Karachi, September 21, 2022 (PPI-OT): Mari Petroleum Company Limited (Detailed Report)

Numerous Birds in Hand

We initiate coverage on Mari Petroleum Company Limited (MARI) with a Jun’22 Target Price of PkR2, 540/sh, implying a capital upside of 57% over the latest close (PkR 1,621.67/sh) and dividend yield of 12.0% in FY23—warranting a Buy stance on the stock. Our investment thesis includes the following key drivers for growth; i) Strong 2P reserve position and substantial recoverable reserve life, ii) strong financial performance, and iii) relatively clean balance sheet.

This is in addition to the USD-hedge that the company provides to investors, as prices of oil and gas products are denominated in the foreign currency. Simultaneously, the key risks to our thesis include; i) strength in the PkR against the USD, ii) lower-than-expected crude oil prices, iii) downward revision in 2P reserve estimates of MARI’s fields, and iv) implementation of IFRS-9 on GoP-related overdue receivables.

Mari Petroleum Company Limited (MARI) is one of the premier Exploration and Production companies operating in Pakistan. The company is the third largest in terms of area under exploration, with 8.4% of the exploration area in the country held by it.

MARI is the operator of Mari Gas Field, in addition to the Zarghun, Sujawal, Halini, Kalabagh, Ghauri, Dharian, and recently added Bolan East fields. ~23% of Pakistan’s gas production during FY22 was attributable to the company, with the Mari field singlehandedly accounting for ~21% of the total gas production in the country during the period.

Customers concentrated in a somewhat safe sector, i.e. Fertilizer: Due to the low heating value of the gas extracted from the Mari gas field, majority of the field’s gas supply is allocated to the fertilizer sector, which uses natural gas in its production process.

Of the total allocation from the Mari Field, 72.7% is allocated to the fertilizer industry. Consequently, 37% of gas production in FY21 from the Mari Field was supplied to Fauji Fertilizer Company Limited (FFC), while 28% was supplied to Engro Fertilizer Company (EFERT) and 10% to Fatima Fertilizer Company (FATIMA). Demand for agricultural products remains sticky in Pakistan.

Despite the economic challenges faced by the country in the recent past, Fertilizer products’ off take has remained resilient, with total nutrient sales increasing by 3.6%YoY in 1HCY22, whereas Urea sales were up by 12%YoY to 3.25mn tons. Hence, the company’s major customer is one that would continue to demand its natural gas.

An estimated 65%-70% of Pakistan’s population is indirectly or directly dependent on the agricultural sector for its livelihood, hence it is in the country’s interest to protect the fertilizer industry, which is an input for farmers across the country. It also works in MARI’s favour that the Fertilizer industry is much better at making payments, hence cash collection is much better when gas is supplied to the sector.