ON November 5, Pakistan Petroleum Limited surprised the market by announcing that it had opted to convert to the Exploration and Production Policy 2012 for concessions operated by it as well as for those concessions where it is a joint venture partner with other operators.

These include Kuzdar, Kalat, Hala, Barkhan, Zamzama South, Kharan West, Kharan East, Kharan, Dhok Sultan, Kotri, Zindan, Gambat South, Sirani, Kotri North, Jungshahi, Kandhkot East PCA (Chachar), Latif (OMV operator) and Tal (MOL operator).

In a filing with the stock exchange, PPL explained that “the effect of the conversion would be that in the event of a new discovery in any new exploratory effort in the concessions for which conversion has been opted, gas production from the same would be entitled to the Petroleum Policy 2012 price”.

Usman Riaz, an analyst at Taurus Securities, believed that other exploration and production (E&P) companies can also follow in PPL’s footsteps as it will improve their realised gas prices.

According to energy experts, the Petroleum Policy 2012 contains incentives and higher prices for exploration companies to boost oil and gas exploration and help the country overcome the energy shortage.

PPL currently supplies around 21pc of the country’s total natural gas and also produces high quantities of crude oil, liquid natural gas and liquefied petroleum gas.

In his FY15 report to shareholders, the company’s chairman, Waqar A. Malik, said “it was a tough year for the oil and gas sector. There are few instances in recent times for such a rapid and dramatic change in the business environment. In the space of a few months, oil prices went from a high of over $109 per barrel to a low of $59 on June 30, with a further decline witnessed post-year-end ($46 per barrel on August 20)”.

According to energy experts, Petroleum Policy 2012 contains incentives and higher prices for exploration companies to boost oil and gas exploration

PPL CEO Syed Wamiq Bokhari presented his outlook in the report by saying that “total gas demand stands at some 8bcfd against total supply of 4bcfd. In order to bridge this gap, we are striving to optimise production and reserve replacement by drilling more wells and fast-tracking the development of new fields as well as enhancing production from mature assets.

“As this entails considerable investment, the company is proactively seeking strategic partnerships to not only curtail the risk but also to enhance its knowledge base. The company’s accelerated exploration efforts in the recent past have started giving results.”

The government allowed the company to continue producing under the Sui mining lease for another year, until May 31, 2016.

During the year ending June 30, PPL drilled nine exploratory wells and four development wells in its operated areas and made four hydrocarbon discoveries. Two more discoveries in partner-operated blocks were made, resulting in six discoveries overall.

Yet, its offshore activities do not seem to have been as successful, as the directors did not discuss the company’s planned ventures in Iraq and Iran.

In FY13, PPL had ventured to acquire an exploration block in Iraq, becoming the first state-owned enterprise with transnational operations. And in September 2011, it had told investors that it was seeking to enter into a joint venture with Iranian companies.

However, a disillusioned energy expert who also is a PPL shareholder said he was not thrilled by such announcements. “Such intentions have continued to be expressed, but the question is how many of them have truly materialised?”

In FY15, PPL earned an after-tax profit of Rs34bn. By year-end, the company had cash and cash equivalents amounting to Rs22.72bn, total assets at Rs247.7bn and reserves at Rs172.2bn. It held Rs19.7bn in paid-up capital.

Over 67.5pc of the company’s equity was held by the government by end-June, followed by a 10.88pc stake by 101 non-resident financial institutions and 7.35pc by the PPL Employees Empowerment Trust. The general public, comprising 23,448 resident investors, held 5.42pc of the shares.

PPL’s free float stood at an estimated 24pc, resulting in a market capitalisation of Rs64bn, according to Topline Securities analyst Nabeel Khursheed. The PPL stock has a 3.4pc weightage in the KSE-100 index.

While the company’s stock has followed the downward trajectory of its sectoral peers — it closed last Thursday at Rs124.71 a share — KASB Securities analysts remarked that “the market has overestimated PPL’s sensitivity to oil prices and broadly overlooked the positives.

These include the extension in the Sui mining lease, conversion of gas prices and the company’s successful efforts at ramping up production”.

For the July-September quarter, PPL posted unconsolidated earnings of Rs5.9bn, which were down 57pc year-on-year. The earnings were below market expectations.

The company identifies both opportunities and risks for its operations in its period reports. The opportunities include rising demand for energy; deeper prospects in already discovered fields with available infrastructure and price incentives; and investments in exploratory blocks where foreign companies are reluctant to participate.

Some of the key risks include a further significant decline in crude prices; under-performance of major oil and gas fields (forcing material revision in production and reserve estimates); delays and cost overruns in project execution; and any adverse turn in the security conditions. However, the management affirms that it has mitigating strategies for these risks in place.

Published in Dawn, Business & Finance weekly, November 16th, 2015