Karachi, February 28, 2022 (PPI-OT): E and P: Better operating results amid PIOL investment
Operating profitability of E and P listed space has witnessed exceptional growth during the year and current oil market continues to augment a higher earnings growth outlook for remaining announcements of FY22. However, payout rate did not improve as much, sticking to 27% of earnings as most of the sales continue to get strapped into the intercorporate circular debt.
During 2QFY22, US$100mn were expensed for investment in JV of Pakistan International Oil Limited (PIOL), each by OGDC, PPL and MARI, which muted the impact of better operating earnings towards bottomline.
OGDC and PPL receivables have reached unfathomed levels, which has resultantly called for authorities and stakeholders to start calibrating a way out of the menace of circular debt.
Impressive earnings stream in 2Q
The earnings announcements of Pakistan’s listed E and P’s space have shown impressive growth over the last year as oil prices nearly doubled while all E and P’s witnessed production decline except for MARI whose GTH project added fairly. Operating profitability has witnessed exceptional growth during the year and current oil market continues to augment a higher earnings growth outlook for remaining announcements of FY22. However, payout rate did not improve as much, sticking to 27% of earnings as most of the sales continue to get strapped into the intercorporate circular debt.
Tepid sequential growth owing to PIOL
All listed E and Ps, except POL, have 25% stake in PIOL, with an initial capital outlay of US$400mn under concession agreement between PIOL and ADNOC. Resultantly OGDC, PPL and MARI each booked an expense on investment into the JV of PIOL which took away the translation of growth in operating earnings towards bottomline. PIOL is an investment in an offshore block in Abu Dhabi and successful prospects in adjoining areas keeps stakeholders confident of a wildcat discovery in the next 2-3 years.
A calling of overdue receivables
MARI and POL remain relatively shielded from circular debt as it is barely a significant chunk of their revenue. However, OGDC and PPL receivables have reached unfathomed levels, which has resultantly called for authorities and stakeholders to start calibrating a way out of the menace of circular debt. Both the company managements are confident that a precise mechanism will be finalized by the authorities to overcome the aged receivables, which will also remove the overhang of circular debt on valuations of OGDC and PPL.
The current movement in oil prices continues to bode well for Pakistan E and Ps as slow recovery in international oil supplies in face of heightened demand growth is keeping oil near to triple-digit mark. MARI stands out as our top pick in the listed space where our TP of Rs2,564/share offers 45% potential upside from current levels and our estimates provide a dividend yield of 8% and an FY23E PE and EV/EBITDA of 5.3x and 1.8x, respectively.