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Profitability of the energy sector

November 19, 2012

Although the energy crisis continues to impede economic growth, the utility companies are making profits on the back of an increase in production and electricity tariff, and rupee depreciation.

These companies booked substantial growth in the last fiscal year as well as in the first quarter of this year and their better financial performance boosted the confidence of investors in equity market.

In FY12, E&P companies had reported 41 per cent jump in their combined profits which rose 10 per cent more in the first quarter of FY13. The profits of four major E&P companies — Oil & Gas Development Company (OGDC), Pakistan Oilfields (POL), Pakistan Petroleum Limited (PPL) and Mari Gas (heavy-weights of Karachi Stock Exchange) — helped the recent rally in stocks.

Besides, better performance of E&P sector is having a trickle-down effect on electricity generation companies, most notably on Hubco, another stock market heavy weight.

According to a research report of Invest Capital Market, total production of the E&P sector grew from the first quarter of the last fiscal year to around 70,000 barrels per day during the same period this year. But the increase in combined output of the four companies was a bit lower—about seven per cent—due to decline in production of three oilfields of POL.

In FY12, the E&P sector’s 41 per cent growth in profitability was driven by increase in production, higher international oil prices, rupee depreciation and increase in well head price of major gas fields in Qadirpur and Sui. However, the OGDC saw a nominal increase in its production of crude oil and gas to 37,615 barrels per day and 1091 million cubic feet per day respectively from 37,370 barrels per day and 1013 million cubic feet per day in the previous year.

The pickup in energy production contributed to growth in the E&P sector’s profitability though the country as a whole was still facing energy shortages. Higher production of oil and gas (up seven per cent year- on- year in the first quarter) fuelled the overall economic activity.

Partial resolution of the circular-debt issue (which paved the way for higher intake of petroleum products by electricity producing companies) is another factor supporting expansion in production of E&P sector.

For example, Hubco’s revenue through sale of electricity rose a huge 42 per cent to Rs175 billion in FY12 chiefly due to the commissioning of its 214MW fuel-fired project in district Narowal in Punjab.

By clearing some of Hubco’s overdues, the government enabled the company to clear its debts with oil marketing companies and created financial space for Hubco to make Narowal plant operational. The project was launched towards the end of FY11 but the tariff of electricity produced by it was finalised in FY12.

The rupee depreciation against the dollar (10 per cent in FY12) also boosted sales value of electricity produced by it (as the company receives payments in US currency). Increase in sales of electricity was one of the key drivers of Hubco’s profit which shot up 51 per cent to an all-time high of about Rs8.2 billion.

However, the company’s profit slipped in the first quarter to Rs1.241 billion from Rs1.269 billion in the same period of the last year.

The construction of 84MW hydropower plant downstream of Mangla Dam is expected to become operational by the end of June 2013, according to information provided to Hubco’s shareholders.

Whereas rupee depreciation makes our imports costlier, dampens demand for imported goods and pushes up imported inflation, it boosts revenue of E&P companies as the prices of their products (even for domestic consumption) is linked to the dollar. And it benefits companies like Hubco that set prices of their end-products not in local currency but in dollars.

A slight uptick in the output of large-scale manufacturing and overall economic growth has also benefited energy sector companies.

Increase in electricity tariff also enabled privatised Karachi Electric Supply Company to post a huge profit of Rs2.30 billion during the first quarter of this fiscal year as its net revenue grew 30 per cent year-on-year during this period. This was in continuation of the trend set in the last fiscal year when the company had reported a full-year profit of Rs2.62 billion after making losses for six consecutive years.

Encouraged by improved finances, the KESC has just taken up a project with the help of foreign company to add 27MW to its Korangi-based Combined Cycle Power plant.

One important feature of the E&P sector’s performance is that companies have made some progress in discovering new reserves of oil and gas. And the Petroleum (Exploration and Production) Policy of 2012, which envisages fresh incentives for exploratory work, is expected to further encourage investment in oil and gas discovery projects.

According to officials of the ministry of petroleum and natural resources, some major discoveries between February and August have added to the national output about 1800 barrels per day of crude oil and 62 million cubic feet per day of gas.