BMA Capital Management Limited.

Pakistan Oilfields Limited (POL) started FY16 on a weak note with steep underperformance of 20%FYTD against the benchmark index on account of i) sluggish 1QFY16 result (down 66%YoY) and ii) depressed oil prices (down 41%FYTD). The said factors continue to overshadow the promising outlook of POL, slated to deliver a CAGR of 11% and 13% in oil production and earnings, respectively over next three years.

With 1QFY16 result being marred by non‐recurring factors i) dry‐well write off and ii) Makori East (ME) temporary shutdown, we believe the dismal trend in quarterly earnings to have bottomed‐out. We now foresee a recovery of 15%QoQ‐17%QoQ in earnings during next three quarters of FY16 primarily driven by 10%QoQ‐15%QoQ growth in oil production and thus, making current trading level (reflecting an implied oil price of USD32/bbl) an attractive entry point. The growth in oil production will be driven by tiein of Maramzai‐3, ME‐4 and ME‐5. On the exploration front, the grant of ~49% higher wellhead gas price under Petroleum Policy 2012 for new exploratory efforts at TAL block will further strengthen the earnings profile in long term. In this regard, POL is currently exposed to drilling at three concessions in Tolanj South, Tolanj West and Makori Deep. We maintain our conviction on POL (TP: PKR433/sh), offering a total return of 45% over last closing price.

Rebound in earnings to improve sentiment

POL undershot street consensus as 1QFY16 earnings clocked in at PKR5.95/sh, down 66%YoY compared to PKR17.62/sh in 1QFY15. The sharp decline in earnings was due to 12% decline in oil production due to technical issue at ME field and dry‐well write off at Margala North (POL stake: 30%). Given the nonrecurring nature of aforesaid events, we expect increase in oil production from TAL block courtesy i) resumption of ME field and ii) tie‐in of ME‐4 and Maramzai‐3, adding 11% to current oil production will likely improve the earnings in subsequent quarters. Our full year EPS of FY16 and FY17 stands at PKR30/sh and PKR46/sh based on oil price assumption of USD45/bbl and USD50/bbl, respectively.

High impact drilling bolsters outlook

POL’s exploratory and development drilling continues to remain concentrated in TAL Block. On the development side, drilling at ME‐5 (started in Sep’15) is currently at 50% of its target depth. Given a proven track record of Makori East, we expect another stream of oil heavy addition from the said well. On the exploration front, drilling at Tolanj South, Tolanj West and Makori Deep is underway while locations for Mardankhel‐1 and 2 have also been approved by the operator. The recent conversion of new exploratory wells at TAL Block into PP2012, offering ~49% higher wellhead gas price than previous policy, will further strengthen the earnings profile over the long run.

Investment perspective

We believe the dismal trend in quarterly earnings to have bottomed‐out and now foresee a recovery of 15%QoQ‐17%QoQ in earnings during next three quarters of FY16, primarily driven by 10%QoQ‐15%QoQ growth in oil production. At last closing, POL traded at an implied oil price of USD32/bbl, thus, offering an attractive entry point. Given strong long term fundamentals, we re‐iterate our ‘BUY’ stance on POL with a TP of PKR433/sh.