Ppl

SC SECURITIES (PVT) LTD.

Corporate Member: Karachi Stock Exchange (Guarantee) Ltd.

Pakistan Petroleum Limited

SHORT TERM Sell LONG TERM Buy On Weakness FAIR VALUE

PKR 211

70,000,000

350.00

60,000,000

300.00

50,000,000

250.00

40,000,000

200.00

30,000,000

150.00

20,000,000

100.00

10,000,000

50.00

Total No. of Shares : 685,82 mn

10/21/2005

9/9/2005

9/30/2005

8/19/2005

7/7/2005 7/28/2005

6/16/2005

5/5/2005

5/26/2005

4/13/2005

3/1/2005

VOLUME

3/22/2005

2/8/2005

1/14/2005

12/3/2004

12/24/2004

10/15/2004 11/5/2004

9/3/2004

9/24/2004

8/13/2004

Current Price : PKR 196

7/23/2004

-

CLOSE

EPS for FY05 : Rs 12.57 EPS for FY06F : Rs 16.64 PER : 11.78 Price Performance (%) 1 month : 8.2% 2 month : 15.6% 3 month : -8.8% Price Range Since Listing : PKR 99.80-PKR 310.40 (Dividend Adjusted Prices) Market Capitalization : PKR 126,846m Free Float % : 15% Free Float Shares : 103m

Research Department

SC Securities (Pvt) Ltd. Tel: 92 21 111 111 721 (Ext 107,108) Email: [email protected]

Pakistan Petroleum Limited (PPL) is the pioneer oil and gas exploration and production (E&P) of Pakistan. The company started its operation in 1952, it contributes 25 percent of total gas production of Pakistan. PPL is the owner of the largest gas field of Pakistan i.e. Sui. The company has working interest in all the major geological regions of Pakistan; they are mainly in the form of joint ventures with both local and foreign firms. The company holds working interest in 15 exploration licenses, that comprises of 9 operated and 6 non-operated fields.

Investment Highlights ?? Pakistan Petroleum Limited is currently trading at a discount of 7 percent from our fair value of Rs 211 based on DCF valuation. The upside in PPL seems to be quite negligible keeping a long-term view on the market. Therefore it is advised for long-term investors to keep a positive stance on this stock but they may feel better off in the long run if they follow the Buy On Weakness strategy. ?? The positive aspect about PPL is that on the basis of Gas Price Agreement regarding Sui and Kandhkot gas fields, the company is expected to show healthy growth even without any changes in its reserve and production ratios.

E & P Sector

Pakistan Petroleum Limited Financial Highlights ?? PPL has achieved its ever-highest sales revenues for the FY05 of Rs 23.3 billion representing a 32 percent growth over FY04. ?? In FY05 PPL has shown substantial growth in revenues and has posted the highest ever Profit After Tax in its history of Rs 8.6 billion, an improvement of 30 percent over last year and an earnings per share of Rs 12.57 up from Rs 9.65 in FY04. ?? Taxation for the FY05 has increased by 98 percent mainly due to increase in taxable income and adjustment for deferred taxation.

SC Securities (Pvt) Ltd.

2

E & P Sector

Pakistan Petroleum Limited Pakistan Petroleum Limited has been able to show this phenomenal growth in its earnings due to a number of factors, that includes higher international crude oil prices, the phased price increase under the Sui and Kandhkot Gas Price Agreement 2002; and an increase in sales volume from Sawan, Kandhkot, Qadirpur and Tal fields resulting in a 32 percent growth in turnover to Rs 23.3 billion.

Reserves and Production

Sui

Sawan

Kandhkot

Miano

Mazarani

Block-22

Qadirpur

Adhi

Different oil and gas fields of PPL are operating under different petroleum policies and agreement. Tal, Sui and Kandhkot fields are operating under Petroleum Policy 2001 though Sui and Kandhkot have a modified pricing mechanism under the Gas Price Agreement. Sawan, Hasan, Sadiq and Khanpur fields are operating under the Petroleum Policy 1997 and Qadirpur field is operating under Petroleum Policy 1993. Adhi and Miano (whose plant debottlenecking project was completed in November 2004, that enhanced the raw gas processing capacity by an average of 30 MMscfd to 232 MMscfd.) have special agreements regarding pricing mechanism in place.

Qadirpur gas field do not have an upside price capping mechanism Discovered

Sui

Kandhkot

Sawan

Miano

Qadirpur

1952

1959

1998

1993

1990

PPL

PPL

OMV

OMV

OGDCL

PPL's Share

100%

100%

26.18%

15.16%

7%

Production for FY05

0.25

0.04

0.12

0.08

0.18

Volume of Gas Sales for FY05 Balance Recoverable Reserve

0.21

0.038

0.123

0.052

0.171

3.04

0.73

2.07

0.7

4.2

Reserve Life

12.3

18.24

17.68

9.31

22.29

Field Operator

OIL/NGL

LPG

MMscf

Thousand barrels

Tonnes

Original Proven Recoverable Reserves At 1 July, 2004 13,102,077

15,337

488,670

Change during the year -Revision of previous estimates -New Additions At 30 June, 2005

857,482 167,689 14,127,248

653 11,540 27,530

488,670

9,085,824 349,580 9,435,404 4,691,844 958

5,827 512 6,339 21,191 1.4

116,788 9,088 125,876 362,794 24.9

Production Accumulated upto 1 July, 2004 Production during the year Accumulated upto 30 June, 2005 Net Reserves 30 June, 2005 Daily Average Production

SC Securities (Pvt) Ltd.

Natural Gas

3

E & P Sector

Pakistan Petroleum Limited

Sui and Kandhkot Gas Price Agreement

Sui and Kandhkot gas price discounts are to be phased out by 2007

PPL’s earning is expected to grow drastically in the coming years. Under the Sui and Kandhkot Gas Price Agreement the discount in prices applicable on gas from Sui and Kandhkot fields is going to be completely phased out by FY07. Governement had linked the gas pricing for both Sui and Kandhkot fields with international crude oil prices, under which the discount factor on well head gas price of both fields will be removed gradually till year 2007. Sui and Kandhkot accounts for approximately 83 percent of the PPL’s total production, therefore it is likely to provide high cash flows to the company, that will be enough to support the aggressive exploration plan of the country.

Failure Of Pasni Offshore Drill

Estimated failure cost of Pasni Offshore Drill is about Rs 800million

Pasni offshore well could not find oil or gas reserves in commercial quantities; therefore preparations are underway to abandon the well. The estimated loss from this failure is about 800 million. Though the drill was unsuccessful, it has provided PPL with the experience and knowledge of offshore drilling which will be helpful in its future goals of considering other offshore and international exploration operations.

Privatization of PPL

Sell off of PPL may take place towards the end of this year

The privatization commission intends to sell a 51% equity stake in PPL along with management control to a strategic investor. Given the hightened interest in upstream production and exploration activities, there is significant interest amongst both local and foreign oil companies in acquiring PPL. Eleven companies submitted Statements of Qualification for acquiring PPL including reputable international names: British Gas, OMV, MOL, Kufpec, China National Petroleum Company, Tysons Oil and Energy, and BP Pakistan. Out of which six have been prequalified to proceed further. It is expected that the sell off will take place towards the end of this year.

International Oil Scenario Oil prices in about a years time has almost doubled this is due to the fact that oil consumption across the world accelerated by far higher pace than the new reserves discovered. This high oil prices are likely to be around for a while. The falling production from the oil producing countries, mainly in the Gulf of Mexico and the North Sea, is supposed to be main reason for the recent high prices of oil. The upsurge in demand is mainly attributed to the fast growing economies of China and India. Other factors that have been part of this steep rise in international oil prices are the political instability in

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4

E & P Sector

Pakistan Petroleum Limited Middle East and the hurricanes like Katrina and Emma hitting the Gulf of Mexico.

Oil prices are expected to remain around $60 mark

Though it looks like as if this steep rise in oil prices has already seen its peak and is now settling down at $60 mark, but the winter is still ahead and oil prices tend to rise in winter season. Also if the oil prices will continue to make new highs the global economic growth will slow down consequently resulting in lower demand for oil. This argument can also be backed by the fact that rising trend in oil prices has resulted in increased demand for alternative fuel sources like natural gas, and this will lower the demand for oil.

Financial Performance PPL has shown significant earnings growth from FY03 onwards and in FY05 the growth over last year’s profit is of 30 percent. This growth is expected to continue atleast in FY06 and FY07 as well because of the scheduled increase in well head gas prices of Sui and Kandhkot gas fields (57% of total PPL’s Revenue come from these two fields). Also the higher oil prices will result in increase in well head gas prices of other fields as they are directly linked with the international oil prices. Return on equity and net margin though these percentages have not changed in FY05 but as can be seen from the chart, the percentages have drastically improved in the last five years. PPL has been able to cut down its long-term debts in FY05 by 400 million. This phenomenal growth in PPL’s earnings is expected to continue for atleast next two years as the discounts from the Sui and Kandhkot gas fields are scheduled to be removed gradually by 2007 and that will have a major impact in PPL’s earnings without much effort of their own.

SC Securities (Pvt) Ltd.

5

E & P Sector

Pakistan Petroleum Limited

Financials Profit And Loss Account FY2004A

FY2005A

FY2006F

FY2007F

FY2008F

Rs '000

Rs '000

Rs '000

Rs '000

Rs '000

17,667,508

23,294,169

30,712,781

36,855,338

40,540,871

Fixed Expenditure

6,262,659

6,951,772

7,716,712

8,488,383

9,167,453

Royalties

1,953,576

2,673,146

3,657,759

4,206,422

4,416,744

Operating Profit

9,451,273

13,669,251

19,338,311

24,160,532

26,956,674

27,631

29,263

30,991

33,161

35,814

169,507

546,772

358,140

465,581

628,535

18,254

19,219

20,235

18,212

21,854

566,689

751,076

995,458

1,244,323

1,617,619

Profit Before Taxation

9,063,468

13,474,991

18,711,749

23,396,740

25,981,549

Taxation

2,446,069

4,851,839

7,297,582

8,890,761

10,491,098

Profit After Taxation

6,617,399

8,623,152

11,414,167

14,505,979

15,490,451

Earnings Per Share

9.65

12.57

16.64

21.15

22.59

Sales

Share of profit in Bolan Mining Enterprises Other Income Financial Charges Other Charges

Balance Sheet FY2004A

FY2005A

FY2006F

FY2007F

FY2008F

Rs '000

Rs '000

Rs '000

Rs '000

Rs '000

Share Holders Equity

16,051,456

21,245,444

27,619,077

36,457,182

45,571,477

Long Term Provisions

1,669,931

1,899,545

2,160,731

2,808,950

3,707,814

Long-term liability for gas development surcharge

1,509,893

819,662

-

-

65,759

61,969

Liabilities against asset subject to finance leases

71,264

85,517

102,621

Deferred liabilities

480,313

548,053

586,417

615,738

628,052

Current Liabilities

5,562,709

7,217,129

8,299,698

9,544,653

11,453,584

Total Liabilities

9,288,605

10,546,358

11,118,110

13,054,858

15,892,071

Total Fixed Assets

9,887,657

11,274,763

13,529,716

17,027,945

22,062,791

136,818

651,807

814,759

977,711

1,124,367

Long-term Receivable

1,509,893

819,662

471,236

Long-term Loans - Staff

12,293

11,297

11,523

Investments

Deferred Taxation

12,099

13,309

1,163,661

994,715

1,360,507

2,180,003

2,071,003

Current Assets

12,629,739

18,039,558

22,549,448

29,314,282

36,192,078

Total Assets

25,340,061

31,791,802

38,737,188

49,512,039

61,463,548

SC Securities (Pvt) Ltd.

6

E & P Sector

Pakistan Petroleum Limited Operating Profit Margin (%)

Net Profit Margin (%)

70

40

65 60

35

55

30

50 45

25

40 35

20

30

15

25 20 15

10

10

5

5

0

0 FY00

FY01

FY02

FY03

FY04

FY05

FY06F

FY07F

FY00

FY08F

FY01

Return On Equity/Capital Employed (%)

FY02

FY03

FY04

FY05

FY06F

FY07F

FY08F

Sales (Rs million )

45

45,000

40

40,000

35

35,000

30

30,000

25

25,000

20

20,000

15

15,000

10

10,000

5

5,000 -

0 FY00

FY01

FY02

FY03

FY04

FY05

FY06F

FY07F

FY00

FY08F

FY01

FY02

FY03

FY04

FY05

FY06F FY07F FY08F

Net Current Assets (Rs million )

Fixed Assets (Rs million ) 24,000

26,000

22,000

24,000 22,000

20,000

20,000

18,000

18,000

16,000

16,000

14,000

14,000

12,000

12,000

10,000

10,000

8,000

8,000

6,000

6,000 4,000

4,000

2,000

2,000

-

-

FY00 FY00

FY01

FY02

FY03

FY04

SC Securities (Pvt) Ltd.

FY05

FY01

FY02

FY03

FY04

FY05

FY06F FY07F FY08F

FY06F FY07F FY08F

7

E & P Sector

Pakistan Petroleum Limited

Current Ratio

Return On Assets (%) 30

3.50

25

3.00 2.50

20

2.00 15

1.50 10

1.00

5

0.50 -

0 FY00

FY01

FY02

FY03

FY04

FY05

FY06F

FY07F

FY00

FY08F

FY01

Earnings Per Share (Rs)

FY02

FY03

FY04

FY05

FY06F FY07F

FY08F

Dividend Per Share (Rs)

25.00

12.00

10.00

20.00

8.00 15.00 6.00 10.00 4.00 5.00

2.00

-

FY00

FY01

FY02

FY03

FY04

FY05

FY06F

FY07F

FY08F

FY00

Dividend Yield (%)

FY01

FY02

FY03

FY04

FY05

FY06F

FY07F

FY08F

Breakup Value Per Share (Rs)

6.00 200.00 180.00

5.00

160.00 140.00

4.00

120.00

3.00

100.00 80.00

2.00

60.00 40.00

1.00

20.00 -

FY00

FY01

FY02

FY03

SC Securities (Pvt) Ltd.

FY04

FY05

FY06F

FY07F

FY08F

FY00

FY01

FY02

FY03

FY04

FY05

FY06F

FY07F FY08F

8

E & P Sector

Pakistan Petroleum Limited Valuations Our estimated FY06 profitability for the company is to depict an increase in its Profit After Tax figure from Rs 8.6 billion to Rs 11.4 billion for the FY05. Consequently the EPS for the FY05 is forecasted to be Rs 16.64. Keeping this as our basis for analysis, PER multiple of Pakistan Petroleum Limited comes to around 11, that is fairly in line with the sector PER multiple. The Breakup Value of the company for the FY05 is Rs 31 that gives the PBV multiple of 6.3 that is slightly above the sector multiple, therefore in terms of PBV, PPL is trading slightly above its fair value. PPL is not the kind of stock for investors who are into dividend payout, as the company do not have a very healthy payout history and is considered to be a stock that do not offer a good dividend yield to its shareholders even if compared with other scrips of the E&P sectors like OGDC, POL, etc. Our DCF based value for PPL is Rs 211 per share. That means at current price level PPL has an upside potential of 7 percent, that is negligible keeping a long term view. Therefore, it is recommended for long term investors to keep a strategy of Buy On Weakness strategy for PPL.

DCF valuation Terminal growth

Discount rate

Key Ratios

FY2000A

8%

10%

12%

14%

16%

18%

0%

277.3

216.5

176.2

154.1

126.6

110.2

3%

404.2

282.6

215.4

182.0

143.6

122.3

4%

488.8

319.4

235.0

195.2

151.2

127.5

5%

629.7

370.8

260.2

211.5

160.2

133.4

6%

911.6

447.9

293.8

232.2

170.9

140.4

FY2004A

FY2005A

FY2006F

FY2007F

FY2008F

Operating Profit Margin

%

20

17

37

41

53

59

63

66

66

Net Profit Margin

%

12

11

28

34

37

37

37

39

38

Return On Assets

%

4

4

12

21

26

28

29

29

25

Return On Equity

%

8

7

21

34

41

41

41

40

34

1.66

1.76

1.87

1.57

2.27

2.5

2.72

3.07

3.16

Current Ratio

FY2001A

FY2002A

FY2003A

Earnings Per Share

Rs

15.86

13.98

2.66

6.11

9.65

12.57

16.64

21.15

22.59

Dividend Per Share

Rs

0.14

0.14

0.17

3

4.5

5.5

7.5

10

10.5

Breakup Value Per Share

Rs

189.46

199.94

12.75

17.76

23.4

30.98

40.27

53.16

66.45

Dividend Yield

%

0.07

0.07

0.09

1.53

2.3

2.81

3.83

5.1

5.36

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9