Petroleum:- Pakistan Petroleum Limited - Analysis Of Financial Statements Financial

Petroleum:- PAKISTAN PETROLEUM LIMITED - Analysis of Financial Statements Financial Year 2002 - 2003 Q Financial Year 2008 OVERVIEW (July 29 2008): Recent results 3Q'08PPL posted a sales revenue of Rs 33,126 million for 9M'07 compared to Rs 28,034 million in the same period last year, depicting an increase of 18.2%. Profit after tax of the company grew to Rs 14,971 million during the nine months ended March 31, 2008 compared to Rs 13,105 million during the corresponding period of previous year, representing an increase of 14.2%. The increase in PAT is due to rising world oil prices, which offset the decline in production from Sui gas fields. Also contributing to increase in profitability was an increase in gas production from Kandhkot, Adhi, Qadirpur, Sawan and Tal fields which more than offset the decline in production from Sui and Miano fields, commencement of gas/crude oil production from Nashpa field and phased increase in Sui and Kandhkot gas prices under the 2002 Gas Price Agreement, with the last such increase becoming effective from January 01, 2007. ================================================================================== ========= Unit Quarter ended Quarter ended Nine months Nine months March 31, March 31, ended March 31, ended March 31, 2008 2007 2008 2008 ================================================================================== ========= Natural Gas MMcf 82,922 84,708 248,019 244,413 -----------------------------------------------------------------------------------------Crude Oil / Natural Gas Liquids (NGL) / Condensate Barrels 348,069 393,339 1,100,830 689,902 -----------------------------------------------------------------------------------------Liquehed Petroleum Gas (LPG) Tonnes 5,069 4,183 13,285 9,963 ================================================================================== ========= As is evident from the chart, the sales of natural gas have gone up slightly, while the crude oil, NGL sales have shown better improvement over the same period last year. ================================================================================== ============= E&P Sector's Profitability ================================================================================== ============= PAT (Rs m) EPS (Rs ) DPS (Rs) 9 mths' 08 9 mths' 07 9 mths' 08 9 mths' 07 Chg.(%) 9 mths' 08 9 mths' 07 ----------------------------------------------------------------------------------

------------1.OGDC 36,246 34,627 8.43 8.05 4.7% 6.00 5.50 2.PPL 14,971 13,105 19.85 17.37 14.2% 5.00 4.09 3.POL 5,422 4,561 27.51 23.14 18.9% 4.MARI 1,469 460 39.97 12.51 219.5% 2.24 ---------------------------------------------------------------------------------------------Sub Total 58,106 52,752 10.2% ================================================================================== ============= As can be observed above, the E&P sector has shown an increase in its profits, due to rising international oil prices and an increase in gas wellhead prices . The productivity of both crude and gas has been higher compared to the corresponding period of FY07. ============================================================ Total Oil & Gas Production Statiatics (Daily Average) ============================================================ 9 mths' 08 9 mths' 07 Chg (%) ============================================================ Oil (bpd) 70,165 66,243 5.9% Natural Gas (mmcf/d) 3,964 3,675 2.3% ============================================================ Pakistan's GDP has grown at an average of 5.8% for the last five years. The rapid growth in the industrial sector has triggered a surge in demand for energy products. The country's gas consumption has been rising at a rapid rate, a fiveyear CAGR of 5.4%. The cumulative profitability of the listed E&P companies grown phenomenally over the last few years. The top line of these companies grew at a five-year CAGR of 24.8% mainly due to significant growth in the volumetric sales and significant surge in crude oil prices. Moreover, for the same period, the bottom line increased at a 5-year CAGR of 28.42%. For FY07, the profitability of E&P sector increased by a 4.9%. Oil production, however, grew only by 2.8% during the year to 67,415 bpd in FY07 compared to 65,577 bpd in FY06 and gas production increased negligibly by 0.9% to 3,872 mmcfd from 3,836 mmcfd in FY06. PPL is one of the oldest and largest E&P company in the country. It was incorporated in 1950 subsequent to the promulgation of the Pakistan Petroleum Production Rules, 1949. The primary activities of the company involve exploration, development and production of Pakistan's natural reserves of oil and gas. PPL inherited all the assets and liabilities of its parent, the Burmah Oil Company (Pakistan Concessions) Limited and commenced business on 1st July 1952. The company remained under the management control of its parent, Burmah Castrol, UK until 1997 when the government purchased the entire equity interest of Burmah Castrol PLC, formerly Burmah Oil Company. The government owns 78.4% stake of PPL, the International Finance Corporation (IFC) owns 6.1% and the rest 15% are free-float available in the equity markets of the country. PPL is the second largest Exploration and Production (E&P) company both, in terms of production and reserves. The company's contribution to oil and gas

production in the country is illustrated in the chart. PPL accounts for 26.8% of country's total oil and gas production and 23.9% of total oil and gas reserves. It is also one of the market leaders in terms of its holdings of exploration area. Out of 242,714 sq.kms area under exploration in Pakistan, PPL holds the second largest share, more than 22% in joint venture with partners. PPL has working interest in 24 exploration blocks, of which eight are PPL operated and the other 14, including 4 off-shore are partner operated. Sui and Kandhkot gas fields are two of the major PPL operated fields where PPL has 100% ownership. Sui caters to about one-fifth of the total gas demand in the country. In FY06, Sui contributed 67% of total gas sales of the company, higher than FY05. This increase however was due to less than 100% capacity utilization in FY05. Later, the production from this field has declined due to its gradual depletion. As a result, the contribution of the field is likely to decline in the future. In first nine months of FY07, Kandhkot and Sui fields contributed about 80% of the company's total sales. This was due to the unique pricing formula for the two fields. Both, the Sui and Kandhkot are the backbone of PPL. Mazarani and Adhi are other major fields operated by PPL where the company has 87.5% and 39% stakes respectively. Among the partner-operated fields, Miano, Sawan, Tal and Qadirpur are more prominent. The figure above shows the contribution of each field to the total gas production of PPL. In order to meet the growing energy demands of the country, PPL has enhanced its exploration efforts. This includes the acquisition of new areas and working interests. As various agreements are finalized, the working interests of the company will increase to 24 areas, 19 onshore and 5 offshore. PPL has the second largest exploration programme in the industry. One of the major oil and gas discoveries since FY02 has been in the Nashpa block. The Tal block is another major find. Among the activities undertaken during FY07, the Sarang X-1 well in Kot Sarang block was abandoned in the third quarter of FY07 as the dry hole. However, the seismic survey in Hala and Tajpur blocks has been completed. Besides this, activities also took place in PPL non-operated areas. Moreover, initial phase of drilling of the Adhi well was completed in FY06 and development of Sawan6 and Sawan-10 was also completed. The exploration efforts during FY07 reaped benefits in the form of three discoveries of oil and gas out of 10 exploratory wells drilled during the year. First, an oil discovery of 20.4 mmcfd was made in Tajjal 1 of Gambat block in second half of the current fiscal year. PPL holds 23.68% shares in this joint venture. Besides this, one oil and gas discovery was made at Mela-1 (Nashpa Block) and a gas discovery was made at Latif-1 (Latif Block). Lastly, PPL has recently made a gas condensate discovery in Hala Block at Adam X-1 well in Sindh. A successful drill test system was carried out which flowed at a rate of 1,301 bpd of condensate and 27.4 mmcfd of gas. PPL has 65% stake in this discovery. The testing for other prospective zones has been completed in this area and encouraging results have been produced.

Moreover, testing of one exploratory well drilled in PPL operated Hala Block (Adam X-1) has been completed and the results are encouraging. Another exploratory well in partner operated Tal Block (MamiKhel-1) has also shown encouraging results and is being tested for potential reservoir zones. In addition, two more exploratory wells ie Qadirpur Deep and Kahi Deep-X1 in Tal Block were suspended for further evaluation. The remaining three exploratory wells in S.W. Miano II, Tal (Sumari Deep-X1) and Kot Sarang blocks were plugged and abandoned due to discouraging results. In addition to oil and gas discoveries, PPL has completed three major expansion projects during FY07. These include commissioning of the second LPG/NGL Plant at Adhi. Following commissioning, the performance test was carried out which has confirmed the design capacity of the plant. The completion of this project has more than doubled the field production capacity. Phase II of the SUL Compression at Sui and the revamping of Sui power supply system were the other two major projects completed during the year. At the same time, the Kandhkot Wellhead Gas Compression Project has been initiated to maintain the contractual delivery pressure of gas sales while maximizing the reserves recovery. PPL is also evaluating international business opportunities, both for venture exploration as well as acquisition of developed and undeveloped reserves. The company's efforts in International Exploration have paid off with its successful bid for a block in Yemen in a 50:50 joint venture with OMV as operator. Currently, Product Sharing Agreement (PSA) negotiations are underway with the Government of Yemen for the Block. In addition, a three-member technical/commercial team has visited Morocco, Tunisia and Mauritania for evaluation of exploration opportunities in these countries. Evaluation of exploration investment opportunities in other North African and Central Asian countries has also started. During FY07 the average oil production grew significantly by 58.2% to 2,830bpd from 1,789bpd in FY06. This growth can be attributed mainly to an improvement in production from Adhi field, Tal Block and additional production of 213.2bd from Mela field. The production from Adhi field increased especially after the commissioning of Adhi LPG/NGL Plant II. The FY07 saw a 301.2mmcfd reduction in average gas production from the Sui field, thus depressing gas production of the company. However, increase in production from Sawan in Nashpa Block, Tal Block and Adhi field, managed to partially offset the decline from Sui. As a result, the total gas production declined by 1.8% to 991 mmcfd in FY07, as compared to 1,009mmcfd in FY06. The sales revenue grew by 21% in FY07 to 38.4 billion. A number of factors contributed to this growth in sales. The higher international crude oil prices during FY07, together with the phased price increase under the Sui and Kandhkot Gas Price Agreement 2002 contributed to the growth in sales. Moreover, the increase in production, especially from the Adhi field, Tal Sawan and commencement of Extended Well Test Production from Mela-1 discovery at Nashpa Block, also contributed significantly to the sales growth. The growth in sales and production generated an all time high profit figure for PPL in FY07. The profit after tax for FY07 stood at Rs 16.8 billion,

depicting a 25% growth over FY06, the highest among the three market leaders in the E&P sector. Sales revenue increased by 36% in FY06 as compared to FY05. The phased increase in prices under the Sui and Kandhkot Gas Price Agreement 2002 was prominent factor behind the rising sales and profits. The higher international oil prices backed the trend. The rising gas supplies particularly from the Qadirpur, Tal and Kandhkot fields contributed to higher sales revenue. As a result, profit after taxation increased by a massive 55% in FY06 compared to FY05. The profit margin for PPL continued with its positive trend in the FY06 and FY07. The company soars above the industry with respect to the profit margins. The ROA has shown improvement during FY07 but the ROE has declined nominally. The company has benefited from a 63% growth in other income, one of the highest in the industry. This mainly came from higher financial income from deposits and other sources. Field expenditure increased by 18% in FY06 and 13.4% in FY07 largely due to heightened exploration activities since the company had working interest in 19 blocks in the FY07. The revision in wellhead gas prices of Sui and Kandhkot fields also contributed positively to the company's profitability. PPL has performed well in terms of asset management, exhibiting a positive trend for inventory turnover and DSO. The company's efficiency in inventory management has resulted in its operating cycle being shorter than the industry average. FY07 saw a further increase in the collection period of receivables for PPL and the trade debts continued to mount. Although high DSO is an industry wide trend in the E&P sector but a reduction in the period will improve the company's efficiency and have a positive impact on the company's financial strength. The total assets turnover and sales/equity have also fared better than the average industry for all years, once again depicting the company's strength in asset management. The total assets turnover rose slightly in FY06 whereas the sales to equity ratio fell marginally during the same year. This indicates a better utilization of the company's assets than the industry. PPL has the lowest level of leverage among the major players in the E&P sector. This is evident in the lower debt ratios of the company compared to the other companies. The debt ratios are low and have been steadily declining over the last few years, indicating that the company is largely equity financed. PPL has not undertaken any long term loans during the past few years. This shows that the company does not rely on loans or other such instruments to finance its growing exploration activities. This trend reflects upon the financial strength of PPL compared to its peers. Despite the equity financed nature of the company, the financial charges have been mounting and the TIE ratio of PPL has shown a negative trend since the FY06. This may be attributed partly to the increase in assets subject to financial lease in the last one and a half years. However despite the decline, the TIE remains substantially strong. In the FY07, a large portion of the finance cost accrued to the unwinding of discount on decommissioning cost. The liquidity management of PPL has improved greatly since the FY03 as illustrated in the figure. The liquid funds generated from operating activities contributed to the improvement in the ratio. In FY07, the company managed to catch up with and supersede the industry, thus breaking the trend of lower

than average current ratio. During FY07, PPL has increased its investments in short term instruments, contributing to the improvement in current ratio. Additionally, the company as maintained a lower level of inventory than the other major players in the sector. This reflects company's strength in asset management as well as the liquidity of its asset portfolio. The large amount of cash balances and short term investments maintained by the company will also help PPL in financing future exploration activities. EPS has shown a positive trend for the last few years and the high net profit during FY07 translated into a 25% growth in EPS, bringing it to Rs 24.5 per share. The DPS has shown similar growth as EPS. The company declared a dividend of Rs 11 per share for FY07. Future outlookPPL has shown impressive performance in the third quarter of FY08, both in terms of profitability as well as production. The Sui and Kandhkot Gas Price Agreement provides the company with an edge over the other players, and will continue to add to the profitability of the company. The life of its reserves is around 20 years, thus promising a smooth flow of oil and gas for the next couple of decades. Even though the production from one of the backbone fields, Sui, is expected to decline in the future due to its depletion but the company has still been able to maintain a 100% reserve replacement ratio. However, the company is making efforts to extend the reservoir life and optimize gas recovery of the Sui Upper Limestone (SUL) reservoir. Moreover, the increased production from Tal Block, Adhi, Sawan and Qadirpur blocks is expected to cover up for the decreased production from Sui. The commissioning of the Additional Processing Facilities, Phase II at Adhi has increased the production capacity of the field. This is likely to enhance production of the company in the coming years. PPL has the advantage of holding a good resource base in terms of existing resources. Moreover, the company also enjoys additional reserves potential in some of its existing producing areas like Adhi, Qadirpur etc. This bodes well for the future production potential of the company. In addition, the success rate of PPL exploration activities stands around 25% which is remarkable compared to the 10% international rate. Thus even though, the exploration involves a very high risk of drilling the dry holes, the company's success rate had partially reduced this risk. Furthermore, to revamp its exploration activities, the company has employed modern technology, including computer applications, remote sensing and communications techniques and other devices. This will further improve the success rate for the company. The approval of the Petroleum Policy 2007 by the ECC (Economic Coordination Committee) bodes well for the E&P companies, especially those focusing on exploration activities. Being the largest and oldest gas exploration company, PPL therefore, will be one of the major beneficiaries of the policy. Under the petroleum policy 2007, oil and gas process are now indexed with the reference crude oil price, equal to C&F price of the Arabian/Persian Gulf crude oils, with proper adjustments for the quality differential for calculation of crude oil prices (providing 100% linkage with the international prices). The $36 per barrel cap has also been removed. As a result of this, formula, the gas price per unit will grow by a significant 38.5%. Hence the new policy will provide a positive change, especially to PPL and OGDC, the two companies more

aggressive in their exploration activities. An oil discovery of 20.4 mmcfd was made in the Tajjal-1 of Gambat block in second half of the current fiscal year. PPL holds 23.68% shares in this joint venture. The discovery is expected to increase PPL's EPS by 0.18 in the coming fiscal year. Besides this, the discovery in the Hala Block where PPL holds 65% share will also augment production in future. The new gas pricing formula will enable the company to benefit from the international oil and gas pricing tends unlike the former policy whereby they were offered a 30% ROE in addition to costs. Under the new Agreement, the pricing from both fields was to improve semi annually to reach, by 2007, 50% of international oil prices less applicable discounts under the Petroleum Policy 2001. The phased price increases from the Kandhkot and Sui fields, it is believed, will continue to accentuate profits for the company, especially in the face of the rising international crude oil prices. In addition, the government in July 2007 announced new five-year energy policy. The new policy provides a 6-8% increase in oil and gas production prices on new discoveries the petroleum exploration and development companies would make in future. Secondly, under this policy, gas producers are required to pay 50% of the difference to the government in case the gas is sold to a third party. Previously, the companies could only sell their produce to the government or its entities. However, the existing oil and gas producers will continue to follow the existing policy, hence their rates will remain unchanged. On the other hand, the companies currently under exploration phase or those which have applied for the concession license under the old policy will be allowed to switch to the new policy but would have to offer a price at 0.2 GPG. Lastly, the producers will also have to pay a marine research fee and coastal area development fee of $50,000 per year until the first discovery and the amount would double thereafter, until the declaration of commerciality. The fees would go up during the development phase and reach $500,000 during the production phase. These developments in the policy will also have significant impact on PPL which is the second largest company in the sector. ================================================================================== ============== PAKISTAN PETROLEUM LIMITED-KEY FINANCIAL DATA ================================================================================== ============== INCOME STATEMENT (Rs '000) 2003 2004 2005 2006 2007 ----------------------------------------------------------------------------------------------Total Revenue 12,181,320 17,667,508 23,294,169 31,756,712 38,382,645 Field, prospecting and 5,944,870 6,260,909 6,951,772 8,171,060 9,264,776 development expenditure Royalties 1,297,787 1,953,576 2,673,146 3,744,822 4,576,591 Other Income 303,608 169,507 546,772 1,484,946 2,417,390 Operating Profit (EBIT) 4,936,763 9,451,273 13,669,251 19,840,830 24,541,278

Financial Charges 76,197 18,254 19,219 30,096 49,424 Other Charges 355,521 566,689 751,076 1,127,195 2,600,106 Net Income Before Taxes 4,839,355 9,063,468 13,474,991 20,189,533 24,356,770 Net Income After Taxes 4,190,445 6,617,399 8,623,152 13,401,001 16,767,774 ----------------------------------------------------------------------------------------------BALANCE SHEET (Rs '000) 2003 2004 2005 2006 2007 ----------------------------------------------------------------------------------------------Stores & Spares 992,856 1,128,514 1,291,177 1,273,261 1,474,655 Trade Debts 2,644,521 3,842,754 4,582,580 6,941,736 9,002,094 Cash & Bank Balances 4,467,405 6,638,233 10,665,554 17,326,903 Total Current Assets 8,798,337 12,629,739 18,039,558 27,053,297 33,592,403 Total Non Current Assets 8,546,189 9,887,657 11,274,763 12,869,583 16,776,722 Total Assets 20,451,034 25,340,061 31,791,802 41,066,097 50,369,125 Total Current Liabilities 5,593,538 5,562,709 7,217,129 8,332,205 7,715,040 Long Term Liabilities 2,680,089 3,725,896 3,329,229 2,545,345 2,556,034 Total Liabilities 8,273,627 9,288,605 10,546,358 10,877,550 10,271,074 Share Capital 6,858,376 6,858,376 6,858,376 6,858,376 6,858,376 Total Equity 12,177,407 16,051,456 21,245,444 30,188,547 40,098,051 ----------------------------------------------------------------------------------------------LIQUIDITY RATIO 2003 2004 2005 2006 2007 ----------------------------------------------------------------------------------------------Current Ratio 1.57 2.27 2.50 3.25 4.35 ----------------------------------------------------------------------------------------------ASSET MANAGEMENT 2003 2004 2005 2006 2007 ----------------------------------------------------------------------------------------------Inventory Turnover(Days) 29.34 23.00 19.95 14.43 6.92 Day Sales Outstanding (Days) 78.15 78.30 70.82 78.69 84.43 Operating Cycle (Days) 107.50 101.30 90.78 93.13 91.35 Total Asset turnover 0.60 0.70 0.73 0.77 0.76

Sales/Equity 1.00 1.10 1.10 1.05 0.96 ----------------------------------------------------------------------------------------------DEBT MANAGEMENT 2003 2004 2005 2006 2007 ----------------------------------------------------------------------------------------------Debt to Asset(%) 40.46% 36.66% 33.17% 26.49% 20.39% Debt/Equity (%) 67.94% 57.87% 49.64% 36.03% 25.61% Times Interest Earned (Times) 69.18 528.56 741.21 709.29 493.81 Long Term Debt to Equity(%) 22.01% 23.21% 15.67% 8.43% 6.37% ----------------------------------------------------------------------------------------------PROFITABILITY (%) 2003 2004 2005 2006 2007 ----------------------------------------------------------------------------------------------Net Profit Margin 34.40% 37.46% 37.02% 42.20% 33.29% Return on Asset 20.49% 26.11% 27.12% 32.63% 41.82% Return on Common Equity 34.41% 41.23% 40.59% 44.39% 43.69% ----------------------------------------------------------------------------------------------PER SHARE 2003 2004 2005 2006 2007 ----------------------------------------------------------------------------------------------Earning per share 6.11 9.65 12.57 19.54 24.45 Price earning ratio 8.21 14.06 17.11 10.84 10.73 Dividend per share 3.00 4.50 5.50 9.00 11.00 Book value 17.76 23.40 30.98 44.02 58.47 ================================================================================== ==============