Pakistan Petroleum Ltd (PPL) has posted a consolidated NPAT of PKR14.3bn (EPS PKR5.26) for 1QFY21, up 32% qoq but flat yoy, beating our estimate of PKR4.60/sh. Major deviation from our estimate arose from higher revenues (most likely gas revenues, explained below).
Key Highlights for 1QFY21:
Net Sales are up 25% qoq to PKR39.3bn, partly on the back of 13/10% qoq higher gas/oil production to c.709mmcfd/14,400bpd, which normalized after the lockdowns. Additionally, and against consensus expectations, realized gas prices have evidently not come off qoq despite much lower benchmark crude oil prices. Note that OGRA has not yet notified well-head gas prices for July-December 2020; and PPL has seemingly realized price on higher benchmark than suggested by average international crude oil prices. If OGRA notifies lower well-head gas prices subsequently, PPL may have to trim future revenues, in our view.
Exploration expenses of PKR2.3bn is slightly higher than expected (PKR1.7bn). There were no dry wells during the quarter and PPL had done very little seismic activity. The expenses have doubled qoq (lockdown in the previous quarter).
Other income of PKR759mn are down 67% qoq and 19% yoy because of lower earnings on cash and lack of exchange gains.
PPL’s better-than-expected result follows that of POL which was also exceeded estimates; but the company has taken high well-head gas prices, which can turn out lower when OGRA notifies them. We have a Buy stance on the scrip with a June 2021 TP of PKR128/sh based on flat oil price assumption of US$40/bbl. The stock has corrected 23% in the past 3 months and trades at a P/E of 5.7x and EV/EBITDA of 1.4x only. Market pessimism is driven majorly by the incessant deterioration of the company’s cash-flows amid circular debt buildup – its receivables rose from PKR259bn to PKR312bn during FY20. We think better price discovery requires more conviction on payouts, which in turn need an acceleration of energy sector reforms or some bilateral resolution directly with the government (partial conversion of receivables to cash and government securities, for instance). That is not yet in sight and thus the stock may continue to trade at a discount to market multiples, in our view. (Intermarket Securities Limited).