11% 66 96 ‐31%

PBT 744 455 64% 369 319 16%

Tax 172 139 24% 127 45 180%

PAT 572 316 81% 242 274 ‐12%

EPS (PkR) 5.26 2.91 2.23 2.52


48



HASCOL: Chart Bank I






‐

100

200

300

400

500

600

700


2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%



‐

100

200

300

400

500

600

700


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%



35

85

135

185

235

285

335

385

435


0.0%

0.8%

1.5%

2.3%

3.0%

3.8%

4.5%

5.3%

6.0%

6.8%

7.5%



‐

200

400

600

800

1,000

1,200

1,400

1,600

1,800


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

HASCOL Volume (000 tons)

HASCOL Market Share (RHS)

50

250

450

650

850

1,050


Total White Oil

100

150

200

250

300

350

400

450

500

550

600

650


Total Black Oil

HASCOL Total Market Share and Volume (Sales)

49



HASCOL: Chart Bank II

HASCOL Net Profit Margins

HASCOL Gross Margins

HASCOL ROA

EBITA vs. Margins

HASCOL EV/EBITDA

(200)

300

800

1,300

1,800

2,300

2,800

3,300

3,800

CY14A CY15F CY16F CY17F CY18F 1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%


0%

5%

10%

15%

20%

25%

30%

35%


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


‐

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00


HASCOL ROE

50



HASCOL: Annual Databank Shareholding Pattern

Category %

Directors 40.08

Associated Co. 25.75

Execu ve 0.86

Mutual Funds 1.71

General Public:

a. Local 25.87

b.Foreign 0.76

As per annual report 2014 Valua on Mul ple

Year End Dec-31 CY14A CY15F CY16F CY17F CY18F

EPS(PkR) 5.9 12.4 17.0 20.9 24.4

EPS Growth 63.5% 110.6% 36.8% 23.3% 16.8%

Sales Growth 70.3% 25.0% 22.7% 13.8% 22.2%

EBITDA Margin 1.4% 1.7% 1.9% 2.0% 1.8%


PER (x) 20.3 9.6 7.0 5.7 4.9

ROE 20.7% 29.1% 28.5% 26.0% 23.3%

ROA 4.1% 7.6% 8.9% 9.7% 9.6%

CFS (PkR) 6.7 (12.0) 4.7 9.1 13.2

P/CFS (x) 18.0 (10.0) 25.6 13.1 9.1

BVS (PkR) 28.5 42.6 59.5 80.4 104.8

P/BVS(x) 4.2 2.8 2.0 1.5 1.1

DPS (PkR) 3.2 6.1 8.4 10.3 12.1

Dividend yield 2.7% 5.1% 7.0% 8.6% 10.1%

Payout Ra o 54.4% 49.4% 49.4% 49.4% 49.4%

Income Statement

(PkR mn) CY14A CY15F CY16F CY17F CY18F

Net Sales 84,856 106,032 130,148 148,100 180,994

COGS 82,877 103,523 126,970 144,335 176,766

Gross Profit 2,037 2,509 3,179 3,764 4,228

Opera ng Expenses 1,098 640 706 764 797

Opera ng Profit 939 1,620 2,197 2,694 3,090

Other Income 190 102 108 115 123

EBITDA 1,226 1,810 2,428 2,952 3,346

Financial and other charges 264 200 202 217 181

Taxa on 225 142 174 198 242

Net Profit 640 1,380 1,929 2,394 2,790

Balance Sheet


Current Assets 10,975 14,173 17,095 19,841 24,039

Fixed Assets 4,642 3,468 3,716 3,622 3,511

Total Assets 15,617 17,641 20,811 23,464 27,550


Long‐term Liabili es 459 255 229 206 218



Cash Flow Statement


Cash from Opera ng Ac vi es 474 (1,301) 508 992 1,432

Cash from Inves ng Ac vi es (1,793) 283 (390) (67) (38)

Cash from Financial Ac vi es (1,615) (668) (569) (1,009) (1,465)

Net chg. In cash & equiv. 296 (1,686) (451) (84) (71)

Cash & Equiv. At beg. of the year 185 2,509 823 373 289

Cash & Equiv. At end of the period 481 823 373 289 218


51



HASCOL: Quarterly Databank

Valua on Mul ples

Year End Dec-31 2QCY2014 3QCY2014 4QCY2014 1QCY2015 2QCY2015

EPS (PkR) 1.2 1.8 1.2 2.5 2.2

EPS growth ‐31.2% 52.3% ‐34.6% 113.5% ‐11.5%

PER (x) 25.3 16.6 25.4 11.9 13.5

ROE 17.3% 25.4% 16.5% 32.7% 16.4%

ROA 3.4% 3.9% 3.3% 7.2% 5.3%

BVS (PkR) 27.4 28.4 28.4 30.7 54.1

P/BVS (x) 4.4 4.2 4.2 3.9 2.2

CFS (PkR) 9.7 19.6 4.4 13.6 7.7

P/CFS (x) 12.3 6.1 27.5 8.8 15.6

Sales Growth ‐14.5% 66.7% ‐19.4% ‐12.1% ‐11.9%

NPAT Growth ‐31.2% 52.3% ‐34.6% 113.5% ‐11.5%

Gross Margin 3.1% 2.3% 1.8% 3.2% 4.6%

Opera ng Margin 1.5% 1.3% 0.4% 2.0% 2.3%

Net Margin 0.8% 0.7% 0.6% 1.4% 1.4%

Effec ve tax rate 43.3% 21.4% 20.2% 14.2% 34.4%


(In PkRmn) 2QCY2014 3QCY2014 4QCY2014 1QCY2015 2QCY2015

Net Sales 16,386 27,323 22,031 19,370 17,057

COGS 15,881 26,683 21,640 18,753 16,281

Gross Profit 505 640 391 616 776

Opera ng Exp 244 293 303 229 388

Opera ng Profit 261 347 88 388 388

Other Income 52 120 120 72 34

Other Charges 13 0 108 44 13

Financial Charges 55 217 ‐61 96 66

NPBT 227 249 161 319 369

Taxa on 98 53 32 45 127

NPAT 129 196 128 274 242

Balance Sheet


Long Term Assets 3,324 4,402 4,642 4,732 7,821

Current Assets 11,683 15,733 10,975 10,459 10,470

Total Assets 15,007 20,135 15,617 15,190 18,290

Long Term Liabili es 513 476 459 545 757


Total Liabili es 12,022 17,042 12,518 11,847 12,389



Cash flow Statement


CF from opera ons 1,057 2,141 474 1,477 838

CF from inves ng ac vi es (702) (1,732) (1,793) (110) (802)

CF from financing ac vi es 1,419 1,648 1,615 28 92

Net chg. In cash & equiv. 1,774 2,057 296 1,395 127

Cash & Equiv. At beg. 185 185 185 489 481

Cash & Equiv. At end 1,959 2,242 481 1,885 608

52



APL: Reaping Benefits of Integration Accumulate Price‐PkR529.8; Target Price‐PkR620; Upside to Target Price 17%

We ini ate coverage on A ock Petroleum Limited (APL) where the scrip provides an upside

poten al of 17% against our DCF based target price of PkR620/sh. The stock offers a FY16E

D/Y of 8% making it one of the highest yielding companies at the KSE-100 Index and cur-

rently trades at a FY16E P/E of 10.6x. Over next three years, the company’s earnings are

es mated to grow at a CAGR of 14.5% supported by annual market share gains of 50-

75bps. Moreover, the company is in the process of developing mul ple bulk oil terminals

which should improve overall efficiencies of the company by unlocking supply chain con-

straints enabling it improve its overall presence across Pakistan. Addi onally, the company

being a major asphalt player in the market is poised to benefit from the construc on of

large scale road connec vity projects earmarked under the Chinese Pakistan Economic

Corridor (CPEC).

APL: Valua on Snapshot

Volumes growth to hold the key: OMC sector has historically been and is expected to remain

all about volumes. In this regard, the company’s market share during FY15 has averaged at

9.6%, virtually stagnant when pi ed against its market share of 9.4% in FY14. We expect the

opera ng environment for the company to improve going forward as volumes of regulated

products (MS and HSD) are forecasted to grow. We believe this growth is likely to be aug‐

mented by MS’s low discount to CNG and feel that overall economic developments are likely

to spur HSD’s demand. In this backdrop, we expect demand for MS to grow at a 3yr forward

CAGR of 10.0% while the same for HSD is expected to be around 2.0%. Furthermore, we be‐

lieve the expected increase in regulated products demand is likely to create room for APL

where it can accelerate the pace of its market share growth which in the past 5yrs has grown

from 5.6% in FY10 to 9.6% at present.

APL increasing its physical footprint! The company has kept up with its policy of increasing

its presence in all corners of Pakistan. In this regard, the company recently inaugurated its

500th retail outlet and currently the company has 513 retail outlets under its belt out of

which 34 outlets were streamed online during 9MFY15. Moreover, the company plans to

con nue with its current retail sites expansion plan where it plans to roll out between 40 to

50 retail outlets per year, augmen ng its current retail presence. In addi on to this, the com‐

pany has recently enhanced its storage capacity at Keamari Terminal with an aim to facilitate

the increased import of MS. Moreover, developmental work is on‐going on Mehmoodkot oil

terminal as it would strengthen the company’s supply chain and enhance product availability

in the Punjab province. Furthermore, with similar bulk oil terminals being developed at Sa‐

hiwal, Shikarpur and Habibabad districts, the company aims to induce more cost efficiencies

into its business model and improve upon its current 40k metric ton storage capacity.

Asphalt to provide further trac on to the bo omline: The Company remains amongst the

key players involved in asphalt marke ng where it would be amongst the prime beneficiaries

of road network expansion as well as auxiliary road network development. With respect to

the recently announced CPEC, a 2,442km roadway megaproject connec ng China’s Kashgar

region with Pakistan’s Gwadar port lends credence to the company's asphalt volume outlook.

KSE100 Index vs. APL



(0.20)

(0.15)

(0.10)

(0.05)

‐

0.05

0.10

0.15

0.20

0.25

0.30

Aug‐14

Sep‐14

Oct‐1

4

Nov‐1

4

Dec‐14

Jan‐15

Feb‐15

Mar‐1

5

Apr‐15

May‐15

Jun‐15

Jul‐15

Aug‐15

KSE100 APL



EPS (PkR) 52.2 39.6 50.0 56.2 59.5

EPS Growth 11% ‐24% 26% 12% 6%


PER (x) 10.2 13.4 10.6 9.4 8.9

EV/EBITDA 5.8 8.3 5.4 4.9 4.7

ROE 31% 23% 28% 30% 31%

ROA 13% 9% 12% 13% 13%


Absolute (%) ‐8.8 1.9 ‐1.8

Rel. Index (%) ‐6.4 ‐13.1 ‐9.0

Absolute (PkR) ‐50.9 9.7 ‐9.8

KATS Code APL

Bloomberg Code APL.PA

Price PkR 529.83

Market Cap (PkRmn) 43,946 Market Cap (US$mn) 422.56

Shares (mn) 82.94


3M Low (PkR) 526.00



3M Avg Turnover '000 17.51 1 Yr Avg Turnover '000 41.66

3M Avg DT Value (PkR000) 9.87 3M Avg DT Value (US$000) 0.09



53



Valua on and investment perspec ve: We project the company to post a bo om line

growth of 14% on average in the next three years driven by improving market share and reju‐

venated asphalt sales. We have an Accumulate stance on APL which provides an upside of

18% against our DCF based Jun’16 target price of PkR620/sh and offers an FY16E D/Y of 8%

where it remains amongst the highest dividend yielding companies at the bourse.

FY15 Result Review: During the period under review, the company posted a bo omline de‐

cline of 24%YoY to post a NPAT of ~PkR3.3bn (EPS: PkR39.6) against a NPAT of PkR4.3bn

(EPS: PkR52.2) in FY14. Such dismal performance is primarily a ributed to a 30% decline in

interna onal oil price in FY15 despite a 7%YoY growth in volumes. Fall in interna onal oil

price brought with itself sizable inventory losses which kept the company’s gross profitability

at bay, declining by 17%YoY to PkR4.9bn during FY15 against PkR5.9bn in the corresponding

period previous year. The company’s other income also declined by 17%YoY, falling to

PkR1.4bn on the back of 16.3%YoY lower commission income earned during the review peri‐

od. On sequen al basis, the company posted an earnings growth of 2.8x QoQ which we be‐

lieve is driven by sizable inventory gains the company enjoyed during 4QFY15.

APL: FY15 Result Review

Risks to Thesis Business risk: One of the key reasons for APL being successful is its efficient business model

(due to its group ver cal integra on) and any disrup on within the supply chain can cause

adversely affect the company.

Liquidity risk: One of the biggest risk that is associated with CPEC is the exposure to credit

sales as the company enters into a contract with the GoP for sale of asphalt. A prolonged

delay in GoP receivables can heighten liquidity concerns for the company.

Increased compe on: Realizing the importance of storage capacity smaller players are ag‐

gressively looking to build up storage capaci es which can lead to increased compe on for

market share.

(PkRmn) FY15 FY14 YoY 4QFY15 3QFY15 QoQ

Net sales 171,730 205,163 ‐16% 37,109 34,468 8%

Cost of Sales 166,803 199,221 ‐16% 34,831 33,698 3%

Gross Profit 4,927 5,942 -17% 2,279 770 196%

Opera ng Expenses 2,189 1,937 13% 652 531 23%

Opera ng Profit 2,738 4,006 -32% 1,627 238 583%

Other Income 1,148 1,376 ‐17% 257 242 6%

Finance Income 1,113 1,068 4% 282 249 13%

Finance Costs 132 134 ‐1% 27 8.237 228%

Share of profit from Associates 5 25 ‐81% 13 ‐3.992 ‐426%

Other Charges 334 435 ‐23% 147 50 194%

PBT 4,538 5,907 -23% 2,005 667 201%

Tax 1,251 1,580 ‐21% 670 183 266%

PAT 3,286 4,327 -24% 1,334 484 176%

EPS (PKR) 39.6 52.2 ‐24% 16.1 5.8 176%


54



Source: Company Reports & AKD Research *Note: Cashflows for 6Months ended Jun 30'13

APL: Chart Bank I






‐

200

400

600

800

1,000

1,200

1,400


6%

7%

8%

9%

10%

11%

12%

13%



600

620

640

660

680

700

720

740

760

780

800

820


9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%



100

150

200

250

300

350

400

450

500


5.0%

5.3%

5.5%

5.8%

6.0%

6.3%

6.5%

6.8%

7.0%

7.3%

7.5%



‐

500

1,000

1,500

2,000

2,500

3,000


8%

9%

9%

10%

10%

11%

APL Volume (000 tons)

APL Market Share (RHS)

600

700

800

900

1,000

1,100

1,200

1,300

1,400


Total White Oil

600

700

800

900

1,000

1,100

1,200

1,300


Total Black Oil

APL Total Market Share and Volume (Sales)

55



APL: Chart Bank II

APL Net Profit Margins

APL Gross Margins

APL ROA

EBITA vs. Margins

APL EV/EBITDA

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


2.5%

3.0%

3.5%

4.0%

4.5%

5.0%


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


0%

5%

10%

15%

20%

25%

30%

35%


0%

2%

4%

6%

8%

10%

12%

14%


‐

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00


APL ROE

56



APL: Annual Databank Shareholding Pattern

Category %

Directors 6.78

Associated Companies 72.51

NIT, ICP 0.07


Ins, Modarabas & leasing 4.79

General Public:

a. Local 6.45

b.Foreign Co. 0.23

* As of Jun ‐ 2014 Annual Report


Valua on Mul ple


EPS (PkR) 52.2 39.6 50.0 56.2 59.5

EPS Growth 10.8% ‐24.0% 26.1% 12.5% 5.9%

Sales Growth 24.6% ‐16.3% ‐7.9% 5.2% 5.3%

Gross Margin 2.9% 2.9% 4.1% 4.4% 4.4%

EBITDA Margin 3.1% 2.9% 4.3% 4.5% 4.5%


PER (x) 10.2 13.4 10.6 9.4 8.9

ROE 31.4% 23.1% 28.1% 30.4% 30.9%

ROA 12.7% 9.2% 12.0% 12.8% 13.0%

CFS (PkR) 28.6 (14.8) 98.6 98.5 106.4

P/CFS (x) 18.5 (35.9) 5.4 5.4 5.0

BVS (PkR) 166.4 171.3 177.7 185.0 192.7

P/BVS(x) 3.2 3.1 3.0 2.9 2.7

DPS (PkR) 47.5 34.5 43.5 48.9 51.8

Dividend yield 9.0% 6.5% 8.2% 9.2% 9.8%

Payout Ra o 91.1% 87.1% 87.1% 87.1% 87.1%

Income Statement


Net Sales 205,163 171,730 158,144 166,405 175,231

COGS 199,221 166,803 151,687 159,124 167,444

Gross Profit 5,942 4,927 6,457 7,281 7,787


Opera ng Profit 5,381 3,886 5,828 6,474 6,769

Other Income 1,376 1,148 1,644 1,832 2,042

EBITDA 6,362 4,943 6,853 7,507 7,830

Financial and other charges 435 334 311 345 361

Taxa on 1,580 1,251 1,438 1,533 1,538

Net Profit 4,327 3,286 4,146 4,662 4,937

Balance Sheet


Current Assets 31,249 32,875 31,608 33,054 34,627

Fixed Assets 2,837 3,788 3,022 3,240 3,442

Total Assets 34,086 29,912 34,629 36,294 38,069


Long‐term Liabili es 582 605 702 772 848



Cash Flow Statement


Cash from Opera ng Ac vi es 1,457 4,735 8,182 8,169 8,829

Cash from Inves ng Ac vi es 779 (4,000) (547) (4,073) (4,100)

Cash from Financial Ac vi es (4,555) (3,521) (3,547) (3,990) (4,222)

Net chg. In cash & equiv. (2,320) (2,785) 4,088 106 507

57




APL: Quarterly Databank

Valua on Mul ples


EPS (PkR) 8.17 15.17 2.52 5.84 16.09

EPS growth ‐30.9% 85.8% ‐83.4% 131.7% 175.5%

PER (x) 16.2 8.7 52.5 22.7 8.2

ROE 19.6% 40.0% 6.5% 15.8% 39.4%

ROA 7.9% 14.2% 3.2% 7.0% 17.8%

BVS (PkR) 166.4 151.6 154.1 147.4 163.5

P/BVS (x) 3.2 3.5 3.4 3.6 3.2

CFS (PkR) 17.6 (14.3) (12.2) 57.1 na

P/CFS (x) n.m n.m n.m n.m n.m

Sales Growth 21.7% ‐5.4% ‐19.0% ‐23.1% 7.7%

NPAT Growth ‐30.9% 85.8% ‐83.4% 131.7% 175.5%

Gross Margin 1.7% 3.5% ‐0.1% 2.2% 6.1%

Opera ng Margin 3.9% 2.4% ‐1.0% 0.7% 10.3%

Net Margin 1.2% 2.3% 0.5% 1.4% 3.6%

Effec ve tax rate 21.3% 30.7% ‐327.9% 27.4% 33.4%



Net Sales 58,498 55,347 44,806 34,468 37,109

COGS 57,493 53,410 44,865 33,698 34,831

Gross Profit 1,005 1,937 -59 770 2,279

Opera ng Exp ‐1,272 621 385 531 ‐1,537

Opera ng Profit 2,277 1,317 -444 238 3,816

Other Income 367 351 294 238 269

Other Charges 2,000 133 5 49 2,336

Financial Charges ‐217 ‐282 ‐203 ‐241 ‐255

NPBT 860 1,817 49 667 2,005

Taxa on 183 558 ‐160 183 670

NPAT 677 1,259 209 484 1,334

Balance Sheet


Long Term Assets 2,837 2,910 3,305 3,345 3,788

Current Assets 31,249 32,420 22,806 24,395 26,124

Total Assets 34,086 35,330 26,111 27,740 29,912

Long Term Liabili es 582 601 619 591 605


Total Liabili es 20,286 22,759 13,331 15,514 16,352



Cash flow Statement


CF from opera ons 1,457 (1,185) (1,010) 4,739 4,735

CF from inves ng ac vi es 779 518 1,020 (1,381) (4,000)


Net chg. In cash & equiv. (2,320) (1,762) (2,474) (161) (2,785)

Cash & Equiv. At beg. of the year 9,970 7,650 7,650 7,650 7,491

Cash & Equiv. At end of the period 7,650 5,890 5,177 7,491 1,920

58

Annexure

Key Issues Agreed between IRAN and P5+1

Uranium enrichment capacity: Iran’s current capacity of 19,000 gas centrifuges would be reduced by more than two‐thirds to

6,104, out of which just over 5,000 would actually be enriching uranium. All of them would be first‐generation centrifuges based

on technology going back to the 1950s. Furthermore, for the first 15 years of the deal Iran would not enrich beyond the level of

3.67% purity, low‐enriched uranium (LEU) of the kind used in nuclear power stations.

Fordow underground enrichment plant: This cavern under a mountain near the city of Qom first came to light in 2009. Under

the agreement, it would be used only for non‐military research. No fissile material would be allowed at the site. These re‐

strictions would apply for 15 years.

The enriched uranium stockpile: Iran’s stockpile of LEU would be reduced from its current level of about 7,500kg to 300kg, a

reduction of 96%. The reduction would be achieved either by shipping the uranium abroad or by diluting it.

Research, development and future enrichment capacity: There would be limits on the R&D work Iran could do on advanced

centrifuges, so that it could not suddenly upgrade its enrichment capacity after the first 10 years of the agreement and bring its

breakout time down from one year to a few weeks almost overnight. Iran would be able to test experimental new centrifuges

on a small scale according to a gradual plan.

Inspections: Inspectors from the International Atomic Energy Agency (IAEA) would have full access to all Iran’s declared nuclear

sites as at present, but with much more advanced technology than they are using now. Inspectors would be able to visit non‐

declared sites where they think nuclear work might be going on. A commission made up of a range of IAEA members would be

set up to judge whether the inspectors’ access requests are justified, and would take its decision by majority vote.

Sanctions relief: As Iran takes the agreed steps listed above to reduce the capacity and proliferation risk of its nuclear infrastruc‐

ture, the US and EU would provide guarantees that financial and economic sanctions will be suspended or cancelled. The EU

would stop its oil embargo and end its banking sanctions, and Iran would be allowed to participate in the Swift electronic bank‐

ing system that is the lifeblood of international finance. Barack Obama would issue presidential waivers suspending the opera‐

tion of US trade and financial sanctions.

A new UN Security Council resolution and the arms embargo: The JCPOA will be incorporated into a new Security Council

resolution intended to replace and supersede six earlier sanctions resolutions imposed on Iran over its nuclear programme. The

resolution will be passed before the end of the month but the agreement will not take effect for 90 days, allowing for the do‐



Source: News Reports & AKD Research

59

AKD SECURITIES LIMITED

Member: Karachi Stock Exchange

Buy > 20% upside potential

Accumulate > 5% to < 20% upside potential

Neutral < 5% to > -5% potential

Reduce < -5% to > -20% downside potent ial

Sell < -20% downside potential

Rating Definitions

This publica on/communica on or any por on hereof may not be reprinted, sold or redistributed without the wri en consent of AKD Securi es Limited. AKD

Securi es Limited has produced this report for private circula on to professional and ins tu onal clients only. The informa on, opinions and es mates herein

are not directed at, or intended for distribu on to or use by, any person or en ty in any jurisdic on where doing so would be contrary to law or regula on or

which would subject AKD Securi es Limited to any addi onal registra on or licensing requirement within such jurisdic on. The informa on and sta s cal data

herein have been obtained from sources we believe to be reliable and complied by our research department in good faith. Such informa on has not been

independently verified and we make no representa on or warranty as to its accuracy, completeness or correctness. Any opinions or es mates herein reflect

the judgment of AKD Securi es Limited at the date of this publica on/ communica on and are subject to change at any me without no ce.

This report is not a solicita on or any offer to buy or sell any of the securi es men oned herein. It is for informa on purposes only and is not intended to

provide professional, investment or any other type of advice or recommenda on and does not take into account the par cular investment objec ves, financial

situa on or needs of individual recipients. Before ac ng on any informa on in this publica on/communica on, you should consider whether it is suitable for

your par cular circumstances and, if appropriate, seek professional advice. Neither AKD Securi es Limited nor any of its affiliates or any other person connect‐

ed with the company accepts any liability whatsoever for any direct or consequen al loss arising from any use of this report or the informa on contained

therein.

Subject to any applicable laws and regula ons, AKD Securi es Limited, its affiliates or group companies or individuals connected with AKD Securi es Limited

may have used the informa on contained herein before publica on and may have posi ons in, may from me to me purchase or sell or have a material

interest in any of the securi es men oned or related securi es or may currently or in future have or have had a rela onship with, or may provide or have

provided investment banking, capital markets and/or other services to, the en es referred to herein, their advisors and/or any other connected par es.

AKD Securi es Limited (the company) or persons connected with it may from me to me have an investment banking or other rela onship, including but not

limited to, the par cipa on or investment in commercial banking transac on (including loans) with some or all of the issuers men oned therein, either for

their own account or the account of their customers. Persons connected with the company may provide corporate finance and other services to the issuer of

the securi es men oned herein, including the issuance of op ons on securi es men oned herein or any related investment and may make a purchase and/or

sale of the securi es or any related investment from me to me in the open market or otherwise, in each case either as principal or agent.

This document is being distributed in the United State solely to "major ins tu onal investors" as defined in Rule 15a‐6 under the U.S. Securi es Exchange Act

of 1934, and may not be furnished to any other person in the United States. Each U.S. person that receives this document by its acceptance hereof represents

and agrees that it: is a "major ins tu onal investor", as so defined; and understands the whole document. Any such person wishing to follow‐up any of the

informa on should do so by contac ng a registered representa ve of AKD Securi es Limited.

The securi es discussed in this report may not be eligible for sale in some states in the U.S. or in some countries.

Any recipient, other than a U.S. recipient that wishes further informa on should contact the company.

This report may not be reproduced, distributed or published, in whole or in part, by any recipient hereof for any purpose.

Disclosures & Disclaimers



pakistan oil & gas - valuations are heavily discounted, (akd bluetop sep 02, 2015)

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