Pakistan oilfields limited

Overview:
Pakistan Oilfields Limited (POL) is a leading oil and gas
exploration and production company listed on all the three stock exchanges
of Pakistan. Pakistan Oilfields Limited was incorporated on 25th November 1950. It is
a subsidiary of the Attock Oil Company which holds 53.9% shares of the company.
Attock Oil Company was founded in 1913 and made its first oil discovery in
1915 at Khaur, District Attock. AOC has, therefore, pioneered exploration and
production of oil and gas in this region nearly a century ago. In 1978, POL
took over the exploration and production business of AOC. Since then, POL
has been investing independently and in joint venture with various
exploration and production companies for the search of oil and gas in the
country

Industry background:
The industry of exploration and production of oil and gas had
existed in Pakistan even before the partition of 1947. According to government sources,
66 exploratory wells existed in the country before its creation. Up till now, 725 wells
have been drilled in the country for the purpose of exploration. These drilling activities
have produced 219 wells, out of which 54 were of oil and 165 were of condensate oil
and gas.

The success rate of finding a commercially viable well in Pakistan is much higher than
international success rates. In every three to four drillings, there is a find, while at the
international level discovery comes after eight to 10 attempts. The country has so far
960 appraisal wells, which indicates how much potential of oil and gas exists in the area
and whether an area is commercially viable or not.

The Ministry of Petroleum and Natural Resources has so far awarded 119 exploration
licences to public and private sector companies.

Operational facts:
Pakistan Oilfields Limited maintains a highly
diversified exploration and production portfolio. POL is presently operating
nine Development and Production leases i.e. Pariwali, Meyal, Joyamair,
Minwal, Dhulian, Khaur, Pindori, Turkwal and Balkassar
The Company has Joint Venture agreements with the following E&P
companies:

i) The Attock Oil Company Limited in Central Potwar (Turkwal), Pindori,

Kirthar and Ikhlas.
ii) Oil & Gas Development Company Limited (OGDCL) in Pindori, Chak
Naurang, Gurgalot Block and Kotra.
iii) Orient Petroleum Inc. in Dhurnal, Ratana and Bhangali.
iv) Tullow Pakistan (Development) Limited in East Badin Extension Block-B.
v) MOL Pakistan in Tal Block, Margala and Margala North. In Tal Block Oil &
Gas discoveries have been made in Manzalai, Makori, Mamikhel and
Maramzai fields. Manzalai Central Gas Processing facility, having
capacity of 300 MMSCFD, has been commissioned on October 28, 2009
to process gas from Manzalai field. The plant is currently processing 233
MMSCFD of gas. POL has a 25% pre-commerciality working interest in
this venture.
vi) Pakistan Petroleum Limited in Adhi.
vii Government Holding (Pvt) Limited in Pariwali, Minwal.
)

Two new exploration licenses have been awarded to POL in Dera Ghazi Khan
and Rajanpur Blocks in January 2010.
POL exploration team is proactively evaluating exploration and exploitation
opportunities within and outside Pakistan with an ultimate aim to sustain
long-term production goals and bring value for the shareholders.
Production porfolio:
1. Crude oil
2. Natural gas
3. Liquid petroleum gas
4. Sulphur
5. Solvent Oil

Financial performance:
Crude Oil continues to be the major contributor (48.5%: Rs 7.052 billion) to POL's net
sales of Rs 1454 billion in FY09. However the contribution of the crude oil to revenue
declined by 28% in FY09 (57% of net sales of over Rs 9.81 billion in FY08). This is due
to a 26.8% decline in the crude oil prices during the year compared to FY08 and due to
work-over activities taking place at the Pindori 3 and Pindori 4 fields. Natural gas
contributed about 25.6% to the net sales, while that of POLGAS/CAPGAS amounted to
24% in FY09. Interestingly, the sales of natural gas showed an improvement of 17% for
FY08, while the revenues from POLGAS/CAPGAS decreased by nearly 9% YOY 2009.
The sales of sulphur declined by 35% from FY08 to Rs 0.754 billion, although it forms a
very negligible portion of POL's net sales for FY09. It is worth mentioning that there was
an increase in gas price by 36.9%, POLGAS price by 15.7%, solvent oil price by 16.8%
and sulphur price by 72.3% as compared to last year. Crude oil sales volume decreased
by 27.5%, gas by 14.3% and POLGAS by 25%. The cumulative effect of products price
fluctuation and the decrease in volumes has led to a decrease of 16.1% in net sales to
Rs 14,047 million.

The profitability ratios for many companies in the industry fell in FY10. However the
profitability of Pakistan Oilfields Limited has slightly increased from 2009 to 2010. The
gross profit margin has increased from 59.3% to 61.00%. The ROA has increased to
26.83% and ROCE to 25.53%. The profit margin has also increased to 41.68% from
39.99% in 2009.So the profitability has increased in 2010.The increase in gross profit in
2010 is due to the fact that gross profit has increased by around 31% as compared to
2009.The after tax profit of Pakistan Oilfield limited has increased by 32% from 2009 to
2010 and there has been no significant increase in the total assets therefore this
increase in ROA is observed. Again net income has increased and common equity
remains same so ROCE has increased in 2010.Despite a turbulent year for the oil gas
sector, Pakistan oilfields limited managed to perform fairly reasonably. In terms of
profitability, the Gross Profit for FY09 registered a sizeable decline of 20% to stand at
Rs 8.41 billion (FY08 Rs 10.6 billion). Net profit for FY09 is Rs 5.58 billion, down about
33% from the previous year's Rs 8.412 billion. There are many apparent reasons for the
decline in profitability of the company. During the year, the international oil prices saw
considerable fluctuations, the prices of Arabian light ranging from a low of US $35 to a
high of US $141 per barrel amid economic uncertainty and poor global economic
projections. The rupee also devalued against various foreign currencies, especially the
greenback. These external situations, coupled with 27% less crude production this year
have adversely affected the profitability of the company. Both ROA and ROE can be
brought up from its current levels to that of its competitors, thus indicating the untapped
potential of POL.

FY09 cost of POLGAS/CAPGAS (ie purchasing and transportation costs) fell by 20% as
compared to the same period last year. It must be noted that this cost subsided in
FY09's first quarter compared to the costs for the same period of previous year, but that
was due to fall in production.

POL's exploration costs continue to rise consecutively for FY09. FY08 saw a dramatic
increase of two times compared to the same costs in FY07. The trend continues in
FY09 and the cost stood at Rs 2.075 billion, a 100% increment compared to FY08. The
major reason for this substantial increase was the cost incurred in
exploration/abandonment activities at the company's own fields and in other joint
ventures such as Adhi, Dhumal, Tal block, margalla block, Margalla south block.
Growing exploration costs were also seen in the Tal, Margalla and Margalla south
blocks, which are the areas on which POL is currently concentrating its exploratory
activities. Other operating income increased by 46.7% to Rs 2,041.9 million. This
increase is mainly due to good returns on bank deposits, dividend income from
subsidiary and associate companies.

In FY10 cash and bank balances make around 33% percent of the total current assets.
The current ratio has increased from 3.54 in 2009 to 3.69 in 2010, a slight change over
the previous year. The liquidity position of the company, which had dropped below the
industry's average last year, has declined slightly again. The current ratio has shown a
decline of about 15% due to 20% decline in POL's current assets and a 5% decrease in
current liabilities the decrease in current assets being mainly due to the cash at hand
which stood at Rs 4.074 billion, 45% down from FY08 (Rs 7.5 billion). In FY09 cash and
bank balances represented around 41% of the total current assets whereas, cash and
bank balances amounted to around 60% of the current assets. One reason that
accounts for smaller change in the current liabilities during FY09 is that the company
has about 32% less tax liabilities.

The inventory turnover ratio of POL in FY09 stands at 71.54. This increase was mainly
at the back of higher stock in trade, which rose by 52% in FY09 to stand at Rs 0.9591
billion and stores and spares grew by 21.52%. The Day Sales Outstanding finished
higher this year as compared to last year, standing at 45.23 in FY09. The trade debts
were slightly higher this year about 1.43% from FY08 to stand at Rs 1.82 billion. The
non-proportionate change in net sales seems to be an important factor in this regard.

The Total Assets Turnover has dropped below 0.49 in FY09 to 0.39, primarily due to
greater indulgence in exploration and the work-over activities by the company. This
increased the acquisition of plants and equipment and simultaneously the exploration
and evaluation assets of POL this year, adding to the non-current assets. The asset
management ratios too have shown an upward trend in 2010, the total asset turnover
has increased to 0.48 in 2010. The reason can be attributed to the increase in sales of
27% in 2010.The sales to equity ratio has increased to 0.61 showing that the stock
invested is generating more sales per unit as compared to 2009. As the receivables
turnover has increased the Day Sales Outstanding has fallen to 45.12 in 2010.

The Sales to Equity ratio declined further in FY09 at 0.53. This can be attributed to large
decrease in the net sales of about 15% during the current fiscal year and a modest rise
of about 1% in the total Equity. However it has increased to 0.61 in FY10. This can be
attributed to the increase in sales in FY10 as compared to FY09 by 27%, equity remains
the same.

Overall, the debt ratios relating to POL reflect the fact that the company is largely equity
financed. It was only in FY06, when POL had taken long term loans that these ratios
increased. Ever since the loans were repaid in FY07, debt ratios have plunged, making
POL's debt management as good as its competitors. In FY09, the debt to assets ratio
was 24.5% as compared to 22.08% in FY08. This is largely on account of increase in
total liabilities which stood at Rs 8.952 billion, almost 16% higher than FY08. FY09 saw
the Times Interest Earned ratio dropping to new low of 15.26%, despite the higher
amount of debt in that year.

The debt ratios of 2010 also are indicative of the fact that the company is largely equity
financed. The debt to equity ratio for 2010 is 35% and the company has very little debt
on its balance sheet. The debt to asset ratios and long term debt to equity ratios are
25.9% and 23.6% respectively. This has not shown a substantive change from
2009.2010 showed a commendable increase in TIE to 45.29.This can be attributed to a
45% decline in finance costs and increase in EBIT of around 60%.

The market performance of POL has been commendable for a long period of time. The
earnings per share of the company stood at Rs 23.59 per share in FY09. This is lower
than the previous year's earning per share of Rs 35.57. This can be attributed to the
lower net income and the demand for retained earnings for the various explorations and
other activities the company is looking forward to.

This year, the company announced an interim dividend of 80% per share ie Rs 8 per
share and further recommended a dividend of 100% ie Rs 10 per share. The cash
dividend is higher this year as compared to FY08's dividend per share of Rs 16 and
20% bonus shares. The dividends per share for FY09 and FY10 have increased to 18
and 25.5. An increase in dividends per share shows that the company is making good
profits. The book value fell in FY09 and later increased back in FY10 from 109.65 to
123.13. The EPS for 2010 is 31.44. The price/earning ratio has also increased to 6.87 in

2010.

Future outlook :
Against all odds, Pakistan Oilfields Limited has managed to stay profitable in turbulent
times. The decrease in profitability is primarily attributable to the decrease in production
and the impact of the relatively higher exploration expenditure in this nine-month period,
incurred primarily in Kirthar South, Ikhlas and Margalla blocks. This has, however, been
offset by a favourable exchange rate variance between the rupee and the dollar and
recognition of revenue upon the finalization of long outstanding crude oil sales
agreements of certain fields.