KARACHI: As the earnings season for the first quarter 2009-10 draws to a close, review of overall performance of individual sectors have come to be of investor interest. Oil & gas exploration (E&P) companies posted profit after tax (PAT) amounting to Rs18.89 billion for the first quarter ended Sept 30, 2009. The earnings reflected 36 per cent slump over the PAT at Rs29.73 billion for the corresponding quarter of the previous year.

The four listed companies on the sector include Oil & Gas Development Company (OGDC), Pakistan Petroleum Limited (PPL) Pakistan Oil Fields (POL) and Mari Gas Limited (MGCL).

‘The decline in the earnings was mainly due to steep drop year-on-year in Arab crude oil and wellhead gas prices by 66 per cent and 32 per cent respectively in 1QFY2010’, says sector analyst at Arif Habib Limited. In addition to prices, production of crude also declined, making a deeper dent on the bottom line.

The sector’s sales suffered a massive drop of 24 per cent to Rs48.7 billion for the quarter under review, from same time last year, due mainly to both adverse price and production variances.

Analysts noted that the volatility in the international crude oil prices dimmed the top line of the individual companies but the reasons for all companies on the sector were not the same.

POL’s top line suffered on account of 66 per cent year-on-year decrease in the international crude oil prices.

For the other three companies (OGDC, PPL and MGCL), the reason for a weakened top line was a 32 per cent year-on-year drop in wellhead gas prices.

Evidently on security concerns, the exploration and development activity appeared to have come to a grinding halt.

Analysts said that it could be deduced from a 51 per cent plunge in exploration costs in the quarter under review.

The sale revenues of companies nose-dived by 24 per cent, also in consequence of the slide in the reserve replacement ratio.

Supplementary sources of income were no help as ‘Other income’ of companies dipped by 53 per cent year-on-year to Rs1.8 billion from Rs3.8 billion in the corresponding time period last year, on account of reduced cash balances. The ‘inter-corporate circular debt’ played havoc on the E&P sector, choking the vital cash flows.

Going forward, analysts expected upward movement in the international prices of crude to strengthen the sales, of the sector particularly in the second half of the current financial year when wellhead gas prices were expected to be revised upwards.

Also discoveries in the oil fields of Naspha and Maramzai were seen by analysts to improve the volumes going ahead.

However, circular debt was seen as a major risk factor due to its propensity to block the top line benefit from travelling down to reach the foot of the profit& loss account, due to a possible drop in other income on account of lower level of cash.