Experts upgrade POL from Sell to Buy with a revised TP of PKR430/sh. Besides high sensitivity to oil prices, which we expect to average US$45/50 per barrel in FY21/22f, the main attraction for the stock is the handsome dividend yields of 13%/14% (highest in the IMS Universe).

POL will add Mamikhel South by March 2021, which will help in plateauing production of its key asset, Tal block. This offsets the potential failure of Jhandial-2 well and the delay in drilling of Mardankhel-4 well in Tal due to security reasons.

Amid limited production growth, we rank E&Ps on their ability to pay dividends. POL thus rises to the top of the pecking order, where it neither is plagued by circular debt nor has ambitious capex plans. Future catalyst can be the resolution of gas prices of Tal block.

Raise to Buy on higher oil prices

We upgrade Pakistan Oilfields Ltd (POL) from Sell to Buy with a revised TP of PKR430/sh (up from PKR338/sh earlier), where we have raised our FY21/22f/LT oil price assumption to US$45/50/50 per barrel from flat US$40/bbl earlier. Contrary to the recent past, POL’s high sensitivity to oil prices (refer table overleaf) is a favored attribute; but also, its high dividend yields – of 13/14% for FY21/22f – is a key reason for our liking. POL has industry-leading average ROEs and FCF yields of c.30% and c.16% over FY21-23f, respectively, because of greater revenues from liquids (more profitable) than gas, hence low exposure to circular debt, and less aggressive capex plans. Nonetheless, a potential failure at Jhandial-2 well will resurface concerns on POL’s reserves life, in our view; but we are more optimistic about the prospects for Tal block (its major asset).

Tal block will remain fruitful for long…

Notwithstanding that the large fields in Tal block are in depletion phase and do not boast long reserves life, the asset continues to promise reliable production growth for POL. Recall that Tal contributes about 75% of POL’s revenues. The near-term catalyst is the commencement of production from Mamikhel South well by March 2021 (discovered July 2020), which had initial flows of over 3,000bpd of oil and 16mmcfd of gas (annualized EPS impact of c.PKR4.5/sh). Meanwhile, MOL Pakistan (the operator of Tal) is processing recently acquired seismic data from the West and KOT regions of Tal block (no drilling there yet) which could pave the way for more drilling at Tal in future, in our view. One dampener at Tal, however, is the reemergence of security issues at Mardankhel, which has delayed the drilling of the next development well beyond FY21, as per POL management; this is similar to the episode in FY16-17 before the discovery was brought into production, but the issue was eventually effectively quelled.

…while success of recent drillings have been modest

We think that the second well at Jhandial field will prove unsuccessful. Three formations at the well have not yielded any hydrocarbons. Before a fourth formation could be tested, the drill string was lost. Hence, POL has resorted to side tracking. In case Jhandial-2 is deemed unsuccessful, we highlight that it is not a part of our base-case estimates, and even a potential downgrade of its reserves will not affect our estimates materially. The recent exploration at Balkassar yielded only modest results (initial flow of 32bpd). POL plans to drill two exploratory wells – in DG Khan and Kirthar blocks – by 3QFY21.

(Intermarket Securities Limited.)