Pakistan Oil & Gas Sector (Initiation) - Attractive Valuations Time To Fill Up PDF

21 August 2017
Danish Owais
Pakistan Oil & Gas Sector danish.owais@efg-hermes.com
Attractive valuations; time to fill up
Initiation of Coverage
Pakistan
Price performance
Initiating coverage on Pakistan oil & gas sector
PSX100; Upstream and downstream sector
In this note, we initiate coverage on the upstream and downstream Pakistan oil & gas
PSX100 Upstream
sectors with a Buy rating. In the upstream segment, we initiate coverage on: i) OGDC Downstream
(Buy/TP: PKR186) - trading at an implied oil price of USD41/bbl, our top pick; ii) PPL 57,500
(Buy/TP: PKR209) - implied oil price of USD45/bbl; and iii) POL (Buy/TP: PKR538) - implied
oil price of USD48/bbl. The current implied oil prices of OGDC, PPL and POL are at a 50,000
discount of 23%, 15% and 9% to our FY18 average Arabian basket oil price of
USD53/bbl, respectively. Moreover, our Arabian basket price forecast for our valuation 42,500
models have been set at a 4% discount to our in-house FY18 Brent assumption
(USD55/bbl). In the downstream space, we initiate coverage on PSO (TP: PKR508) with 35,000
Jul-16
Aug-16
Sep-16
Apr-17
Jan-17
Dec-16
May-17
Jun-16
Jun-17
Nov-16
Oct-16
Feb-17
Mar-17
a Buy on undemanding valuation forward P/E of 6.1x (vs. 5-year multiple of 7.6x).
Pakistan upstream - attractive entry point

Source: PSX, EFG Hermes estimates
The Pakistan E&P sector is down over 7% YTD, relatively flat against the broader index
and is now trading at a forward P/E of 9.0x, which implies a discount of 9% to its five- Valuation snapshot
year historical average (9.9x). Moreover, pricing policy initiatives, low servicing costs and P/E P/E
Upstream Rating TP ETR
FY17e FY18e
improved security situation have encouraged E&P companies to increase exploratory OGDC Buy 186 30% 9.9 9.0
activities, which will ultimately replenish reserves and thus ensure better production PPL Buy 209 34% 9.7 8.5
flows going forward. Also, the sector is hedged for currency devaluations as oil and gas POL Buy 538 21% 11.9 10.2
prices are referenced in USD. W. Avg 10.1 9.0
Downstream
Pakistan downstream discounted valuations PSO Buy 508 19% 6.7 6.1
The Pakistan downstream sector has outperformed the broader benchmark by over 7% Source: Company data, EFG Hermes estimates
YTD; PSO has outperformed the sector and KSE100 index by over 3% and 11% YTD,
respectively. At a forward P/E of 6.1x, PSO is trading at a 23% discount to the broader
benchmark. In addition to an attractive valuation, PSO has encouraging fundamentals.
We forecast volume growth of 3.9% CAGR over our forecast horizon (FY16-21) for PSO
and core margins to widen by 38bps to 4.5% by FY21e.
Strong structural demand for petroleum products

Current demand for petroleum products in Pakistan is over 172mnboe and refined
production of domestically extracted crude is just over 28mnboe, which leaves a shortfall
of 144mnboe (~84% of domestic consumption) that is covered by imports. Given the
extent of the shortfall, we believe it has always been in the collective interest of all
stakeholders to provide a supportive platform (with regard to pricing and security) for
domestic E&P companies, and we expect this to sustain regardless of the political regime.
Disclosure Appendix at the back of this report contains important disclosures, analyst certifications Page 1 of 104
and the status of non-US analysts
Pakistan Oil & Gas Sector 21 August 2017
Contents
Trial Title 1
Trial Title 2
Trial Title 3
Trial Title 4
1. Executive Summary 4
Low operating costs provide a buffer against subdued oil prices 7
Pakistan upstream; attractive entry point 8
Pakistan downstream; overly discounted 9
2. Pakistan Oil & Gas upstream exploration activities 13
Policy incentives 17
Improving technology for geological studies 18
3. Pakistan Oil & Gas Production flows 19
Oil and gas flows are expected to grow at a five-year CAGR of 3% and 1%, respectively 19
4. Pakistan oil & gas downstream sector 24
Pakistan oil marketing companies 24
Volumetric growth of primary products to remain strong 25
Circular debt is rising again despite low oil prices 27
5. Appendix : Global oil outlook 28
Page 2 of 104
Supply expected to keep oil prices subdued 28
Re-aligning pricing power 29
I. OPEC and non-OPEC curbs to restrain their own excess supply 29
II. US shale revolution is driving out old rulers 30
III. Iran sanction uplift - Additional stress to global oil market 32
6. Appendix 2 33
Tight and shale hydrocarbon reserve potential in Pakistan 33
7. Appendix 3 34
The rise of the circular debt, creating bottlenecks 34
Oil & Gas Development Co. 35
Pakistan Petroleum 54
Pakistan Oilfields 70
Pakistan State Oil Co. 85
Page 3 of 104
1. Executive Summary
Attractive valuations; time to fill up
We initiate coverage on the upstream and downstream Pakistan oil & gas sectors with a Buy rating. In the
upstream segment, our coverage includes: i) OGDC (Buy/TP: PKR186), our top pick; ii) PPL (Buy/TP: PKR209);
and 3) POL (Buy/TP: PKR538). The upstream sector lost over 7% YTD, and is trading at a forward P/E of 9.0x,
which implies a discount of 9% to its five-year historical average (9.9x). Moreover, current implied oil prices
of OGDC (USD41/bbl), PPL (USD45/bbl), and POL (USD48/bbl) are at a discount of 23%, 15% and 9% to our
FY18 average Arabian basket oil price forecast of USD53/bbl, respectively. Moreover, our Arabian basket price
assumption for our valuation models has been set at a 4% discount to our in-house FY18 Brent assumption
(USD55/bbl).
In the downstream space, we initiate coverage on PSO with a Buy rating (TP: PKR508) on an undemanding
valuation. The downstream sector remained relatively flat during 2017, where PSO has outperformed it by
3% YTD and the broader market by 11% YTD. At a forward P/E of 6.1x (vs. five-year historical multiple of
7.6x), PSO is trading at 23% discount to broader benchmark.
Figure 1: Valuation snapshot

Market
Company Symbol Rating TP Price P/E (x) Earnings Per Share (PKR) DPS D/Y ETR
Cap
PKR PKR (USDmn) FY18 FY17e FY18e FY19e FY18
Upstream
Oil & Gas Dev. Co. OGDC Buy 186.00 147.00 6,020 9.04 14.80 16.25 16.80 5.75 3.9% 30%
Pakistan Petroleum PPL Buy 209.00 163.00 3,066 8.52 16.72 19.12 20.48 9.50 5.8% 34%
Pakistan Oilfields POL Buy 538.00 474.00 1,065 10.21 39.83 46.40 49.66 37.00 7.8% 21%
Universe weight 9.01
Downstream
Pakistan State Oil PSO Buy 508.00 448.00 1,007 6.14 66.90 72.98 67.91 25.5 5.7% 19%
Source: Company data, EFG Hermes estimates
The below graphs highlight that our oil universe is currently trading closer to the mean trend line.
Figure 2: OGDC PE (x) band Figure 3: PPL PE (x) band
OGDC PE Upper Band @ PE of 13x PPL PE Upper Band @ PE of 15x

Lower Band @ PE of 5x Linear (OGDC PE) Lower Band @ PE of 5x Linear (PPL PE)
400 500
350 450
400
300
350
250
300
200 250
150 200
100 150
100
50
50
0
0
Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17
Source: Bloomberg, Company data, EFG Hermes estimates Source: Bloomberg, Company data, EFG Hermes estimates
Page 4 of 104
Figure 4: POL PE (x) band Figure 5: PSO PE (x) band
POL PE Upper Band @ PE of 18x PSO PE Upper Band @ PE of 19x

Lower Band @ PE of 5x Linear (POL PE) Lower Band @ PE of 4x Linear (PSO PE)
1,200 1,800
1,600
1,000
1,400
800 1,200
1,000
600
800
400 600
400
200
200
0 0
Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
Below charts highlight the comparison of our E&P universe with the current oil price and our forecast five-
year average. OGDC, our top pick in the E&P space, is trading at a steep discount with its implied oil price
averaging at USD41/bbl, thus offering an undemanding valuation.
Figure 6: OGDC is trading at a 13% and 27% discount to the Figure 7: PPL is trading at an implied oil price of US$45/bbl, at
valuations based on current and forecast oil prices, a discount of 10% and 28% to current and forecasted Arabian
respectively basket
200 250
180
160 $56/bbl 200
$48/bbl $56/bbl
140
$41/bbl $48/bbl
120 150 $45/bbl
100
80 100
60
40 50
20
0 0
Implied oil price Current oil price Avg. forecasted oil Implied oil price Current oil price Avg. forecasted oil
price (1) price (1)
(1)
We forecast Arabian basket to average at USD53, USD55.1, USD56.5 and
(1)
USD57 per barrel for FY18,19, 20 and 21 onwards; therefore our five-year USD57 per barrel for FY18,19, 20 and 21 onwards; therefore, our five-year
average oil forecast price is USD55.7/bbl average oil forecast price is USD55.7/bbl
Page 5 of 104
Figure 8: POL is trading at par to current Arabian basket and Figure 9: PSO TP sensitivity to Arabian Basket
14% discount to our forecast oil price average
600 540
500 520
$56/bbl
$48/bbl $48/bbl
400 500
300 480
200 460
100 440
420
0
US$40 US$50 US$56 (1) US$60
Implied oil price Current oil price Avg. forecasted oil
price (1)
(1)
(1)
We forecast Arabian basket to average at USD53, USD55.1, USD56.5 and We forecast Arabian basket to average at USD53, USD55.1, USD56.5 and
USD57 per barrel for FY18,19, 20 and 21 onwards; therefore, our five-year USD57 per barrel for FY18,19, 20 and 21 onwards; therefore, our five-year
average oil forecast price is USD55.7/bbl average oil forecast price is USD55.7/bbl
In addition to E&P companies, PSO (the only downstream company in our universe) is also sensitive to oil
prices, owing to: i) inventory gains/losses; and ii) furnace oil margins, which are denoted as a percentage of
ex-refinery high sulphur furnace oil (HSFO) prices.
The below graphs highlight the implied oil price comparison with OPEC basket for the upstream stocks under
our coverage.
Figure 10: OGDCs implied oil price comparison with Arabian Figure 11: PPLs implied oil price comparison with Arabian
basket basket
USD per barrel USD per barrel
Avg. Arabian Basket OGDC implied oil price Avg. Arabian Basket PPL Implied Oil Price
120 120
100 100
80 80
60 60
40 40
20 20
0 0
Oct-14
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Apr-13
Oct-13
Apr-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Jul-13
Jul-14
Jul-15
Jul-16
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Jul-13
Jul-14
Jul-15
Jul-16
Source: Company data, OPEC, EFG Hermes estimates Source: Company data, OPEC, EFG Hermes estimates
Page 6 of 104
Figure 12: POLs implied oil price comparison with Arabian basket
USD per barrel
Avg. Arabian Basket POL Implied Oil Price

120
100
80
60
40
20
0
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Jul-16
May-17
May-13
Jul-13
Nov-13
May-14
Jul-14
Nov-14
May-15
Jul-15
Nov-15
May-16
Nov-16
Low operating costs provide a buffer against subdued oil prices
In the event of further oil price declines, Pakistans E&P companies are placed in a slightly safe zone due to
low operating costs resulting from extraction of conventional reserves, providing a buffer to investors from
the sharp downturns in oil prices. Also, companies still have room to further reduce costs by curtailing
exploration activities should the need arise. As shown in the table below, a 50% cut in exploration costs
would bring down the FY17e break-even levels from USD8.8, USD13.1 and USD19.3 per BOE to USD8.7,
USD12.0 and USD18.8 per BOE for PPL, OGDC and POL, respectively.
Figure 13: Operating costs by company

FY17 estimated operational costs Curtailment of exp. costs by
50%
PPL OGDC POL PPL OGDC POL
Royalty 1.8 2.5 3.0 1.8 2.5 3.0
Operating expenses 6.7 8.5 15.3 6.7 8.5 15.3
Exploration and prospecting 0.3 2.1 0.9 0.2 1.0 0.5
expenditure
Total cost USD/BOE 8.8 13.1 19.3 8.7 12.0 18.8
Page 7 of 104
Pakistan upstream; attractive entry point
Investment thesis
E&Ps are trading at attractive levels: The E&P sector has lost over 7% YTD owing to the
recent correction witnessed in the broader benchmark. Our oil universe is trading at a discounted
implied oil price; where OGDC, PPL and POL are trading at a discount of 23%, 15% and 9% to
our FY18 average Arabian basket oil price of USD53/bbl, respectively.
Hedge against currency devaluation: Since oil sales and wellhead gas prices are referenced
to the US dollar, the sector provides a good hedge against currency devaluation, especially when
the IMF forecasts local currency to be overvalued by over 10% against the US dollar.
Increased exploration: Taking advantage of the low servicing costs, the upstream companies
have increased their exploratory efforts to replenish reserves, which support our fundamental
call. Notably, these companies are currently working on leases that are expected to hold greater
potential of reserves, such as Zorgarh, Soghri, Pirkoh etc (explained later in detail).
Pricing policy incentives: In the recent past, the regulatory body and Ministry of Petroleum
has approved conversion of previous gas concessionary agreements of various leases into 2012
Petroleum Policy for new discoveries. This has encouraged upstream companies to increase their
exploration activities. Moreover, the conversion of the Sui Mining Lease into a D&P lease has
raised the Sui wellhead gas prices by over 60%; this will help PPL augment its operating margins
by over 6% for FY17e and encourage it to drill deeper in the field in search of additional reserves.
Improved security situation: Following recent army operations across the country, the law
and order situation in remote exploration leases has improved, aiding the companies in carrying
out exploratory activities in these areas, which include parts of Baluchistan and Khyber
Pakhtunkhwa province.
Investment risks
Oil price risk: A sharp downturn in international oil prices is likely to have a negative impact on
the profitability of our upstream companies.
Security risk: Although recent operations by the Pakistan Army have significantly improved the
security situation across the country, a sudden deterioration in security across Pakistan would
have a negative impact on exploration and production activities. Also, tensions with local
communities with respect to social demands could hinder production flows; a recent example
being the TAL block.
Exchange rate risk: Appreciation of Pakistan Rupee against USD (which seems unlikely)
negatively affects earnings, since oil and gas revenues are referenced in USD.
Regulatory risk: Any adverse change in regulatory pricing framework could have a negative
impact on profits.
Environmental risks: More global focus on environmental issues, including emissions, proper
disposal of acidic waste, and health & safety of employees, etc. may influence changes in local
laws and regulations and increase the cost of compliance and penalties (in case of non-
compliance).
Natural disasters: Earthquakes, floods or any other natural disasters in the vicinity of the
hydrocarbon extraction fields or transport route could disrupt production, causing a negative
impact on earnings.
Page 8 of 104
Pakistan downstream; overly discounted
Investment thesis
Downstream stocks are trading at a discount: Following the recent recovery in international
oil prices, the downstream sector outperformed the broader benchmark by over 7% YTD, where
PSO has outperformed the sector and the broader market by 3% and 11% YTD, respectively.
At a forward P/E of 6.1x (vs. five-year historical multiple of 7.6x), PSO is trading at a 23%
discount to the broader benchmark.
Volume growth of primary products to remain strong: Rise in per capita income by 6.4%
Y-o-Y, along with the recent increase in infrastructure development projects (including CPEC) is
expected to support automobile sales, especially commercial vehicles for logistical support to
transport goods to and from China, which should bode well for fuel demand. Moreover, policy
changes to reduce dependence on imported coal-based power projects should aid FO demand
since the country is facing an energy deficit. We forecast volume growth at a CAGR of 3.9%
over the forecast horizon (FY16-21).
Improved margins should support earnings: Margins on diesel and motor gasoline, which
contribute over 33% and 24% to the total industrys petroleum products volume, are linked to
inflation, which is expected to improve the sectors core earnings.
Investment risks
Oil price risk: Volatility in international prices of crude oil (Arabian/Persian basket) exposes oil
marketing companies to inventory gains and losses. Moreover, FO margins are directly linked to
high sulphur furnace oil (HSFO); therefore, any downward variance in oil prices is likely to affect
profitability, adversely.
Currency risk: Foreign currency risk arises mainly, where payables exist due to imports of goods
and loans acquired in foreign currencies. Since OMC imports petroleum products and borrows
in foreign currencies, any depreciation in PKR would have a negative impact on the bottom line.
Liquidity risk: Rise in the circular debt, owing to governments delayed subsidy payments to
power distribution companies substantially affects the entire supply chain, including
downstream oil & gas companies, resulting in liquidity risks.
Interest rate risk: The interest rate risk arises from loans (short term and long term) and working
capital finance obtained at variable rates. If the market rates increase, the variable rates payable
on such loans would increase; hence, affecting profitability.
Regulatory risk: Any adverse change in margins or policies could have a negative impact on
the bottom line.
Page 9 of 104
Ratings summarised
Upstream ratings
1. Oil and Gas Development Company (OGDC) - Buy

We initiate coverage on OGDC with a Buy rating based on our TP of PKR186/share, offering 27% upside. The
stock also offers a forward dividend yield of 4%; hence, providing an expected total return of over 30%.
OGDC is our top pick in the sector for the following reasons:
The stock is down 11% YTD, underperforming the broader benchmark by over 3% YTD, owing to recent
weakness witnessed in the local market. Notably, OGDC is trading at an implied oil price of USD41/bbl,
that is, at a steep discount of 23% to our FY18 average Arabian basket oil price forecast of USD53/bbl;
hence, providing appealing valuations for investments
OGDC is currently conducting exploratory efforts in leases such as Zorgarh and Soghri, which have greater
potential to add reserves and production flows, going forward
Also, the development projects to enhance production and reserves from Nashpa, and (non-operated JV)
TAL might increase its contribution to the companys hydrocarbon portfolio. These leases contribute
~50% to the countrys oil volume, where the operators are continuously making efforts to raise
production flows
OGDC has the highest operating margins in our oil universe (45% FY17e), owing to its optimal product
mix (Gas: 76% & Oil: 22%), which allows the company to lower its operating costs and better
concessionary pricing agreements, helping it to obtain higher realised prices than its peers
Moreover, the company provide a hedge against currency devaluation since oil and gas prices are
reference in USD.
Our valuation is based on a SOTP methodology, where the companys core 2P reserve based value contributes
PKR113 per share, exploration option and discounted market value of its stake in Mari Petroleum adds PKR67
and PKR6 per share, respectively.
2. Pakistan Petroleum Limited (PPL) - Buy

Pakistan Petroleum Limited (PPL) offers 28% upside potential based on our TP of PKR209/share, we initiate
coverage on the stock with a Buy rating. Along with the potential upside, the stock also offers a forward
dividend yield of 6%. PPL underperformed the benchmark and the sector by over 6% YTD, owing to the
recent decline in the local bourse. The stock currently trades at an implied oil price of USD45/bbl that is at a
considerable discount of 15% from our FY18 Arabian basket oil price forecast of USD53/bbl; hence, making
it an attractive Buy.
In addition to undemanding valuations, our Buy recommendation on the stock comes on the back of:
Conversion of Sui Mining Lease (ML) into a Development & Production Lease (D&P), which has raised the
Sui wellhead gas prices by over 60% and therefore will aid the company to augment its operating margins
by over 6% in FY17e. Since these prices are effective from June 2015, we expect, PPL to revise its FY16
earnings retrospectively, by ~PKR4.5/share. We have incorporated the new prices in our workings from
FY17 onwards
In addition to higher operating margins, these new prices will enable the company to drill deep in the
field, where initial estimates suggest a count of nearly 500bcf of gas reserves
Also, new discoveries from Gambat South, Tal and Nashpa leases with ongoing developments in Dhok
Sultan block should continue to support the companys hydrocarbon production
Furthermore, the company provides a currency hedge for investors who are cautious with respect to over
valuation of PKR against USD
Our valuation is based on a SOTP methodology, where the companys core 2P reserve based value, exploration
option, and cash value contribute PKR134 per share, PKR64 and PKR11 per share, respectively.
Page 10 of 104
3. Pakistan Oil Fields (POL) - Buy

Pakistan Oil Fields (POL) offers upside of 14% based on our TP of PKR538/share. We initiate coverage on POL
with a Buy rating. The stock also offers a forward dividend yield of 8%, enhancing the expected total return
to over 21% for FY18. Our Buy rating on the name is attributable to the following:
POLs share price have fallen over 11% YTD, underperforming the broader benchmark and the sector by
4% YTD, owing to the recent decline in the broader benchmark. We believe current valuations provide a
good entry opportunity, as the stock is trading at an implied oil price of USD48/bbl, that is, at a 9%
discount to our FY18 average Arabian basket oil price forecast of USD53/bbl
Notably, incremental oil production from Tal block (operated by MOL) is expected to support its volume
base. Tal block contributes 67% and 79% of the companys oil and gas production, where the operator
is drilling three wells in the block, which include Tolanj East 1, Makori East 6 and Mardan Khel 2. Going
forward, we expect oil production from Tal to grow at a three-year CAGR (FY16-19e) of 4.5%
Apart from Tal Block, outcome of the exploratory efforts carried out in Gurgalot Lease could provide
further upside surprises to production growth
Unlike its peers, POL has curtailed its exploratory activities in its own operated fields to bring down costs
from USD25.5/boe in FY15 to USD19.5/boe in FY16, which has aided the company to augment its profits
in the short term. However, this step is anticipated to lower flows from its own operated leases, going
forward, where we believe contribution from own operated fields will decline to 17% and 10% of oil
and gas production in FY19e from 19% and 13% in FY16
POL, similar to its peers provide a hedge against currency devaluation. It is worth noting that the local
currency is estimated to be over 10% overvalued against USD as per the IMF estimates.
POL remains our least preferred pick in the E&P sector, owing to its low exploratory efforts and narrow
hydrocarbon production base. Our valuation is based on SOTP methodology, where the companys core 2P
reserve based value, exploration option, cash and discounted portfolio value contributes PKR402, PKR50,
PKR45 and PKR41 per share, respectively.
Downstream rating
1. Pakistan State Oil (PSO) Buy

PSO offers 13% upside based on our TP of PKR508/share. The stock also offers a forward dividend yield of
6%, taking the cumulative expected total return to 19%. We initiate coverage on PSO with a Buy rating on
the back of:
PSO has outperformed the sector by over 3% YTD and the broader market by 11% YTD. At a forward
P/E of 6.1x, PSO is trading at a 23% discount to KSE100 index
We forecast healthy growth in motor gasoline (MOGAS) and high speed diesel (HSD) volumes, where we
expect the primary products to grow at a five-year CAGR (FY16-21) of 8.6% and 4.7% for the company,
respectively, owing to strong automobile sales (five-year CAGR of 8%), backed by i) low oil prices; and ii)
rise in commercial transport demand to meet China Pakistan Economic Corridor (CPEC) trade transit
requirements
Moreover, we expect furnace oil volumes to grow at five-year CAGR (FY16-21) of 1.6% for the company,
owing to policy changes by the government to reduce dependence on imported coal-based power
projects
Since MOGAS and HSD margins are linked to the annual inflation average, we expect these to rise 5%
every year, going forward. Notably, these products contribute over 28% and 19% to the companys
volumes
As circular debt is on the rise again and has now reached PKR460bn, PSOs trade receivables from
WAPDA, HUBCO and KAPCO have also surged from ~PKR146bn in FY16 to ~PKR175bn in 9MFY16,
despite a PKR20bn payment by the government in Feb 2017. Encouragingly, we believe the government
will clear its partial dues in the pre-election year to curtail load shedding and to lure voters
Our valuations are based on SOTP methodology, where the companys discounted cash flow (DCF) contributes
PKR500/share and discounted market value of Pakistan Refinery (PRL) stake contributes PKR8/share.
Page 11 of 104
Consumption of petroleum products to remain strong
Current demand for petroleum products in Pakistan is over 172mnboe and refined production of domestically
extracted crude is just over 28mnboe, which leaves a shortfall of 144mnboe (~84% of domestic fuel demand)
that makes Pakistan heavily reliant on imported crude and petroleum products.
As shown below, Pakistan extracts over 34mnbbls of crude oil, out of which over 30mnbbls are processed by
the local refineries, resulting in the final refined output of just over 28mnboe.
The refineries, with a cumulative annual processing capacity of ~19mnMT, import over 64mnbbls of crude
oil, mainly from Gulf countries, resulting in a refined output of just over 62mnboe from imported crude,
meaning a total refinery output of just over 90mnboe.
Figure 14: Supply chain and consumption of petroleum products
Source: Energy Year Book (FY15)
Despite heavy imports by the midstream, Pakistan downstream segment (OMCs) also imports a sizeable
portion to meet local demand, where OMCs cumulatively import over ~101mnboe of petroleum products.
Consumer demand for petroleum products grew at a five-year CAGR of 3.3% (FY11-16), where we believe
demand will remain strong and grow at a five-year CAGR of 5.1% for the forecast horizon (FY16-21). Our
forecast for strong fuel demand is backed by i) healthy automobile sales, which is expected to grow at a five-
year CAGR of 8% (FY16-21), backed by low oil prices and higher disposable income; and ii) rise in commercial
fuel consumption, owing to China Pakistan Economic Corridor (CPEC) trade transit.
Page 12 of 104
2. Pakistan Oil & Gas upstream exploration activities
Exploration drive to continue
Despite subdued oil prices, Pakistan exploration and production companies have continued their exploration
drive to augment their reserves and production flows, owing to i) improved security situation; and ii) policy
incentives provided by the government. Moreover, companies have adopted advance technologies to enhance
the probability of identifying hydrocarbon reserves 1.
Figure 15: Wells drilled

Total drilled exploratory and development wells
Exploratory Wells Development Wells

70
60
50
40
30
20
10
0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E
Source: Energy Year Book (FY15), PPIS, EFG Hermes estimates
For the past few years, Oil Reserve Replacement Ratio (RRR) have remained positive averaging at 148% (FY12-
15*), despite production growth of 12% over the same period. However, preliminary stats on reserves for
Dec 2016 reflect a depletion of 21mnbbls of oil lowering the reserve ratio to negative territory. We believe
this decline in the oil RRR is temporary and will improve by year-end, as outcomes from current drilling activities
are announced2.
(1) Exploration process begins with the identification of prospective hydrocarbon reserves through seismic surveys (2D&3D). On prospective
finds, the upstream companies drill exploratory wells; however, the assurance of hydrocarbons on a particular location cannot be
confirmed unless a company drills an exploratory well, analyse the log notes recorded during the drilling phase and extracts the initial
testing results.
(2) The RRR is the reserve replacement ratio is a measure of the magnitude of reserve additions compared to production levels. Low RRR
means companies are not able to replenish their reserves following hydrocarbon production, which would eventually hurt production
levels, going forward.
Page 13 of 104
Figure 16: Pakistan oil reserve replacement ratio Figure 17: Pakistan gas reserve replacement ratio
500% 200%
400% 150%
300% 100%
50%
200%
0%
100%
-50%
0%
-100%
-100%
-150%
-200% -200%
1HFY17*
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
1HFY17*
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
*Energy Year Book for FY16 is not published until now; FY17 preliminary *Energy Year Book for FY16 is not published until now, FY17 preliminary
data is released by PPIS data is released by PPIS
Source: Energy Year Book (FY15), Pakistan Petroleum Information Service, Source: Energy Year Book (FY15), Pakistan Petroleum Information Service,
EFG Hermes estimates EFG Hermes estimates
On the other hand, the gas reserve replacement ratio, which remained negative during the past three years,
has improved in 1HFY17. This improvement in gas RRR is attributable to i) MNPRs recent approval of the
supplementary agreements to convert various existing blocks to 2012 Petroleum Policy3, which has
encouraged E&P companies to increase efforts in gas exploration; and ii) improvement in security situation.
Going forward, we expect the gas reserve ratios to improve, owing to increased exploratory activities resulting
from low servicing costs and better policy incentives provided by the GoP. Moreover, revision of Sui wellhead
pricing and subsequent drilling in its deep reservoir pockets is expected to augment the reserve profile.
(3) The GoP has adopted various policies to encourage exploration companies to improve extraction of indigenous resources. However,
GoPs failure to respond to the changing dynamics of the oil industry has always impacted resource extraction, so much so that lack of
returns due to low wellhead gas pricing led a few foreign upstream players such as Petronas (2011) and Niko Resources (2013) to exit
Pakistan. Notably, during 19501980s, wellhead gas prices were derived on a Cost Plus Return on Equity mechanism under the Pakistan
Petroleum (Production) Rules 1949, then policies of 1991 and 1993 were introduced under which wellhead gas prices were derived
using percentage discounts to energy equivalency of High Sulphur Furnace Oil (HSFO). Soon after the introduction of 1994 and 1997
PPs, which linked the wellhead gas prices to the Crude Prices (Arabian/Persian Basket plus Average Freight Rate Assessment (AFRA)) less
zonal discounts, 2001 PP came up. However, 2001 policys cap of US$36/bbl failed to factor in the oil price hike during 2004-2007
where OPEC basket marked a high of US$73.8/bbl in Jul07.To counter the aforementioned weakness, the Ministry of Petroleum and
Natural Resources (MPNR) came up with 2007 Petroleum Policy, which increased the cap to US$45/bbl for wellhead gas pricing with a
Gas Price Gradient (GPG) applied between (0.2 1.0) over US$45/bbl. Once again the policy failed to factor in the magnitude of oil price
hike of 2008 rally where OPEC basket touched a peak of US$140.7/bbl in Jul08. However in the 2009 PP, the MPNR fixed the cap at
US$100/bbl, which was further raised to US$110 in 2012 Petroleum Policy.
Page 14 of 104
Improved security situation is helping exploration activity
In the past, upstream companies have remained reluctant to carry out exploration activities in major parts of
Khyber Pakhtunkhwa (KPK) and Balochistan, owing to the poor security situation; hence, foregoing potential
additions. Nonetheless, successful army operations across the country have improved security, making it easier
for upstream players to carry out exploration activities in the aforementioned areas.
Figure 18: Decline in civilian and security forces casualties due to ongoing Pakistan army operation
Civilians Security Forces Terrorists

3500
3000
2500
2000
1500
1000
500
0
CY11 CY12 CY13 CY14 CY15 CY16 CY17
Source: South Asia Terrorism Portal, EFG Hermes estimates
The improved security situation has encouraged E&P companies to invest in exploratory activities in KPK and
Balochistan; the graphs below highlight the increase in exploratory efforts in these provinces.
Figure 19: Civilian casualties by province Figure 20: Militants killed during operation phase by province
Security situation has improved in all regions, as civilian casualties have The beginning of the army operation in 2014 wiped out a large number of
declined across the country militants
CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14
CY15 CY16 CY17 CY15 CY16 CY17
1,400 3,000
1,200 2,500
1,000
2,000
800
1,500
600
1,000
400
500
200
0 0
Balochistan FATA KP Punjab Sindh Balochistan FATA Sindh KP Punjab
Source: South Asia Terrorism Portal, EFG Hermes estimates Source: South Asia Terrorism Portal, EFG Hermes estimates
Page 15 of 104
Figure 21: Drilling activity by province Figure 22: Seismic surveys by province
Seismic surveys have also increased in Balochistan and KPK in the past two
Drilling activity has increased in Balochistan and KPK (Meters drilled) years 2D (Line km)
FY15 FY16 FY17e FY15 FY16 FY17e
160,000 6000
140,000
5000
120,000
4000
100,000
80,000 3000
60,000
2000
40,000
1000
20,000
0 0
Sindh Punjab Balochistan KPK Sindh Punjab Balochistan KPK
Source: PPIS, EFG Hermes estimates Source: PPIS, EFG Hermes estimates
Page 16 of 104
Policy incentives
In an effort to encourage E&P companies to extract more indigenous gas production, the Ministry of
Petroleum and Natural Resources (MPNR) has recently approved the supplementary agreements to convert
various existing blocks to 2012 PP. However, this conversion will be effective only for the new discoveries
(not the existing ones), whereas incremental production from old discoveries will be priced according to
their old concessionary agreements. This policy implementation has already started to yield results, where
gas RRR for the first time in five years has recorded a whopping upsurge of 180% in 1HFY17 (vs. five-year
average 7%). We believe this step will bode well for the E&P companies as (it can be seen in the PP table
below) wellhead gas prices derived from the 2012 PP are higher for all zones (in any oil price environment)
against the rest of the policies (2001, 2007 and 2009). In this regard, 47 exploration leases have been
approved under supplementary agreements.
Notably, the GoP has further announced Low Btu Gas Price Policy in 20124 and a Marginal Gas Field Policy
in 20135 to encourage E&P companies to extract hydrocarbons from uneconomical gas fields.
Figure 23: Sensitivity of crude oil on wellhead gas prices by petroleum policy and zones
The table below represents the sensitivity of crude oil on Wellhead gas prices based on various petroleum policies and zonal arrangements
Arabian basket Zone 1 Zone 2 Zone 3
(USD/bbl) 2001 2007 2009 2012 2001 2007 2009 2012 2001 2007 2009 2012
Wellhead gas prices USD/mmbtu
30 2.87 3.01 3.40 3.67 2.68 2.84 3.18 3.50 2.50 2.70 2.96 3.33
40 3.03 3.37 3.81 4.28 2.84 3.11 3.56 4.08 2.64 2.90 3.32 3.89
50 3.03 3.65 4.08 4.89 2.84 3.35 3.82 4.67 2.64 3.02 3.55 4.44
60 3.03 3.85 4.35 5.26 2.84 3.55 4.07 5.02 2.64 3.06 3.79 4.78
70 3.03 4.05 4.62 5.62 2.84 3.75 4.32 5.37 2.64 3.10 4.03 5.11
80 3.03 4.25 4.76 5.87 2.84 3.95 4.45 5.60 2.64 3.14 4.14 5.33
90 3.03 4.45 4.89 6.11 2.84 4.15 4.58 5.83 2.64 3.18 4.26 5.56
100 3.03 4.65 5.03 6.35 2.84 4.35 4.71 6.07 2.64 3.22 4.38 5.78
110 3.03 4.85 5.03 6.60 2.84 4.55 4.71 6.30 2.64 3.26 4.38 6.00
120 3.03 5.05 5.03 6.60 2.84 4.75 4.71 6.30 2.64 3.30 4.38 6.00
*Zone 1 is high-risk and high-cost region; Zone 2 is medium-risk and high-cost region; and Zone 3 is medium-risk region with low to high risk
Moreover, recent approval by the government to convert the expired Mining Lease (ML) of Sui field, into
Development and Production Lease (D&P) will further encourage exploration activities and improve the
countrys reserve profile. Sui field, which contributes nearly 11% to Pakistans gas production, was priced
on the basis of negotiated settlement that was inked in early 2000s between the government and the
operator. Its conversion into D&P lease has raised the realised wellhead gas prices by over 60%, which
would provide further impetus for the operator to drill deeper into the potentially rich hydrocarbon block,
where initial deep estimates suggest a count of nearly 500bcf of gas reserves.
(4) In the absence of incentives, it is commercially unviable for E&P companies to produce low quality gas from the proven reserves. The gas
below the pipeline quality (900btu/cft) incurs additional cost, since companies have to produce higher volumes of gas to generate
pipeline-comparable heating values. However, greater volumes of low btu gas contains more Carbon dioxide, Nitrogen and Hydrogen
Sulphide molecules, which makes it highly corrosive for the gas processing plants, reducing its useful life. In this regard, MPNR an-
nounced a Low Btu policy back in 2012, which pertained to the fields having heating value below 450btu/cft. The price of gas with
heating value of 450btu/cft is fixed at US$6/mmbtu, which shall be increased by US$0.01/mmbtu for each btu/cft reduction below
450btu/cft up to 175btu/cft. The maximum price at 175btu/cft shall be US$8.75/mmbtu. However, the low btu gas with a heating value
ranged between 450 and 600btu/cft would entail a price of USUSD6/mmbtu.
Why quality gas low was commercially non-viable at previous policies? If a company operates two gas fields: 1) First field with
pipeline quality gas (900btu/cft) and 2) Second field with low btu gas (450btu/cft). The company will have to extract 2cft of gas from
the second field against the production of 1cft of gas from the first field to equate the heating values. Therefore, it would incur additional
cost for extracting an extra 1cft of gas from the second field, although the selling price of gas would be based on the heating value
(900btu) rather than volume (cft). Thus, making the low BTU gas unviable to extract.
(5) Marginal and Stranded gas fields have low proven reserves that cannot be exploited due to poor commercial economic viability. Higher
drilling costs, low pressures with low reserve volumes makes it less feasible for E&P companies to pursue production from such fields,
leaving it stranded. MPNR announced another policy in 2013 i.e. Marginal / Stranded Gas Policy, according to which the marginal field
gas prices will be set in accordance with 2012 PP with an additional premium of US$0.25/mmbtu for the three zones. Furthermore, for
marginal fields having low Btu gas, either the premium of marginal gas field or low Btu gas will be applied. In no case the two prices can
be applied simultaneously.
Page 17 of 104
Improving technology for geological studies
Over the years, local upstream companies have been using 2D seismic surveys for the identification of
potential hydrocarbon reserves. This method is a low-cost one (nearly 70% cheaper than 3D surveys), but
can result in considerable uncertainty in identifying exploratory prospects; hence, reducing companies
effectiveness in replenishing reserves. However, low servicing costs, along with the need to replenish gas
reserves have encouraged upstream players to increase the contribution of 3D surveys, in their geological
studies. We believe this will aid the companies in identifying hydrocarbon prospects with greater success, in
future years to come. The below graph shows the increased focus of upstream companies towards 3D
surveys.
Figure 24: Contribution of 3D studies to total geological surveys
Contribution of 3D surveys Linear (Contribution of 3D surveys )

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Aug-16
Dec-16
Aug-14
Jan-15
Aug-15
Oct-15
Jan-16
Jan-17
Sep-14
Oct-14
Mar-15
Apr-15
Sep-15
Mar-16
Apr-16
Sep-16
Oct-16
Mar-17
Apr-17
Jul-14
Nov-14
Feb-15
Jul-15
Nov-15
Feb-16
Jul-16
Nov-16
Feb-17
May-15
May-16
Source: Pakistan Petroleum Information Service (PPIS), EFG Hermes estimates
Page 18 of 104
3. Pakistan Oil & Gas Production flows
Oil and gas flows are expected to grow at a five-year CAGR of 3%

and 1%, respectively
Oil production in Pakistan has witnessed strong growth over the years, growing at a three-year CAGR (FY12-
15) of 12%. However, preliminary data for FY16 shows that the country witnessed an oil production decline
of ~8% Y-o-Y, which was attributable primarily to diminishing well flows from matured fields such as Aassu
(down 63% Y-o-Y), Sonro (down 61% Y-o-Y), Murid (down 69% Y-o-Y) and Rahim North (down 98% Y-o-
Y).
Figure 25: Pakistan oil production Figure 26: Crude oil production by company
Barrels of oil per day (bopd) % Contribution to countrys total oil production
100,000
90,000 Others 7% POL 2%
80,000 PPL 7%
70,000
OGDC 44%
60,000 UEPL 19%
50,000
40,000
30,000
20,000
10,000 MOL 21%
0
FY12A FY13A FY14A FY15A FY16A FY17E FY18F
Source: Company data, EFG Hermes estimates Source: Energy Year Book (FY15), EFG Hermes estimates
Figure 27: Major Oil fields

Balance
Operator of Discovery Oil flow Recoverable 2P OGDC's PPL's POL's
Field
the Field Year (bopd) Reserves Stake Stake Stake
(mnbbls)
OGDC Nashpa 2009 21,518 137.62 56% 29% 0%
MOL Makori East 2011 14,433 24.70 28% 28% 21%
PPL Adhi 1978 7,423 28.12 50% 39% 11%
MOL Maramzai 2009 4,125 4.00 28% 28% 21%
OGDC Kunar 1988 4,056 6.94 100% 0% 0%
OGDC Pasakhi 1989 3,194 6.20 100% 0% 0%
OGDC Rajian 1994 2,583 3.95 100% 0% 0%
MOL Mardankhel 2015 1,732 16.20 28% 28% 21%
OGDC Mela 2006 1,729 4.23 56% 29% 0%
OGDC Chanda 1999 1,227 3.30 72% 0% 0%
OGDC Kunnar & Pasakhi Deep 2005 1,018 6.33 100% 0% 0%
OGDC Chak2 2002 885 0.10 63% 0% 0%
OMV Maurice Mehar 2003 813 2.40 0% 0% 0%
MPCL Halini 2011 789 2.46 0% 0% 0%
OGDC Chak 63 2002 787 6.13 63% 0% 0%
OGDC Dakhni (Cond.) 1983 697 3.70 100% 0% 0%
OGDC Sono 1988 605 0.29 100% 0% 0%
MOL Mamikhel 2008 588 0.10 28% 28% 21%
Page 19 of 104
On the other hand, gas production clocked in at 1,480.74bcf (4.05bcf/d) in FY16, up 1% Y-o-Y, mainly due
to better production flows from fields like Naimat West (up 173% Y-o-Y), Bhit & Badhra (up 79% Y-o-Y) and
gas extraction from recently-explored block Rajani.
Going forward, we expect production growth numbers to remain stable at 3% for oil and 1% for gas owing
to players efforts to enhance production from matured fields and expedite development projects and
exploration activities to bring more flows to the system.
Figure 28: Pakistan gas production Figure 29: Gas production by company
Million Cubic feet per day (Mmcfd) % Contribution to the countrys total gas production
4,500
4,000 MOL 7% POL 0%
3,500 ENI 11%

Others 37%
3,000
2,500
2,000 PPL 16%
1,500
1,000
500
OGDC 29%
-
Source: Company data, EFG Hermes estimates Source: Energy Year Book (FY15), EFG Hermes estimates,
Figure 30: Major gas fields in Pakistan

Balance
Discovery Gas flow recoverable OGDC'S PPL's POL's
Operator Field
year (mmcfd) 2p reserves stake stake stake
(bcf)
MPCL Mari 1957 631.21 3,742.00 0% 0% 0%
PPL Sui 1952 444.91 1,414.00 0% 100% 0%
OGDC Uch 1955 400.01 2,118.00 100% 0% 0%
OGDC Qadirpur 1990 339.14 1,276.96 75% 7% 0%
UEPL Rajani 2014 186.69 270.311 0% 0% 0%
PPL Kandhkot 1959 185.23 457.342 0% 100% 0%
Eni Pakistan Bhit 1997 136.04 124.000 20% 0% 0%
MOL Maramzai 2009 124.96 203 28% 28% 21%
UEPL Naimat West 2013 122.93 331.596 0% 0% 0%
BHP Zamzama 1998 111.71 191.93 0% 0% 0%
OGDC Kunar/Pasakhi Deep 2005 108.33 652.00 100% 0% 0%
Eni Pakistan Badhra 1999 93.78 87.000 20% 0% 0%
OGDC Nashpa 2009 88.00 1,130.00 65% 29% 0%
OMV Miano 1993 79.01 62.00 52% 15% 0%
OMV Sawan 1998 66.56 86.00 0% 34% 0%
PPL Adhi 1978 62.79 310.123 50% 39% 11%
OMV Latif 2007 56.80 51.800 0% 33% 0%
Eni Pakistan Kadanwari 1989 43.12 24.00 50% 0% 0%
Page 20 of 104
Growth in oil flows from Khyber Pakhtunkhwa (KPK) is expected

to remain strong
The graph below shows Pakistans oil production by provinces, which highlights strong production growth of
18% seven-year CAGR (FY10-17) from KPK.
Figure 31: Pakistan oil production by province (mnbbls)

Production from KPK has increased by a staggering seven-year CAGR of 18%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e
18
16
14
12
10
8
6
4
2
0
KPK Sindh Punjab
Source: Energy Year Book, PPIS, EFG Hermes estimates
This was achievable, owing to enhanced production from Tal and Nashpa blocks, which more than offset the
decline from matured fields namely Chanda and Mela.
Figure 32: Oil production by fields (mnbbls)

Since flows from Tal and Nashpa have witnessed staggering growth, it has more than offset the declines from matured fields
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e

10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Nashpa Tal Mela Chanda
Page 21 of 104
Tal and Nashpas contribution to the countrys total oil production, which cumulatively stood near 7% in
FY10 rose to nearly 50% in FY17e. While contribution from Mela and Chanda have declined, owing to low
balanced recoverable reserves and declining pressure. Going forward, we expect oil production from Nashpa
and Tal to grow at a three-year CAGR (FY16-19) of 9% and 4.5%, respectively.
Figure 33: Contribution to total oil production by fields

Nashpa and Tal contribute nearly half of the countrys total oil production
FY10 FY17e
30%
25%
20%
15%
10%
5%
0%
Nashpa Tal Mela Chanda
Gas production from KPK and Balochistan is expected to inch up
Gas production from KPK and Balochistan grew at a seven-year CAGR (FY10-17) of 10% and 2%, respectively,
owing to higher flows from Uch, Tal and Nashpa.
Figure 34: Pakistan gas production by provinces

Gas production has increased from KPK and Balochistan
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e
1200
1000
800
600
400
200
0
Sindh Balochistan KPK Punjab
Page 22 of 104
We expect gas flow from Nashpa and Uch to increase at a 7% and 2% three-year CAGR (FY17-19),
respectively, whereas production from Tal block is anticipated to decline 1% in FY18, owing to its ageing
matured fields. However, production flows from Tolanj and Mardan Khel are anticipated to support
production from the block, going forward. Moreover, better flows from Sui are expected to augment
production numbers, owing to its price revision, which will encourage the operator to carry out additional
drilling activities.
Figure 35: Gas production by field (mmcf)

Gas production from Sui along with Nashpa, Uch and new fields of Tal block are expected to support growth
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e
250,000
200,000
150,000
100,000
50,000
0
Nashpa Tal Uch Sui
Figure 36: Contribution to total gas production by fields

Nashpa and Uch are expected to increase their contributions, going forward
FY10 FY17e
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Nashpa Tal Uch Sui
Page 23 of 104
4. Pakistan oil & gas downstream sector
Pakistan oil marketing companies
Short-term recovery in international oil prices, post the production curtailment agreement between OPEC and
non-OPEC members, heightened the quantum of inventory gains coupled with a modest uptick in volumes
of petroleum products (five-year CAGR of 3.3% during FY11-16), which attracted investors interest in OMCs,
aiding the sector to outperform the broader benchmark by 7% YTD.
While the OMC sector rests in the hands of 13 companies, the five major listed companies, namely PSO (3,851
outlets and 12.9mn MT sales), Shell (774 outlets & 2.4mn MT sales), APL (550 outlets & 1.8mn MT sales),
HASCOL (400 outlets & 1.5mn mt Sales), and BYCO (261 outlets & 0.85mn MT sales) hold the sizable market
share of ~85%.
Figure 37: Market share by company

Registered Oil Marketing Companies
Company Volume Market share Status
Pakistan State Oil 11,862,143 55% Listed

Shell Pakistan 2,244,148 11% Listed
Attock Petroleum 1,608,990 8% Listed
Hascol Petroleum 1,383,772 7% Listed
Total Parco Marketing 1,001,009 5% Not Listed
Total Parco Pakistan 906,801 4% Not Listed
Byco Petroleum 773,724 4% Listed
Bakri Trading Co. 459,763 2% Not Listed
Gas and Oil Pakistan 273,729 1% Not Listed
Overseas Oil Trading Co. 167,695 1% Not Listed
Admore Gas 151,410 1% Not Listed
Askar Oil Services 21,192 0% Not Listed
ZOOM 925 0% Not Listed
Source: Oil Companies Advisory Council, Company data, EFG Hermes estimates
Primary products, the downstream sector has in offering, includes:
Furnace Oil (FO) contributes over 38% to the total petroleum product sales, where its primary
consumers are: i) Power sector with 92%; and ii) Industrial sector with 8% share in consumption.
High-Speed Diesel (HSD) contributes over 33% to total fuel sales of the country; its primary
consumers are transport sector with 87% and power sector with 7% share.
Motor Gasoline contributes over 24% to total fuel sales, where transport sector consumes
nearly 98% of the fuel.
Page 24 of 104
Volumetric growth of primary products to remain strong
Furnace Oil (FO), resumption of volumes in sight: Shifting focus from FO to Coal & RLNG for power
generation, which constitutes ~92% of FO consumption, affected the sales of furnace oil, which has
declined at a two-year CAGR of-3.5% during FY14-16. It is worth mentioning that over 18,000MW Coal,
Hydel and RLNG projects are expected to come online, which still threatens volumetric growth, but recent
GoPs policy to curtail new power projects based on imported coal, is expected to provide support to
dwindling FO sales. Going forward, we expect the industrys consumption to grow at a five year CAGR
(FY16-FY21) of 1.3%.
CPEC is anticipated to support High-Speed Diesel (HSD) consumption: Despite posting meager
growth of ~2% p.a over five years, HSD makes up over 33% of the industrys total volume. Since the
Transport sector consumes the majority of the HSD sales (nearly 87%), we believe ongoing CPEC projects
should increase automobile sales, especially commercial vehicles for logistical support to transport goods
to and from China, which should bode well for fuel demand, where we believe demand for the industry
will grow at a five-year CAGR of 5.8% (FY16-21)
Motor Gasoline (MOGAS) sales expected to remain buoyant: With over 24% contribution to total
volumetric sales, MOGAS segment has grown at an astounding five-year CAGR of over 18% (FY11-16),
where consumption of fuel largely emanates from the Transport sector. Since automobile sales are
expected to continue their growth trajectory at a five-year CAGR of 8% during 2017-21, owing to
improved disposable income and trickle down effects of CPEC; consequently, we expect the industrys
fuel sales to grow at a five-year CAGR of 10.2% (FY16-21). Moreover, low intl oil prices and arrival of
more efficient fuel like Ron92, 95 & 97 should further support growth numbers
Improved margins should support earnings
Motor gasoline and diesel margins are linked to the CPI: The margins on motor gasoline (petrol)
and diesel are regulated, where GoP in previous year has approved to link motor gasoline and diesel
margins to CPI, resulting in the hike from PKR2.35/ltr to PKR2.41/ltr for both products. The next revision
is expected in Aug 2017, where we believe average margins will be revised upwards, based on inflationary
expectations of 5%
High-octane fuel is margin-deregulated: Following the introduction of higher-quality fuels, the
government has deregulated margins on Ron95 high-octane product, allowing OMCs to charge different
margins. Currently, V Power by Shell sells at ~PKR86/ltr, PSOs Altron X sells at ~PKR84/ltr and HASCOLs
Hasron 95 is priced at PKR79/ltr
Furnace oil margins: OMCs charge ~3.5% of the import equivalent ex-refinery prices on HSFO. Any rise
in oil prices would expand the margins in absolute terms, but would intensify the circular debt pile-up
which already stands at daunting levels
Non-energy product margins: Margins on non-energy products, such as lube and solvent oil, are also
deregulated. Lube oil has double-digit margins; therefore, recently we are seeing more push from OMCs
toward this fuel segment
Page 25 of 104
Consumption of petroleum products to remain strong
Current demand for petroleum products in Pakistan is over 172mnboe and refined production of domestically
extracted crude is just over 28mnboe, which leaves a shortfall of 144mnboe (~84% of domestic fuel demand),
making Pakistan heavily reliant on imported crude and petroleum products.
This heavy reliance on imports is attributed majorly to low indigenous oil production, where the country meets
roughly 16% of its total oil consumption from local production.
As shown below, Pakistan extracts nearly 34mnbbls of crude oil, from which just over 30mnbbls is processed
by the local refineries with Attock Refinery (50%), having the largest share, is followed by Pak Arab (19%)
and National Refinery (14%). The refined petroleum products from the indigenous oil production is quantified
at ~28.4mnboe.
The Midstream sector, which consists of seven main refineries, including: i) Attock; ii) Byco Petroleum; iii)
Dhodhak; iv) Enar; v) National; vi) Pak Arab; and vii) Pakistan Refinery, has to import crude (~64mnbbls) to
operate the refineries at effective utilisation rates. The refineries produce just over 62mnboe of petroleum
products from the imported crude, hence cumulatively producing just over 90mnboe from imported and local
crude.
Figure 38: Petroleum products supply chain
Source: Energy Year Book (FY15)
Despite heavy imports by the midstream, Pakistans downstream segment (OMCs) also has to import a sizeable
portion to meet local demand, where OMCs cumulatively import roughly ~101mnboe of petroleum products.
Consumer demand for petroleum products grew at a five-year CAGR of 3.3% (FY11-16), where we believe
demand will remain strong and grow at five-year CAGR of 5.1% for the forecast horizon (FY16-21). Our
forecast for strong fuel demand is backed by: i) healthy automobile sales, expected to grow at a five-year
CAGR of 8% (FY16-21), backed by low oil prices and higher disposable income; and ii) rise in commercial fuel
consumption, owing to China Pakistan Economic Corridor (CPEC) trade transit.
Page 26 of 104
Circular debt is rising again despite low oil prices
The major issue that has overshadowed the entire energy chain is the pile-up of circular debt, which has not
only mopped up liquidity from the energy chain, but has also constrained power companies to generate
electricity; hence, affecting national domestic output negatively. The govt. recently established a seven-day
credit mechanism, under which the power producers were required to pay the billed amount to OMCs (PSO
has over ~70% market share in FO) within seven days from the date of purchase of fuel. Despite its
introduction, coupled with low furnace oil prices and reduced T&D losses, the circular debt seems to be rising,
the latest industry figures have reached a whopping PKR460bn mark (the same level as 2013, following the
general elections). However, we expect the govt. to partially settle the circular debt amounts owing to the
pre-election campaign, which might resolve the issue for the time being, but could appear again in 2019.
Page 27 of 104
5. Appendix : Global oil outlook
Supply expected to keep oil prices subdued6
The production curbs adopted by OPEC and some of the non-OPEC members, which were anticipated to mop
up nearly 1.8mnbopd from the supply lines vs. estimated ~2mnbopd oversupply in 2015, was not sufficient
to maintain oil prices above the US$60/bbl mark, which can primarily be explained by:
OPEC and non OPEC members agreed to curb flows from Oct16 production level which itself
was the month with highest recorded production (where KSA, Iraq and Russias production was
up by 3.9%, 3.2% and 2.8% over Oct15 levels).
Also, some OPEC members who were exempted (Libya and Nigeria) from the production cuts,
managed to increase their production. Recall that the Algiers Accord, which temporarily rallied
oil prices by nearly 15%, exempted Nigeria and Libya from production cuts owing to civil strife.
These countries have ramped up cumulative production by over ~300K bopd, while Iran was
allowed to slightly lift its production up to 3.8mn bopd,
Lack of proper implementation of curbing measures by some member countries where in
April17 out of 21 member nations only 10 met their production targets,
Rise in the drilling activity of American shale producers, where the number of U.S. oil rigs has
more than doubled, within the past year, and
Fear of OPEC drifting apart from its curbing agreement, owing to continuous political rifts
among its member countries.
Owing to the above mentioned fundamental issues, we remain conservative on our oil price forecast where
we anticipate Brent to average at USD57, USD59 and USD60 for CY18, CY19 and CY20 onwards.
Figure 39: Comparing the past oil supply glut situations with the recent one
1985-86 1997-98 2014-present

WTI (High - Low) From USD30.12 to USD10.20 From USD26.55 to USD10.82 From USD107.95 to USD26.68
Type of crisis Supply glut Supply glut Supply glut
While production from non-OPEC grew by a Non OPEC production grew 4.2% and 2.8% in 2014
three-year (1995-98) CAGR of 2%, incremental and 2015, respectively, where the US alone added
Production from non-Opec grew 2%Y-o-Y in
production from Venezuela, up by 343K bopd in cumulative additions of 2.7mn bopd in two years,
1985, where the majority of the increase
1997, (an Opec member) created rifts among the driven by shale revolution. Re-playing their old school
came from the North Sea (Brent). Responding
OPEC cartel. In reply, other OPEC members Iraq, strategy OPEC members inc. Iraq (1m bopd) and KSA
World production to the situation, OPEC opted for higher
KSA and Nigeria also increased their production (371k bopd) increased production to drive out costly
market share over price cuts, resultantly
by 579k, 162k & 133K bopd, respectively. US shale production. Widening the supply/demand
exceeding the supply more than the demand
Incremental supply of 1.35mn bopd from OPEC in gap to 2.1% in 2015 against -1.1% in 2013.
by 2.3mnbopd.
1997 flooded the market, widening supply Resultantly, WTI prices nose-dived from USD108.0 in
demand gap from ~0.4% in 1996 to 2% in 1998. Jun 2014 to USD26.68 in Jan 2016.
Back in 1985, when the oil prices soared to Regardless of the Asian Crisis, led by devaluation
Oil consumption exhibited a two-year CAGR of 1.5%
USD30/bbl (historic high back then), global of Yuan, Yen and Thai Bhat, coupled with the
World demand oil demand settled in at 60mn bopd, Asian financial markets crash, oil consumption
(2013-15), regardless of the fear arising from China's
economic slowdown and Asian currency wars.
+0.5%Y-o-Y. surged 2%p.a [five-year (1994-99) CAGR].
The oil price decline pushed OPEC members to

Following the slump in prices, KSA reached OPEC and non-OPEC members (inc. Russia) agreed to
clear the rifts and stabilise the oil prices through
an agreement with other OPEC members to curb production by ~1.8mn bopd in Dec 2016. The
coordinated production cuts, where major supply
curtail production, which included major cuts curbs were implemented from Jan 2017, the
Response and was withdrawn by KSA 565k bopd and
from KSA (itself) by 581k bopd, Nigeria by announcement of the curbs raised oil prices by ~20%,
impact Venezuela 300k bopd. Total production cuts from
126k bopd, Libya by 63k bopd and Indonesia taking WTI above USD55/bbl, as oil prices increased
OPEC were 936k bopd in 1999; thus, recovering
53k bopd. Resultantly, WTI surged from fears of US shale production sparked retracing the
oil prices from USD10.8 in Dec 1998 to USD25.0
USD11 in Jul 1986 to USD21 in Aug 1987. prices below the USD50/bbl benchmark.
in Sep 1999.
Source: Oxford Institute of Energy Studies, EIA, EFG Hermes estimates
(6) The oil price crash of 2008-09 is not mentioned above since it was driven by consumption slowdown, where demand from non-OPEC
declined 2% Y-o-Y in 2009 rather than excess supply. However, to support the oil prices, Saudi Arabia and Kuwait curtailed its production
by ~1.1mn and ~222k bopd in 2009. Production cuts supported the prices, where WTI increased from USD30.3/bbl in Dec 2008 to
USD79.4/bbl Dec 2009.
Page 28 of 104
Figure 40: Oil price timeline

Oil price downturns, over the past three decades, can be explained by demand supply imbalances originating from the above-mentioned issues. The prices
below are WTI annual averages
2008-09 consumption 2014-Present supply

120 slowdown glut
100
80
60 1985-86 supply glut 1997-98 supply glut
40
20
CYTD
CY85
CY86
CY87
CY88
CY89
CY90
CY91
CY92
CY93
CY94
CY95
CY96
CY97
CY98
CY99
CY00
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
Source: EIA, EFG Hermes estimates
Re-aligning pricing power
The global oil industrys pricing power, has been held by Saudi Arabia for decades, but this seems to be
weakening, as technological advancements are lowering shale fracturing costs in the US (constraining its
imports) and as Iran also intends to regain its lost market share (additional supply). Until now Irans production
is capped at 3.8mn bopd, as agreed in the Algiers accord, but rifts between Iran and its arch-rival Saudi Arabia
could lead to production enhancements over the agreed cap. Although Saudi Arabia, with massive
conventional hydrocarbon reserves (266.4bn bbls of oil as of 2015), together with the lowest drilling costs,
may well retain pricing power on the lower side (ability to bring down prices by oversupplying the market),
but it seems to have lost its grip to maintain prices at higher levels, i.e., above USD60/bbl, despite Algiers
Accord where OPEC, Russia and other small producers agreed to slash supplies by ~1.8mn bopd. The cartel
has not been able to successfully maintain prices at higher levels, owing to US shale oil supplies gushing
through the North American pipelines. The actionable move by OPEC and non-OPEC (excluding USA) to
elevate pricing levels would further entice shale production, cementing the supply glut. Resultantly, OPEC
members are faced with a tough choice to rethink the framework and substance of their policies to support
oil prices, where some of the small producers have no choice but to follow the lead of the heavy weights.
I. OPEC and non-OPEC curbs to restrain their own excess supply
After nearly two years of continuous oil price decline initiating from Jul 2014, OPEC members finally reached
an agreement (first in eight years) for production cuts on 30 November 2016 in Algiers. They agreed to shave
production by 1.2mn bopd and imposed a production ceiling at 32.5mn bopd from Jan 2017 onwards. While
Saudi Arabia agreed to make the largest production cut of 486k bopd, Nigeria and Libya were exempted due
to losses incurred by civil strife and violent internal rebellion movements. However, Iran was allowed to lift its
production slightly, up to 3.8mn bopd between Jan 2017 and Jun 2017.
Following consensus on the Algiers Accord by all OPEC members, Non-OPEC at its meeting on 10 Dec 2016
also agreed to slash production by ~600k bopd, which propped up oil prices by ~20%. However, Oct 2016
was set as the base month for production curtailment, which itself was the record production month for
OPEC. Therefore, the cumulative production curb of 1.2mn bopd by OPEC is expected to continue to curtail
the excess supply glut created by itself in 2016 to drive out US shale production.
Page 29 of 104
Figure 41: Top oil producing countries

Rise in production from all top producers over the past years (000bopd)
Russia Saudi Arabia US Iraq Iran

12,000
10,000
8,000
6,000
4,000
2,000
0
2011 2012 2013 2014 2015 2016
II. US shale revolution is driving out old rulers
Following the shale revolution, the US has witnessed hefty growth in crude and lease condensate production
by ~3.4mn bopd over the past six years, achieving six-year CAGR of 8.3% (2010-16). The increment is
significantly substantial because the increase (alone itself) is greater than the output of most of the OPEC
members (excluding Saudi Arabia, Iraq and Iran). Even after such sizable growth in shale production, the US
has continued to remain a net importer of oil. Back in 1995, when American demand stood at 17.7mn bopd,
the country met 44.5% of its total requirement via net imports, out of which ~53% (4.2mn bopd) came from
the OPEC region. Up until 2011, the United States met 45% of its consumption through net imports; however,
since 2012, the shale boom has flooded oil supplies, dragging down the US imports by 12.5% Y-o-Y in 2012
alone. Since then, the US net imports have headed southwards, going down 34% (2016 vs. 2012).
Figure 42: US petroleum products consumption

Production, imports, stock usage and consumption
Crude Oil Production NGPL Production Other Liquids Production Net Imports of Crude and Pet Pro Stock Use
25,000
20,000
15,000
10,000
5,000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Page 30 of 104
Number of rigs deployed is on the rise again

While the decline in oil prices from ~USD101/bbl in Feb 2014 to ~USD48/bbl in Aug 2017 have kept the
numbers of rigs on the lower side (-49%) from 1769 in Feb 2014 to 949 in Aug 2017, the recovery in oil
price, owing to Algiers Accord, has increased the number of operating rigs by over 58% from 597 in Dec
2016 to 949 in Aug 2017. The strong correlation between oil prices and number of rigs under operation
highlights that, as OPEC tries to prop up prices, excess rigs are deployed in the US, which significantly
increases North American oil supplies.
Figure 43: North American rig count vs. WTI crude Figure 44: New well oil production per Rig (bopd)
A strong rebound in rig count following recovery in crude prices Rise in extraction efficiency owing to technological advancements
Rig Count (LHS) WTI Prices (RHS) Aug-15 Aug-16 Aug-17

2500 120 1600
100 1400
2000
1200
80
1500 1000
60 800
1000
40 600
400
500
20
200
0 0 0
Jan-14
Jan-15
Jan-16
Jan-17
Apr-14
Apr-15
Apr-16
Apr-17
Jul-14
Oct-14
Jul-15
Oct-15
Jul-16
Oct-16
Eagle Ford Bakken Niobrara Permian Haynesville Rig

Weighted
Average
Source: EIA, Baker Hughes and EFG Hermes estimates Source:EIA, EFG Hermes estimates
Technological advancements - Reducing costs

Continuous innovation and improvements in the horizontal fracturing methods and techniques have
enhanced the efficiency of rigs, owing to which new oil well production per rig from shale formations has
increased exuberantly by 17% Y-o-Y or 95bopd in Aug 2017. With every well drilled, the exploration
companies are getting more effective at reducing costs. As per a recent statement released by EOG
Resources (a company engaged in exploration and production of shale oil in the US), average operating cost
of shale oil well per BOE has declined 55% over the past four years, making production commercially viable
between USD35/bbl - USD70/bbl for different shale basins against an average of USD70/bbl to USD95/bbl in
2012. Moreover, the ability of shale drillers to quick-start production flows (~30 days estimated drilling time)
in the event of oil price rebound, could open the supply taps to the global oil market; thus, hijacking the
upper end of the pricing power from OPEC. OPECs inability to drive prices, despite the Algiers Accord,
might incline it to negotiate a deal with US shale producers to curtail production, or perhaps expand the
OPEC forum to include non-members (esp. US and Russia) to derive a policy framework to stabilise oil prices
and maintain fair share in the market for all oil exporting countries.
Shale reserves are found around the world, including Pakistan, where (according to a recent study
conducted by USAID) sizable reserves of 10,159 tcf of shale gas and 2.3tn bbls of shale oil are present.
However, the scale and speed of the US boom is unique, and cannot be easily replicated elsewhere. Reasons
include well-documented geology, an experienced and competitive exploration industry, and well-
established ownership and property rights.
Page 31 of 104
III. Iran sanction uplift - Additional stress to global oil market
The return of Iran to the global oil market, following the lift of sanctions, has further aggravated the supply
situation, where it is currently obeying the commitments of Algiers Accord, but its continuous rifts with its
archrival Saudi Arabia make investors nervous about the future. It is worth noting that, prior to the Iranian
Revolution (1977-79) and damages caused by Iran-Iraq War (1980-88) to the countrys producing fields,
pipelines, terminals and refineries, Iran was producing up to 6mn bopd and had a market share of ~20% in
OPECs total production. Therefore, after the recent removal of sanctions, Iran is planning to raise its
production back to its pre-sanction levels until 2021, where production flows are anticipated to be driven
from its older fields and the sale of Iranian oil in storage. Moreover, the possibility of development projects in
new fields and additional exploratory activities cannot be ruled out, given Iran would rigorously pursue share
expansion.
Figure 45: Contribution to OPECs production

Chronological comparison of KSA, Iran and Iraqs contribution to OPEC
Saudi Arabia Iran Iraq

0.50
EU Sanctions
Iran-Iraq War (1980-1988) Iraq-Kuwait War (1990) - Iraq's production down
0.45 US Invasion o against Iran (2012-
due to war damages, and the UN imposing a ban f Iraq (2003) 2015)
0.40 on its exports (1991)
0.35
0.30
US uplifting
0.25 sanctions
(2015-16)
0.20
0.15
0.10
0.05
0.00
2002
2007
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2003
2004
2005
2006
2008
2009
2010
2011
2012
2013
2014
2015
2016
Page 32 of 104
6. Appendix 2
Tight and shale hydrocarbon reserve potential in Pakistan
After the US shale revolution, ample hydrocarbon reserves have been found across the world, including
Pakistan. According to the Energy Information Administrations (EIA) Technically Recoverable Shale Oil and
Shale Gas Resources report published in 2013, the country has sizeable gas and oil reserves of over 586tcf
and 227bnbbls, respectively, in tight/shale formations, of which 105tcf of Shale Gas, 33tcf of Tight Gas and
9.1bnbbls of Shale Oil are considered recoverable. Adding to it, a study was conducted with the help of US
Agency for International Development (USAID), which quoted a figure much higher than the EIA, estimating
total reserves of 10,159tcf of Shale Gas and 2.3tnbbls of Shale Oil, where the majority of which is expected
to be in Sulaiman and Kirthar Belt.
Figure 46: Tight gas known reserves Figure 47: Tight vs. shale formation
Source: ENI, EFG Hermes Research Source: EIA, EFG Hermes Research
Difference between tight and shale formation

In tight formation, hydrocarbon reserves are trapped in small, poorly-connected holes between the rocks
mostly in sandstone and limestone sources. These rocks are hard capped with low porosity, which hinders
hydrocarbon flow to the well. On the other hand, in shale formation, the hydrocarbon reserves remain in the
rock, where it is formed (generally the mudstone) and has not migrated to more permeable rock. Since shale
rock is less porous and permeable compared to tight rock, the production process for shale gas is much more
complicated.
The main issue that hinders shale/tight gas extraction in Pakistan is the availability of water and its subsequent
disposal. As per the Ministry of Petroleum and Natural Resources (MPNR), shale wells require ~3mn to 8mn
barrels of water (as per their depth levels), with an initial estimated cost of USD10/mmbtu for gas production.
The cost is expected to decline if the companies continuously improve the drilling methods and production
volumes.
Page 33 of 104
7. Appendix 3
The rise of the circular debt, creating bottlenecks
Q. What is circular debt and how it emerged as one of the main bottlenecks?
In a normal course of business, the OMCs sell Furnace Oil (FO) to Independent Power Producers and WAPDA
owned generation plants (GENCOs), which produces electricity and sells it to the government run distribution
companies (DISCOs), providing power to end consumers.
The tariff at which GENCOs sell to the DISCOs and the tariff at which electricity is supplied to the end
consumer is determined by NEPRA after receiving government approval.
Electricity subsidies and governments failure to clear payables: The delay in subsidy payments by
the government to DISCOs, which include the cost differential and DISCOs profits created the circular
debt problem
Inefficiencies of government-owned GENCOs: From the costing perspective, inefficiencies and
bureaucratic red tape, along with corruption, unjustified deals, overstaffing etc. increases the electricity
generation costs
Electricity theft and poor collection of electricity bills: From the revenue collection side, electricity
theft and poor collection of electricity bills, esp. from provincial governments and powerful private
individuals and companies exaggerates the problem
Current situation of circular debt
The major issue that has overshadowed the entire energy chain is the pile-up of circular debt, which has not
only mopped up liquidity, but has also constrained the power companies to generate electricity; hence having
a negative impact on the national domestic output. The govt. has recently established a seven-day credit
mechanism, under which, power producers were required to pay the billed amount to OMCs (PSO has over
~70% market share in FO) within seven days from the date of purchase of fuel. Despite its introduction,
coupled with low furnace oil prices and reduced T&D losses, the circular debt seems to be rising, where latest
industry figures have reached to a whopping PKR460bn mark (the same level as 2013 following the general
elections). However, we expect the govt. to partially settle the circular debt amounts owing to the pre-election
campaign, which might resolve the issue for the time being, but could appear again in 2019.
Page 34 of 104
21 August 2017
Oil & Gas Development Co. Stock Rating

Buy
Healthy operating margins & exploration efforts make it a Target Price
perfect E&P package PKR186
Closing Price
PKR147
Oil, Gas & Consumable Fuels. Pakistan Rating: Buy Target Price
PKR185.71
Initiating coverage on OGDC with a Buy rating

We initiate coverage on OGDC, the largest Oil and Gas exploration company in Pakistan, with a Buy rating and TP of PKR186/share,
offering 27% upside and total upside of over 30% when including a forward dividend yield of 4%. OGDC is our top sector pick, we
like the stock due to: i) attractive valuation, it is trading at an implied oil price of USD41/bbl, at a 23% discount to our FY18 average
Arabian basket oil price forecast of USD53/bbl; ii) ongoing exploratory efforts in leases such as Zorgarh and Soghri, which have large
potential to add reserves and production flows, going forward; iii) development projects to enhance production and reserves from
Nashpa, and (non-operated JV) TAL might increase contribution to its hydrocarbon portfolio; iv) highest operating margin in our oil
universe (45% FY17e), owing to 1) its balanced product mix (gas: 76% & oil: 22%), which helps it keep operating costs low; and 2)
better gas concessionary agreements allows it to obtain higher realised prices vs. peers; and 3) it also provides a hedge against currency
devaluation as oil and gas prices are in USD. Our valuation is based on a SOTP methodology, where its core 2P reserve based value
contributes PKR113 per share, exploration option and discounted market value of its stake in Mari Petroleum adds PKR67 and PKR6
per share, respectively.
Exploratory and development efforts are expected to drive extraction growth

OGDC is the largest oil and gas exploration company in Pakistan, covering nearly 32% of the countrys total exploration acreage and
contributing ~44% and ~29% to the countrys total oil and gas production. The company has potential for new discoveries in its
exploratory leases at Zorgarh and Soghri (explained later in detail). Furthermore, continuous developments to enhance production
flows from Tal and Nashpa are further anticipated to cumulatively add over 1.5mnbbls of oil and 5.6bcf of gas to the companys
production portfolio, respectively, by FY19.
OGDC offers highest operating margin within our oil and gas universe
OGDCs balanced product mix (Gas: 76% & Oil: 22%) means it has the second lowest cost (USD13.1/boe) and it realises better
hydrocarbon extraction prices (USD23.6/boe); hence, augmenting its operating margins. Going forward, we expect OGDCs operating
margin to come in at 45% for FY17e, which is the highest in our oil and gas universe.
Key Financial Highlights (Jun Year End) Stock Data

Closing Price PKR147 as of 16 Aug 2017
BH1,BWH1,CBH9
In PKRmn, unless otherwise stated 2016a 2017e 2018e 2019e Last Div. / Ex. Date PKR1.00 / 14 Mar 2017
Revenue 162,867 175,157 186,064 192,586 Mkt. Cap / Shares (mn) PKR632,107 / 4,301
Av. Daily Liquidity (mn) PKR485.00
EBITDA 87,850 95,053 101,143 103,224
52-Week High / Low PKR189 / PKR134
Net income 59,971 63,639 69,904 72,270 Bloomberg / Reuters OGDC PA / OGDC.KA
EPS (PKR) 13.9 14.8 16.3 16.8 Est. Free Float 15.0%
EPS consensus (PKR) 13.9 N/A N/A N/A
Price to earnings 10.5x 9.9x 9.0x 8.7x
Dividend yield 3.5% 3.7% 3.9% 4.1%
Net debt (cash) / Equity (0.0)x (0.0)x (0.0)x (0.0)x
EV / EBITDA 7.1x 6.6x 6.2x 6.0x
ROAE 13.0% 12.8% 12.9% 12.3% Danish Owais
BH1,BWH1,CBH9
FCF yield 2.7% 4.8% 9.6% 8.9% danish.owais@efg-hermes.com
Source: Oil & Gas Development Co., Bloomberg and EFG Hermes estimates
Oil & Gas Development Co. 21 August 2017
Oil, Gas & Consumable Fuels. Pakistan
Data Miner
Investment Thesis Valuation and Risks
We believe OGDC has the potential to offer over 30% total upside We initiate coverage of OGDC with a Buy rating and a TP of
to investors from current price levels, Our buy rating is based on PKR186 per share. Our valuation is based on a SOTP
i), attractive valuation; OGDC is trading at an implied oil price of methodology, where the companys core 2P reserve based value
USD41/bbl, that is, at a discount of 23% to our FY18 average contributes PKR113 per share, exploration option and discounted
Arabian basket oil price forecast of USD53/bbl; ii) it is conducting market value of its stake in Mari Petroleum adds PKR67 and PKR6
exploratory efforts in leases such as Zorgarh and Soghri, which per share. Since oil and gas prices are based in USD terms, the
have large potential to add reserves and production flows, going company provides a hedge to investors against currency
forward; iii) the ability of development projects to enhance devaluations. However, risk associated with the decline in intl oil
production and reserves from Nashpa, and (non-operated JV) TAL prices, exploratory efforts, production extraction and regulatory
might increase its contribution to the companys hydrocarbon policy could adversely affect the profitability and investors
portfolio; iv) OGDC has the highest operating margin in our oil returns.
universe (45% FY17e), owing to its optimal product mix (Gas:
76% & Oil: 22%).
Jun Year End Jun Year End
In PKRmn, unless otherwise stated 2016a 2017e 2018e 2019e In PKRmn, unless otherwise stated 2016a 2017e 2018e 2019e
Income Statement Per Share Financial Summary

Revenue 162,867 175,157 186,064 192,586 EPS (PKR) 13.9 14.8 16.3 16.8
EBITDA 87,850 95,053 101,143 103,224 DPS (PKR) 5.20 5.50 5.75 6.00
Net operating profit (EBIT) 65,333 72,030 79,591 81,126 BVPS (PKR) 111 121 131 142
Taxes or zakat (20,537) (23,711) (26,046) (26,927) Valuation Metrics
Minority interest N/A N/A N/A N/A Price to earnings 10.5x 9.9x 9.0x 8.7x
Net income 59,971 63,639 69,904 72,270 Price to book value 1.3x 1.2x 1.1x 1.0x
Balance Sheet Price to cash flow 11.3x 9.4x 6.5x 6.7x
Cash and cash equivalents 7,904 11,356 5,308 17,045 FCF yield 2.7% 4.8% 9.6% 8.9%
Total assets 589,566 635,099 678,962 726,605 Dividend yield 3.5% 3.7% 3.9% 4.1%
Total liabilities 110,933 116,483 115,172 116,351 EV / EBITDA 7.1x 6.6x 6.2x 6.0x
Total equity 478,633 518,616 563,790 610,254 EV / Invested capital 1.3x 1.2x 1.1x 1.1x
Total net debt (cash) (7,904) (11,356) (5,308) (17,045) ROAIC 10.7% 10.6% 10.8% 10.4%
Cash Flow Statement ROAE 13.0% 12.8% 12.9% 12.3%
Cash operating profit after taxes 83,848 88,432 93,344 96,332 KPIs
Change in working capital (22,554) (19,321) 5,986 153 Revenue growth (Y-o-Y) -22.7% 7.5% 6.2% 3.5%
CAPEX (44,499) (38,561) (38,599) (40,211) EBITDA growth (Y-o-Y) -33.5% 8.2% 6.4% 2.1%
Investments N/A N/A N/A N/A Gross profit margin 54.0% 54.8% 56.1% 55.5%
Free cash flow 16,795 30,550 60,731 56,274 EBITDA margin 53.9% 54.3% 54.4% 53.6%
Net financing (1,718) (1,770) (1,887) (1,965) Net operating profit (EBIT) margin 40.1% 41.1% 42.8% 42.1%
Change in cash 14,624 3,452 (6,048) 11,737 Effective tax rate 25.5% 27.1% 27.1% 27.1%
Source: Oil & Gas Development Co., EFG Hermes estimates Net Debt (Cash) / Equity (0.0)x (0.0)x (0.0)x (0.0)x
Net Debt (Cash) / EBITDA (0.1)x (0.1)x (0.1)x (0.2)x
Source: Oil & Gas Development Co., EFG Hermes estimates
Page 36 of 104
Coverage initiation with a Buy rating on OGDC
OGDC is the largest oil/gas exploration and production player in Pakistan, contributing nearly 29% and 44%
of the countrys gas and oil production portfolio. We initiate coverage on OGDC with a Buy rating and TP of
PKR186/share, providing upside of 27%. Moreover, the stock also provides a forward dividend yield of 4%,
cumulatively offering an expected return of over 30%. Our valuation is based on a SOTP methodology, where
the companys core 2P reserve based value contributes PKR113 per share, exploration option and discounted
market value of its stake in Mari Petroleum adds PKR67 and PKR6 per share. OGDC is trading at an implied
oil price of USD41/bbl, which is at a 23% to our FY18 average Arabian basket oil price forecast of USD53/bbl,
respectively. Moreover, our Arabian basket price assumption for our valuation model has been set at a 4%
discount to our in-house FY18 Brent assumption (USD55/bbl).
Investment thesis
The stock lost over 11% YTD, underperforming the broader benchmark by over 3% YTD, owing to recent
weakness witnessed in the local market. Notably, OGDC is trading at an implied oil price of USD41/bbl, that
is, at a steep discount of 23% to our FY18 average Arabian basket oil price forecast of USD53/bbl.
Our Buy rating on the stock is further backed up by:
Its current exploratory efforts, where it is undertaking activities at its leases, such as Zorgarh and Soghri,
which have large potential to add reserves and production flows, going forward
Also, the development projects in Nashpa, and (non-operated JV) TAL are expected to cumulatively
enhance its annual oil and gas production portfolio by over 1.5mnbbls and 5.6bcf, respectively, by FY19.
These leases contribute ~50% of its oil volume, where the operators are continuously making efforts to
raise production flows
OGDC maintains a balanced product mix (Gas: 76% & Oil: 22%), which together with favourable gas
pricing concessions, helps the company yield the highest operating margin in our Pakistan oil universe.
Figure 48: OGDC is trading at a 13% and 27% discount to Figure 49: OGDCs implied oil price comparison with Arabian
valuation based on current and forecast oil prices, basket
respectively
USD per barrel
200 Avg. Arabian Basket OGDC implied oil price

120
180
160
$56/bbl 100
$48/bbl
140
$41/bbl 80
120
100 60
80
40
60
40 20
20
0
0
Jan-15
Jan-13
Apr-13
Jan-14
Jan-16
Jan-17
Apr-14
Apr-15
Apr-16
Apr-17
Oct-13
Oct-14
Oct-15
Oct-16
Jul-13
Jul-14
Jul-15
Jul-16

price (1)
(1)
USD57 per barrel for FY18,19, 20 and 21 onwards; therefore our five-year
average oil forecast price is USD55.7/bbl
Source: Company data, EFG Hermes estimates Source: Company data, OPEC, EFG Hermes estimates
Page 37 of 104
Exploratory and development efforts are expected to drive

extraction growth
OGDC has intensified its exploratory efforts by taking advantage of low oil servicing costs. The company has
conducted a record number of 2D and 3D seismic surveys in the past two years (cumulatively acquiring 2D
data of 9,222 line km and 3D data of 4,686 sq km from Apr15 to Mar17), to identify hydrocarbon prospects.
Also, the company has increased its drilling efforts to maximise production from current producing wells.
Figure 50: OGDCs exploration and production portfolio blocks spread across Pakistan
July 2017
Source: Company data
Page 38 of 104
The tables below provide the exploratory activities conducted by the company and the potential
each exploratory lease is anticipated to hold.
Figure 51: Ongoing seismic surveys

Potential Reserve Prospects of the ongoing exploratory efforts
Original 2P reserves
Operator Blocks Type Zone Province Nearby producing fields Potential
of nearby fields
OGDC Zorgarh 2D Zone 3 Sindh 1) Sui: Oil Prod. 43b/d, Gas Prod. 445mmcfd Gas: 12,819bcf
2) Kandhkot: Oil Prod. 10b/d, Gas Prod. High
Gas: 1,680bcf
186mmcfd
OGDC Soghri 3D Zone 1 Pubjab/KPK 1) Dakhni: Oil Prod. 747b/d, Gas Prod. 25.5mmcfd Oil: 12.67mnbbls ; Gas: 410bcf
Medium
2) Ratana: Oil Prod. 301b/d, Gas Prod. 7mmcfd Oil: 5.86mnbbls ; Gas: 200bcf
OGDC Pezu 2D Zone 1 KPK Not Available Not available Low
OGDC Samandar 2D Zone 1 Balochistan Not Available Not available Low
OGDC Rasmalan 2D Zone 1 Balochistan Not Available Not available Low
OGDC Shaan 2D Zone 2 Balochistan Not Available Not available Low
Source: Pakistan Petroleum Information Service, Company data, EFG Hermes estimates
Figure 52: Exploratory wells with drilling in progress

Potential prospects of new additions to reserves
Reserve
Original 2P reserves of
Operator Lease Well name Zone Province Nearby producing fields Potenti
nearby fields
al
OGDC Pirkoh Pirkoh Deep 1 Zone 2 Balochistan 1) Pirkoh: Gas Prod. 10mmcfd Gas: 1080bcf
High
2) Loti: Gas Prod. 27mmcfd Gas: 393bcf
1) Nashpa: Oil Prod. 24,209 bpd; Gas
OGDC Nashpa Kacha Khel 1 Zone 1 KPK Oil: 173mnbbls; Gas: 582.8bcf High
Prod.101mmcfd
1) Dakhni: Oil Prod. 747bpd; Gas
OGDC Gurgalot Surqamar 1 Zone 1 Pubjab/KPK Oil: 12.67mnbbls ; Gas: 410bcf
Prod.25.5mmcfd Medium
2) Mela: Oil Prod. 1,537bpd; Gas Prod. 7mmcfd Oil: 17.89mnbbls ; Gas: 67.4bcf
OGDC Ranipur Ranipur 1 Zone 3 Sindh Not available Not available Low
Moreover, the company is also involved in development projects and continuously overhauling its
production facilities to improve the flows from its matured fields.
Page 39 of 104
OGDC offers the highest operating margin in our oil & gas universe
OGDC maintains a balanced product mix, which together with favourable gas pricing concessions helps the
company yield the highest operating margins in our oil universe. On the cost front, OGDC benefits from its
product mix tilt towards gas (BOE measure), averaging 78% over the four-year horizon, compared to PPL
(~90%) and POL(~66%); thus, clocking in the second-lowest operating cost of USD13.1/BOE for the company
(PPL:USD8.8/BOE and POL:USD19.3/BOE) in FY17e. On the revenue front, the majority of the companys gas
fields fall under better concessionary pricing agreements, where in FY17e it is expected to realise a price of
USD3.7/mmbtu for its gas extractions (PPL: USD:2.8mmbtu and POL: USD2.6/mmbtu); hence, yielding
operating margins of 45% (PPL: 43% and POL 43%).
Figure 53: Operating cost and margins

USD$/BOE (otherwise stated)
Operational contribution FY12a FY13a FY14a FY15a FY16a FY17e FY18f FY19f
OPEC basket (USD/Bbl) 110.1 106.1 106.0 71.1 40.1 47.8 53.0 55.1
Realized price 32.2 32.7 33.4 28.5 22.0 23.6 24.5 24.7
Total operational cost 10.7 12.2 12.0 12.8 12.6 13.1 13.4 13.6
Royalty 3.8 3.8 3.9 3.2 2.4 2.5 2.7 2.7
Operating expenses 5.6 5.5 6.3 7.2 7.4 7.7 7.9 8.1
Transportation charges 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2
Exploration and prospecting expenditure 0.7 2.2 1.1 1.6 2.0 2.1 2.1 2.1
General and admin. expense 0.4 0.4 0.4 0.6 0.5 0.5 0.6 0.6
Operating margins per BOE (%) 67% 63% 64% 55% 43% 45% 45% 45%
Page 40 of 104
Valuation and risks
We initiate coverage on OGDC with a Buy rating and TP of PKR186 per share. Our valuation is based on a
SOTP methodology, where the companys core 2P reserve based value contributes PKR113 per share,
exploration option and discounted market value of its stake in Mari Petroleum adds PKR67 and PKR6 per
share. Since oil and gas prices are based in USD terms, the company provides a hedge to investors against
currency devaluation. However, risks associated with a decline in intl oil prices, exploratory efforts, production
extraction and regulatory policy could adversely affect the profitability and investors returns.
Figure 54: Company valuation

Target price (PKR per share)
Valuation (PKRmn) FY17e FY18e FY19e FY20e FY21e FY22e
EBITDA 112,040 120,732 123,259 129,421 134,217 139,612

Taxes (23,683) (26,410) (26,927) (28,032) (28,718) (29,782)
WC investments (19,228) 4,778 1,228 1,295 (3,266) (4,005)
Capex (38,561) (38,599) (40,211) (41,580) (43,680) (47,533)
FCFF 30,567 60,501 57,349 61,104 58,553 58,292
PV of FCFF - 52,074.93 42,487.66 38,964.82 32,138.55 27,539.27
RFR (three year PIB) 11%

Risk premium 5%
Beta 1.04
Terminal growth 6%
SOTP valuation
2P NAV per share 113
Exploration option 67
Portfolio value 6
Target price 186
Figure 55: Exploration option

2P NAV value exc. net debt 479,336
OGDC D&P acres (sq.km) 3,759
Value of acre (PkR mn) 128
Exploration acres (sq.km) 112,453
Current developed area % of exploration acreage 3.3%
Terminal developed area % of exploration acreage - forecast 5.8%
Additional development acreage (sq.km) = (5.8% - 3.3%)*exploration acreage 2,811
Exploration option value 358,491
Hydrocarbon impurity discount 20%
Exploration option value per share 67
Owing to practical limitation of forecasting production flows from unexplored fields, we (in our assumptions)
have incorporated the cost side of future exploration activities only. To account for the value generated from
unexplored fields, we add the exploration option to our TP separately. We have calculated the exploration
option based on the 2P NAV proportionate to its development acreage. With regards to developed proportion
of the total exploration, we expect the number to reach 5.8% in perpetuity, which is conservative in our view.
Moreover, we assume the Risk Free Rate (RFR) to increase in the long term, therefore we have applied a 10yr
historical RFR of 11% against current 10yr Pakistan Investment Bond (PIB) yield of 8%. Furthermore, the
Page 41 of 104
terminal growth rate assumption is based on 10yr historical growth in exploration activities (wells drilled)
which averages over 4% and US real GDP growth rate of 1.5% over the same period.
We provide below the sensitivity analysis of the companys target price to different RFR and terminal growth
rate assumptions.
Figure 56: Sensitivity of companys target price to various risk free rate and terminal growth rate
assumptions
Target price in PKR
Terminal Growth Rate
2% 3% 4% 5% 6% 7%
Risk Free
13% 135 140 145 151 158 166

Rate
12% 143 149 155 162 170 181

11% 153 159 167 175 186 198
10% 164 171 180 191 204 221
9% 176 185 197 210 227 249
8% 191 202 217 234 257 286
Page 42 of 104
2. Company analysis
Initiating coverage on OGDC with a Buy rating
We initiate coverage on OGDC with a Buy rating based on our TP of PKR186/share, offering 27% upside. The
stock also offers a forward dividend yield of 4%; hence, providing an expected total return of over 30%.
OGDC is our top pick in the sector based on the below
OGDC is trading at an implied oil price of USD41/bbl, that is, at a discount of 23% to our FY18 average
Arabian basket oil price forecast of USD53/bbl; thus, providing attractive upside
OGDC is conducting exploratory efforts at its leases, such as Zorgarh and Soghri, which have large
potential to add reserves and production flows, going forward
Also, the development projects to enhance production and reserves from Nashpa, and (non-operated JV)
TAL might increase the companys hydrocarbon portfolio. These leases contribute ~50% of the countrys
oil volume, where operators are continuously making efforts to raise production flows
OGDC has the highest operating margins in our oil universe (45% FY17e), owing to its balanced product
mix (gas: 76% and oil: 22%); and better realisation of gas selling prices
Moreover, the company provides a hedge against currency devaluation since oil and gas prices are
referenced in USD.
Our valuation is based on a SOTP methodology, where the companys core 2P reserve based value contributes
PKR113 per share, exploration option and discounted market value of its stake in Mari Petroleum adds PKR67
and PKR6 per share.
Figure 57: OGDC PER (x) band Figure 58: OGDCs implied oil price comparison with Arabian
basket
USD per barrel
OGDC PE Upper Band @ PE of 13x Avg. Arabian Basket OGDC implied oil price
Lower Band @ PE of 5x Linear (OGDC PE)
400 120
350
100
300
80
250
200 60
150
40
100
20
50
0 0
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Apr-17
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Jul-15
Oct-15
Apr-16
Oct-16
Jul-13
Jul-14
Jul-16
Source: Bloomberg, Company data, EFG Hermes estimates Source: Company data, OPEC, EFG Hermes estimates
Page 43 of 104
The tables below reflect the sensitivity analysis of oil and gas production flows, currency
devaluation and oil price movement on our earnings and target price forecast.
Figure 59: Target price sensitivity to production growth Figure 60: Earning per share sensitivity to oil price
TP in PKR EPS in PKR
Natural Gas Extraction Growth Earnings Per Share
-5% -3% -1% 1% 3% 5% FY18 FY19 FY20 FY21 FY22
-5% 143 154 166 179 192 207 40.00 13.78 13.85 13.92 14.13 14.67
Arabian Basket
Oil Extraction
-3% 150 162 174 187 200 214 45.00 14.75 14.86 15.01 15.24 15.82
Growth
-1% 158 170 182 195 208 222 50.00 15.71 15.93 16.09 16.36 16.97
1% 167 179 191 203 217 231 55.00 16.57 16.75 17.18 17.47 18.12
3% 176 188 200 212 226 240 60.00 17.62 18.07 18.26 18.59 19.27
5% 186 197 209 222 235 250 65.00 18.57 19.14 19.35 19.70 20.42
Figure 61: Target price sensitivity to oil price and currency devaluation
Arabian basket in USD/bbl and target price in PKR
Currency Devaluation
1% 2% 3% 4% 5% 6%
40.00 130 138 147 156 165 175
Arabian Basket
45.00 143 152 161 170 180 190

50.00 155 165 174 184 194 205
55.00 168 178 188 198 209 220
60.00 181 191 202 212 223 235
65.00 194 204 215 226 238 249
Page 44 of 104
Business description
Oil and Gas Development Company Limited (OGDC) is the largest Oil & Gas Exploration and Production
Company in Pakistan. Its exploration assets currently consist of 63 owned and operated JV exploration
licences, along with holding working interest in six non-operated JV blocks. The companys exploratory
licences cover 32% of the countrys total exploration acreage. The development and production lease
portfolio comprises 69 owned and operated JVs and working interests in 34 non-operated JV blocks. The
company contributes nearly 29% and 44% of the countrys gas and oil production portfolio. Since the
Government of Pakistan holds 67.5% of the companys holdings; therefore, most of the directors are affiliated
with the government ministries and bureaucracies.
Figure 62: Board of directors

Brief Profile
Board of directors Position Profile

Mr. Zahid Muzaffar has over 36 years of diversified experience in the energy sector, in both upstream
and downstream oil and gas operations. He has served on the board of directors of London and
Mr. Zahid Muzaffar Chairman Scottish Marine Oil plc in Pakistan and many other international E&P and refining companies. He
headed the acquisition of the largest oil refining company in the Mediterranean, (RAs LANUF Refinery
Libya).
Mr. Zahid Mir is a petroleum engineer with over 27 years experience in the oil and gas industry, with
Mr. Zahid Mir MD & CEO assignments related to onshore and offshore operations having been involved at a senior level in all
stages of upstream operations.
Mr. Jalal joined the Ministry of Petroleum and Natural Resources as Secretary. He also sits on the
Mr. Mohammad Jalal Sikandar Sultan Director
boards of Sui Northern Gas Pipeline, Pakistan Petroleum Ltd and Pak Arab Refinery.
Mr. Iskander Mohammed Khan is a director of the Premier Group of Companies, including Premier
Sugar Mills & Distillery Company Limited, Frontier Sugar Mills & Distillery Limited, Chashma Sugar Mills
Mr. Iskander Mohammed Khan Director
Limited, Arpak International Investments Limited and other non-listed subsidiaries of the Premier
Group.
Mr. Hamid Farooq is Chief Business Development Officer at the Pakistan Telecommunication Company
Mr. Hamid Farooq Director
Limited.
Mr. Muhammad Ali Tabba is Chief Executive of Lucky Cement, a member of the Yunus Brothers
Mr. Muhammad Ali Tabba Director Group, which holds diversified interests in textiles, energy, chemicals, cement and other construction
related sectors.
Mr. Zafar Masud is the Director and Co-Founder of Burj Capital, which is represented in Pakistan by
Mr. Zafar Masud Director Burj Capital Pakistan (Private) Limited, a global corporate finance and advisory house with a specific
focus on the energy sector, particularly alternate energy and power.
Prince Ahmed Omar Ahmedzai belongs to the khan of the Kalat Family of Balochistan. He is the
Prince Ahmed Omar Ahmedzai Director Executive Director of Agha Techny Construction, a planning and project administration firm, working
on infrastructure projects at Gwadar.
Sayed Shafqat Ali Shah is Managing Director of Matiari Sugar Mills Ltd and CEO of Matol (Pvt) Limited.
Sayed Shafqat Ali Shah Director
He is a Member of the Economic Advisory Council (EAC) of Government of Pakistan.
Mr. Khattak has served as a District Nazim of Karak and performed functions as executive head of the
Mr. Rahmat Salam Khattak Director
district management and the council.
Mr. Muhammad Yawar Irfan Khan is Chairman of the Irfan Group of Companies, which includes
Mr. Muhammad Yawar Irfan Khan Director Famous Brands Pvt Ltd and Irfan Foods Pvt Ltd. He also serves as the Chairman of the Asifa Irfan
Foundation Trust, a family-run charity organisation.
Page 45 of 104
Exploratory and development efforts are expected to drive

extraction growth
Taking advantage of low-servicing costs, OGDC has intensified its exploratory efforts by conducting a record
number of 2D and 3D seismic surveys in the past two years (cumulatively, the company acquired 2D data of
9,222 line km and 3D data of 4,686 sq km, from Apr15 to Mar17), to identify hydrocarbon prospects. The
company has also increased its drilling efforts to maximise production from current producing wells.
Figure 63: Seismic surveys Figure 64: Wells drilled

Annual data No. of wells drilled including exploratory and development wells
2D l.kms 3D sq.kms
35
12,000
30
10,000
25
8,000
20
6,000
15
4,000
10
2,000 5
0 0
FY13A FY14A FY15A FY16A FY17E FY18F FY19F FY13A FY14A FY15A FY16A FY17E FY18F FY19F
Source: Company data, PPIS , EFG Hermes estimates Source: Company data, EFG Hermes estimates
The tables below highlight the exploration efforts under progress in various high potential exploration
leases, which may become value enhancing triggers, going forward.
Figure 65: Ongoing seismic surveys

Potential reserve prospects of the ongoing exploratory efforts
Original 2P reserves of
Operator Blocks Type Zone Province Nearby producing fields Potential
nearby fields
OGDC Zorgarh 2D Zone 3 Sindh 1) Sui: Oil Prod. 43b/d, Gas Prod. 445mmcfd Gas: 12,819bcf
High
2) Kandhkot: Oil Prod. 10b/d, Gas Prod. 186mmcfd Gas: 1,680bcf
OGDC Soghri 3D Zone 1 Pubjab/KPK 1) Dakhni: Oil Prod. 747b/d, Gas Prod. 25.5mmcfd Oil: 12.67mnbbls ; Gas: 410bcf
Medium
2) Ratana: Oil Prod. 301b/d, Gas Prod. 7mmcfd Oil: 5.86mnbbls ; Gas: 200bcf
OGDC Pezu 2D Zone 1 KPK Not available Not available Low
OGDC Samandar 2D Zone 1 Balochistan Not available Not available Low
OGDC Rasmalan 2D Zone 1 Balochistan Not available Not available Low
OGDC Shaan 2D Zone 2 Balochistan Not available Not available Low
Page 46 of 104
Figure 66: Exploratory wells with drilling in progress

Potential prospects of new additions to reserves
Original 2P reserves of Reserve
Operator Lease Well name Zone Province Nearby producing fields
nearby fields potential
OGDC Pirkoh Pirkoh Deep 1 Zone 2 Balochistan 1) Pirkoh: Gas Prod. 10mmcfd Gas: 1080bcf
High
2) Loti: Gas Prod. 27mmcfd Gas: 393bcf
1) Nashpa: Oil Prod. 24,209 bpd; Gas
OGDC Nashpa Kacha Khel 1 Zone 1 KPK Oil: 173mnbbls; Gas: 582.8bcf High
Prod.101mmcfd
1) Dakhni: Oil Prod. 747bpd; Gas
OGDC Gurgalot Surqamar 1 Zone 1 Pubjab/KPK Oil: 12.67mnbbls ; Gas: 410bcf
Prod.25.5mmcfd Medium
2) Mela: Oil Prod. 1,537bpd; Gas Prod. 7mmcfd Oil: 17.89mnbbls ; Gas: 67.4bcf
OGDC Ranipur Ranipur 1 Zone 3 Sindh Not available Not available Low
Ongoing efforts in leases with greater potential of hydrocarbon reserves

The leases (detailed below) are currently under exploratory or development phase and hold good prospects
of rich hydrocarbon resources. The companys ongoing efforts in these leases could further help the company
build up its reserves and production flows going forward.
i. Zorgarh Lease: OGDC holds a 96% stake in Zorgarh block, which covers an area of 2,400sq km and
falls under Zone III. Since it is located in between gas producing fields of Sui (Gas Original Recoverable
Reserves (ORR) of 12.8tcf) and KandhKot (Gas ORR: 1.7tcf), the probability of presence of potential
hydrocarbon reserves is fairly high. We expect OGDC will drill an exploratory well in the next 6-9m, from
now
ii. Soghri & Gurgalot Lease: OGDC has a 100% working interest in Soghri and 75% stake in Gurgalot
lease. The company has initiated 3D seismic survey in Soghri and is in the testing phase of an exploratory
well (Surqamar1) in Gurgalot lease with a target depth of 16,299ft, OGDC has already achieved the target
depth, but extensive testing with different options is in progress to map the wells potential. We anticipate
the leases to have potential hydrocarbon reserves since the blocks are geographically located near the
rich hydrocarbon leases of Tal (ORR Gas: 1.5tcf & Oil: 65mbbls), Dakhni (ORR Gas: 410bcf & Oil:
12.67mnbbls), Ratana (ORR Gas: 200bcf & Oil: 5.8mnbbls) and Mela (ORR Gas: 67.4bcf & Oil:
17.9mnbbls)
Figure 67: Zorgarh Lease is expected to have high potential Figure 68: Soghri and Gurgalot blocks to hold medium
potential
The lease is located between the rich gas fields of Sui and Kandhkot Lies near Dakhni and Mela blocks
Source: PPIS, Company data, EFG Hermes estimates Source: PPIS, Company data, EFG Hermes estimates
iii. Pirkoh: The block is already producing nearly 10mmcfd of gas with Original 2P reserves estimated to be
around ~1.08tcf of gas. OGDC has a 100% working interest and is drilling an exploratory well Pirkoh
Deep 1, where we believe the outcome of this exploration would result in significant increase in the
companys gas portfolio, going forward
Page 47 of 104
iv. Thal: OGDC has a 100% interest in the Thal block, which covers an area of 1,623sq km and comes under
Zone III. Thal is located in close proximity to Miano (Gas ORR: 563bcf) and Kadanwari (Gas ORR: 652bcf)
making it a medium resource potential block. In Jan 2016, OGDC announced a discovery in Thal East
Well-1 with an initial flow of 23.5mmcfd (annualised PKR0.17/share cont. to net earnings). Presently, the
operator is drilling an exploratory well Bhambra1, which we believe would augment the companys
reserves
Figure 69: Nashpa, Mela and Tal Block Figure 70: Thal Lease
High potential blocks with rising production flows In close proximity to Miano and Kadanwari
v. Nashpa and Mela: The ongoing development project in the blocks, which includes installation of well
head compressors, crude stabilisation unit and laying of 22kms of gas pipeline for transportation of gas
from Mela to Nashpa, is expected to be completed in Aug 2017. Since OGDC has a 56.45% stake in
Mela & Nashpa, this project is expected to increase OGDCs oil, gas and LPG production by 616bopd,
5.5mmcfd and 190tpd. Presently, OGDC is drilling two development wells Nashpa 8 and Mela 5 and one
exploratory well Kacha Khel 1 in the block, with anticipated completion by Aug 2017, Dec 2017 and Sep
2017, respectively
vi. Tal Lease: The Tal block contributes ~ 13% and ~6% to the companys oil and gas profile, respectively.
The first discovery in the Tal Block was made by MOL Group Pakistan in Manzalai Field back in 2002. The
concession, to date, includes Manzalai, Makori, Makori East, Maramzai, Mamikhel, Mardan Khel and
Tolanj fields. Presently, Mardan Khel 2, Makori East 6, and Tolanj East 1 are under drilling. Furthermore,
production from Mardan Khel 3 explored in Feb 2017 is expected to come online from Aug 2017, adding
~55bopd and ~1.5mmcfd of gas to OGDCs portfolio
Page 48 of 104
Production is expected to support growth
The company produced over 1bcf of gas per day in FY16, contributing nearly 28% of the countrys gas
production, where nearly 50% of gas was extracted from fully owned & operated leases, 29% from operated
joint venture leases, and nearly 21% from non-operated joint venture leases.
Figure 71: Gas Production Figure 72: Gas Production by lease type
Million cubic feet per day (mmcfd) % of total gas production
1,400 Fully owned Operated JV Non-operated JV

60%
1,200 51% 51% 51%
48% 50%
50%
45%
1,000
40%
800 34%
31% 30% 30%
29% 29%
30%
600
22% 21% 21%
20% 19% 19%
400 20%
200 10%
0 0%
FY14A FY15A FY16A FY17E FY18F FY19F FY14A FY15A FY16A FY17E FY18F FY19F
The decline in gas production by nearly 2.5% Y-o-Y in FY16 is primarily due to lower production flows from
matured fields, particularly Qadirpur Gas field, which contributed nearly 22% to the companys gas
portfolio in FY16 vs. 26% in FY15. However an upsurge in FY17 total companys gas flow is likely due to
higher production from Nashpa, Uch and Adhi.
Figure 73: Oil production Figure 74: Oil production contribution by lease type
Barrels of Oil per day (bopd) % of total production
50,000 Fully owned Operated JV Non-operated JV

50%
45,000
45% 43%
41% 40%
40,000 39%
40% 36% 37%
35% 36%
35,000
35%
30,000
30%
24% 25% 24%
25,000 25% 21%
20,000 20%
15,000 15%
10,000 10%
5,000 5%
0 0%
FY14A FY15A FY16A FY17E FY18F FY19F FY14A FY15A FY16A FY17E
Page 49 of 104
On the other hand, oil production stood over 40.6k barrels per day in FY16, contributing nearly 47% to the
countrys oil production portfolio. Oil production witnessed a decline of 0.5%Y-o-Y, owing to lower flows
from Bobi, Raijan, Kunnar and Toot. In FY17, oil flows are expected to rise from Rajian, Kunnar, Nashpa and
Tal blocks.
It is worth noting that OGDCs production base is wide, which reduces the probability of any flow incident
in a particular field to overall production. Moreover, Nashpa and Tal are the recent flow enhancers, which
we expect to cumulatively add over 1.5mnbbls and 5.6bcf to the companys oil and gas production portfolio
by FY19.
Figure 75: Gas production by field (FY16) Figure 76: Oil production by field (FY16)
Kunar 8%
Others 22% Pasakhi 8%
Uch 31%
Others 35%
Tal Lease 6%
Bhit &
Badhra 5%
Nashpa 4%
Nashpa 26%
Tal Lease
Kunar/Pas
Qadirpur 13% Makori East
22% 10%
OGDCs total gross remaining recoverable 3P reserves in FY16 stood at 498mn barrels of oil and 11,689bn
cubic feet of gas, witnessing a three-year cumulative average growth rate of 32% and 4%, respectively.
Furthermore, the reserve life based on the sustained production levels for the company is roughly 32 years
and 26 years for oil and gas respectively.
Figure 77: OGDCs hydrocarbon reserves

3P oil and gas reserves
Gas Reserves bcf (LHS) Oil Reserves mnbbls (RHS)

14,000 600
12,000 500
10,000
400
8,000
300
6,000
200
4,000
2,000 100
0 0
2010 2011 2012 2013 2014 2015 2016
Page 50 of 104
OGDC offers highest operating margin in our oil and gas universe
OGDC maintains a balanced product and revenue mix, which together with favourable gas pricing concessions
helps it yield the highest operating margin vs. peers (PPL and POL). On the cost front, OGDC benefits from its
product mix tilt towards gas (BOE measure) averaging 78% over the four-year horizon, compared to PPL
(~90%) and POL (~66%); thus, it has the second lowest operating cost of USD12.6/BOE in the sector
(PPL:USD9.8/BOE and POL:USD19.5/BOE) in FY16.

OGDC operates at the highest operating margins in EFG Hermes E&P universe
Operating Cost US$/BOE (LHS) Operating Margin (RHS)

16.00 80%
14.00 70%
12.00 60%
10.00 50%
8.00 40%
6.00 30%
4.00 20%
2.00 10%
0.00 0%
Figure 79: Product mix Figure 80: Revenue mix

Barrels of oil equivalent (BOE); % of Gross sales;
LPG 1% Others 3%
Oil 21%
Oil 31%
Gas 66%
Gas 78%
On the revenue front, since the majority of the companys gas fields fall under better concessionary pricing
agreements, the company in FY17 is expected to realise USD3.7/mmbtu for its gas extraction (highest in our
oil universe); hence, yielding operating margins of 45% in FY17 (PPL: 43% and POL 43%).
Page 51 of 104

US$/boe otherwise stated
Operational contribution FY12a FY13a FY14a FY15a FY16a FY17e FY18f FY19f
Realized price 32.2 32.7 33.4 28.5 22.0 23.6 24.5 24.7
Royalty 3.8 3.8 3.9 3.2 2.4 2.5 2.7 2.7
Operating expenses 5.6 5.5 6.3 7.2 7.4 7.7 7.9 8.1
Transportation charges 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2
Exploration and prospecting expenditure 0.7 2.2 1.1 1.6 2.0 2.1 2.1 2.1
General and admin expense 0.4 0.4 0.4 0.6 0.5 0.5 0.6 0.6
Page 52 of 104
Financial Statements
Income Statement (Jun Year End) Cash Flow (Jun Year End)
In PKRmn 2016a 2017e 2018e 2019e In PKRmn 2016a 2017e 2018e 2019e
Revenue 162,867 175,157 186,064 192,586 Cash operating profit after taxes 83,848 88,432 93,344 96,332
COGS (74,977) (79,087) (81,611) (85,607) Change in working capital (22,554) (19,321) 5,986 153
Gross profit 87,890 96,070 104,453 106,979 Cash flow after change in WC 61,294 69,111 99,329 96,485
SG&A (3,771) (3,832) (4,218) (4,553) CAPEX (44,499) (38,561) (38,599) (40,211)
Other operating inc (expense) (18,786) (20,209) (20,645) (21,300) Investments N/A N/A N/A N/A
EBITDA 87,850 95,053 101,143 103,224 Free cash flow 16,795 30,550 60,731 56,274
Depreciation and amortisation (22,517) (23,023) (21,553) (22,098) Non-operating cash flow (453) (25,328) (64,892) (42,572)
Net operating profit (EBIT) 65,333 72,030 79,591 81,126 Cash flow before financing 16,342 5,222 (4,161) 13,701
Share of results from associates 2,189 1,970 2,069 2,172 Net financing (1,718) (1,770) (1,887) (1,965)
Net investment income (loss) N/A N/A N/A N/A Change in cash 14,624 3,452 (6,048) 11,737
Net interest income (expense) (1,718) (1,770) (1,887) (1,965) Source: Oil & Gas Development Co., EFG Hermes estimates
Other non-operating inc (exp.) 14,703 15,121 16,177 17,863
FX gains (loss) N/A N/A N/A N/A
Net provisions N/A N/A N/A N/A
Income before taxes or zakat 80,507 87,350 95,950 99,197 Ownership Structure (%)
Taxes or zakat (20,537) (23,711) (26,046) (26,927) Privatization
Net inc before minority interest 59,971 63,639 69,904 72,270 Commission
Minority interest N/A N/A N/A N/A of Pakistan
OGDCL
Reported net income 59,971 63,639 69,904 72,270 8.8%
Employees
Adjusted net income 59,971 63,639 69,904 72,270 Empowerment
Source: Oil & Gas Development Co., EFG Hermes estimates Trust
11.8%
Balance Sheet (Jun Year End)
In PKRmn 2016a 2017e 2018e 2019e
Cash and cash equivalents 7,904 11,356 5,308 17,045
Accounts receivable (current) 111,204 122,610 120,941 115,552 Government
Inventory 292 492 492 492 of Pakistan
Other debit balances (current) 135,401 218,900 131,038 125,954 79.4%
Total current assets 254,801 353,357 257,780 259,043
PP&E (net) 120,542 127,275 132,216 137,226
Goodwill & intangibles 94,825 104,365 116,914 130,771
Investments (non-current) 112,517 42,223 163,423 189,686
Other debit balances (non-current) 6,880 7,880 8,630 9,880
Total non-current assets 334,765 281,742 421,183 467,563 Rating Distribution
Total assets 589,566 635,099 678,962 726,605
Rating Coverage Universe%
Short term debt N/A N/A N/A N/A
Accounts payable (current) 58,969 63,269 61,208 61,637 Buy 45%
Neutral 43%
Other credit balances (current) 0 0 0 0
Sell 12%
Total current liabilities 58,969 63,269 61,208 61,637
Not Rated 0%
Long term debt N/A N/A N/A N/A
Under Review 0%
Other credit balances (non-current) 51,964 53,214 53,964 54,714
Total non-current liabilities 51,964 53,214 53,964 54,714
Total net worth 478,633 518,616 563,790 610,254
Total equity 478,633 518,616 563,790 610,254
Total equity and liabilities 589,566 635,099 678,962 726,605
Page 53 of 104
21 August 2017
Pakistan Petroleum Stock Rating

Buy
Sui Lease conversion is the key trigger Target Price

PKR209
Closing Price
PKR163
PKR209.43
Initiating coverage on PPL with a Buy rating

We initiate coverage of Pakistan Petroleum (PPL) with a Buy rating, our TP of PKR209/share offers 28% upside with a forward dividend
yield of 6%. The stock trades at an implied oil price of USD45/bbl, at a discount of 15% from our FY18 Arabian basket oil price forecast
of USD53/bbl; hence, making it an attractive buy. Moreover, we also like: i) conversion of Sui Mining Lease to D&P Lease, which has
increased its wellhead gas price by over 60%; hence, improving PPLs operating margins by over 6% for FY17e; and ii) new discoveries
from Gambat South, Tal and Nashpa leases, with ongoing developments in Dhok Sultan block, should continue to support the
companys hydrocarbon production. Also the stock provides a currency hedge for investors who are cautious with respect to the
valuation of the PKR vs. USD.
Sui wellhead gas re-pricing will improve margins by over 6%

Sui, which contributes over 52% to PPLs natural gas portfolio, has been approved to be converted to Development and Production
Lease (D&P). This conversion has raised the Sui wellhead prices by over 60%, which will aid PPL in improving its operating margins by
over 6% in FY17e. Since these revised prices will be effective from Jun15, we expect PPL will restate FY16 earnings retrospectively, by
~PKR4.5/share. Moreover, this conversion will also encourage the operator to drill deep in the field, where initial estimates suggest
nearly 500bcf of gas reserves.
Exploratory activities are expected to support production flows

Since PPLs major gas contributing (own-operated) fields are witnessing a natural decline, it has enhanced its exploratory activities in
Gambat South and Dhok Sultan, which is expected to support production flows, going forward. The company also has stake in leases
operated by MOL and OGDC, namely Tal and Nashpa, which have been the recent major contributors to Pakistans hydrocarbon
production flows. These non-operated fields cumulatively should further augment PPLs annual oil and gas production flow by over
900k bbls and 3bcf, respectively, by FY19e. Moreover, the Sui lease conversion will encourage the company to drill deeper into the
field, where it expects to unearth good reserve potential.

BH1,BWH1,CBH9
In PKRmn, unless otherwise stated 2016a 2017e 2018e 2019e Last Div. / Ex. Date PKR3.00 / 14 May 2017
Revenue 80,151 100,573 110,444 116,815 Mkt. Cap / Shares (mn) PKR321,469 / 1,972
EBITDA 32,730 54,869 64,763 69,319
Net income 17,242 32,976 37,703 40,374 Bloomberg / Reuters PPL PA / PPL.KA
Dividend yield 3.5% 5.1% 5.9% 6.3%
EV / EBITDA 9.1x 5.5x 4.6x 4.3x
BH1,BWH1,CBH9
Source: Pakistan Petroleum, Bloomberg and EFG Hermes estimates
Pakistan Petroleum 21 August 2017
Data Miner
PPL underperformed the benchmark and the sector by 6%YTD, We initiate coverage on PPL with a Buy rating based on our TP of
respectively, owing to a recent decline in the local bourse; hence, PKR209/share. Our valuation is based on a SOTP methodology,
freeing up valuations. Our stance on the stock is further backed where the companys core 2P reserve based value, exploration
by Sui Mining Lease conversion to D&P lease. This conversion has option, and cash value contributes PKR134 per share, PKR64 and
raised Sui wellhead gas prices by over 60%, which will aid the PKR11 per share, respectively. Since oil and gas sale is referenced
company to augment its operating margins by over 6% and will in USD, the upstream business provides a hedge to investors
also encourage the operator to drill deep in the field, where initial against currency devaluations; however, risk associated with
estimates suggest nearly 500bcf of gas reserves from the deep international oil prices, exploratory efforts, production extraction
pockets. Also, more discoveries and higher flows from Gambat and regulatory policy framework could adversely affect
South, Tal and Nashpa leases, with ongoing developments in profitability and investors returns. Moreover, PPLs greater
Dhok Sultan block, should continue to augment the companys proportion of production flow comes from matured fields;
hydrocarbon production. We expect Tal and Nashpa to therefore, the company needs to aggressively explore more leases
cumulatively enhance its annual oil and gas production flow by or drill deeper to replenish its reserves and maintain production
over 900k bbls and 3bcf respectively, by FY19e. flows; this could further raise the probability of exploratory
failures and higher provisioning, which could curtail profitability.

Revenue 80,151 100,573 110,444 116,815 EPS (PKR) 8.74 16.72 19.12 20.48
EBITDA 32,730 54,869 64,763 69,319 DPS (PKR) 5.75 8.36 9.56 10.24
Net operating profit (EBIT) 21,948 42,749 49,195 52,090 BVPS (PKR) 97.7 106.1 115.6 125.9
Change in working capital 14,490 (16,605) (6,659) (3,877) Revenue growth (Y-o-Y) -23.5% 25.5% 9.8% 5.8%
Net financing (659) (491) (622) (646) Net operating profit (EBIT) margin 27.4% 42.5% 44.5% 44.6%
Change in cash (1,283) (9,648) 21 8,719 Effective tax rate 35.4% 29.5% 29.5% 29.5%
Source: Pakistan Petroleum, EFG Hermes estimates Net Debt (Cash) / Equity (0.1)x (0.1)x (0.1)x (0.1)x
Source: Pakistan Petroleum, EFG Hermes estimates
Page 55 of 104
3. Executive summary
Pakistan Petroleum Limited (PPL) offers 28% upside potential based on our TP of PKR209/share; we initiate
coverage on the stock with a Buy rating. Along with the potential upside, the stock also offers a forward
dividend yield of 6%. Our valuation is based on a SOTP methodology, where the companys core 2P reserve
based value, exploration option, and cash value contribute PKR134 per share, PKR64 and PKR11 per share,
respectively.
Investment thesis
PPL underperformed the benchmark and the sector by 6% YTD, respectively, owing to the recent decline in
the local bourse. The stock currently trades at an implied oil price of USD45/bbl, that is at a discount of 15%
from our FY18 Arabian basket oil price forecast of USD53/bbl; hence, making it a buy rating.
Conversion of Sui Mining Lease (ML) into Development & Production Lease (D&P), which has
raised the Sui wellhead gas prices by over 60%, will aid the company to augment its operating
margins by over 6% in FY17e. Since these prices are effective from Jun15, we expect PPL to
revise its FY16 earnings retrospectively, by ~PKR4.5/share. Notably, we have incorporated the
new prices into our forecasts from FY17 onwards
In addition to higher operating margins, these new prices will enable the company to drill deep
in the field, where initial estimates suggest nearly 500bcf of gas reserves
Also, new discoveries from Gambat South, Tal and Nashpa leases, with ongoing developments
in Dhok Sultan block, should continue to support the companys hydrocarbon production
Furthermore, the company provides a currency hedge for investors who are cautious with respect
to over valuation of PKR against USD
Figure 82: PPL PER (x) Band Figure 83: PPL is trading at an implied oil price of US$45/bbl
that is at a discount of 10% and 28% to current and
forecasted Arabian basket prices.
PPL PE Upper Band @ PE of 15x 250
Lower Band @ PE of 5x Linear (PPL PE)
500
200
400 $56/bbl
150 $48/bbl
300 $45/bbl
100
200
50
100
0 0
Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Implied oil price Current oil price Avg. forecasted oil
price (1)
(1)
USD57 per barrel for FY18,19, 20 and 21 onwards; therefore, our five-year
Source: Bloomberg, Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates
Page 56 of 104
Sui wellhead gas re-pricing will improve margins by over 6%
Sui, which contributes over 52% to the PPLs natural gas portfolio, was approved to be converted to a
Development and Production Lease (D&P), with effect from Jun15. Accordingly, the regulatory body has
announced the revised Sui wellhead gas prices at 55% of 2012 Petroleum Policy, which is over 60% from
previous prices. This price hike will augment PPLs FY17e margins by over 60% and will further encourage the
company to drill deeper in the field, where initial deep estimates suggest nearly 500bcf of gas reserves.
Since these prices were revised on 7 July 2017 and are effective from Jun15, our understanding of the IAS 8
and IAS 10 implies that the company will restate its FY16 and FY17 earnings up by PKR4.5/share and
PKR3.9/share, respectively. In our calculations, we have incorporated the raised Sui wellhead gas prices from
FY17 onwards and have not made any changes to actual FY16 earnings.
The re-pricing of Sui wellhead gas will allow the company to realise improved hydrocarbon selling price, which
will augment its operating margins by over 6% for FY17e.
Figure 84: Operating costs and margins after Sui wellhead gas re-pricing
USD/BOE otherwise stated
FY12a FY13a FY14a FY15a FY16a FY17e FY18f FY19f
OPEC Basket (USD/Bbl) 110.1 106.1 106.0 71.1 40.1 47.8 53.0 55.1
Realized price 16.8 17.9 20.5 18.4 13.5 15.3 16.3 16.8
Royalty 2.0 2.2 2.4 2.2 1.6 1.8 1.9 2.0
Field expenditure 4.7 5.4 5.6 7.4 7.6 6.7 6.8 7.0
Other operating expenses 0.8 0.6 0.7 0.7 0.7 0.3 0.3 0.3
Figure 85: Operating costs and margins before Sui wellhead gas re-pricing
USD/BOE otherwise stated
FY12a FY13a FY14a FY15a FY16a FY17e FY18f FY19f
Realized price 16.8 17.9 20.5 18.4 13.5 13.4 14.4 14.7
Royalty 2.0 2.2 2.4 2.2 1.6 1.6 1.7 1.7
Field expenditure 4.7 5.4 5.6 7.4 7.6 6.7 6.8 7.1
Other operating expenses 0.8 0.6 0.7 0.7 0.7 0.3 0.3 0.3
In FY15 and 16, operating costs witnessed a steep rise, which is attributable to 1) higher seismic activities and
provisioning of impairment losses by the company on its investments in PPL Europe E&P Limited. The main
reason for the impairment was significant reduction in oil prices and downward revision of hydrocarbon
resource estimates.
Page 57 of 104
Exploratory activities are expected to support production flows

Since the companys major (own-operated) fields have matured, PPL is pursuing exploration work more
aggressively to offset the natural decline of its matured fields. The company is currently conducting 3D surveys
in Dhok Sultan, which is anticipated to have high reserve potential i.e. above 200bcf of gas. It also has stakes
in leases operated by MOL and OGDC, namely Tal and Nashpa, which have been the recent contributors to
countrys increased hydrocarbon flows. These two non-operated fields should cumulatively augment
companys annual oil and gas production flow by over 900K bbls and 3bcf, respectively by FY19e.
Figure 86: PPLs exploration and production assets
A brief overview of exploratory activities carried out by the company in its own operated leases are mentioned
in the tables below:
Figure 87: Seismic activities - Reserve potential estimates

Reserve
Original 2P reserves
Operator Leases Type Zone Province Nearby producing fields potenti
of nearby fields
al
PPL Dhok Sultan 3D Zone 1 Punjab Dakhni: Oil prod. 747bopd; Gas prod. 25mmcfd Oil: 12.7mnbbls; Gas: 410bcf High
Meyal: Oil prod. 302bopd; Gas prod. 2.2 mmcfd Oil: 42.7mnbblsl; Gas: 287bcf
PPL Sirani 3D Zone 3 Sindh Tajedi: Oil Prod. 53bopd Oil: 2.8mnbbls;Gas: 0.16bcf Low
Ghunghro: Oil prod. 30bopd Oil: 7.8mnbbls; Gas:1.8bcf
PPL Kharan 2D Zone 1 Baluchistan Not available Not available Low
Source: PPIS, Company data, EFG Hermes estimates
Figure 88: Drilling of exploratory wells

Nearby producing Original 2P reserves of nearby Reserve
Operator Leases Well name Zone Province
fields fields potential
PPL Kharan Kharan X1 Zone 1 Balochistan Not Available Not Available Low
PPL Kalat Kalat X1 Zone 2 Balochistan Not Available Not Available Low
Page 58 of 104
Valuation and risks
We initiate coverage on PPL with a Buy rating based on our TP of PKR209/share. Our valuation is based on a
SOTP methodology, where the companys core 2P reserve based value, exploration option and cash value
contribute PKR134 per share, PKR64 and PKR11 per share, respectively.
Since oil and gas prices are based in USD, the upstream business provides a hedge to investors against currency
devaluations. However, risk associated with i) decline in international oil prices; ii) lower production flows from
matured fields; and iii) any adverse changes in regulatory policy can affect the profitability and investors
returns. Moreover, PPLs greater proportion of production flow comes from the matured fields; therefore, the
company needs to aggressively explore more leases or drill deeper to replenish its reserves and maintain
production flows. This could further raise the probability of well failures and higher provisioning, which could
curtail profitability.

(PKRmn) FY17e FY18f FY19f FY20f FY21f FY22f
EBITDA 59,401 69,688 75,161 79,688 81,299 83,454

Less tax (13,814) (15,794) (16,913) (17,755) (17,672) (17,702)
Change in WC (16,605) (6,659) (3,877) (3,448) (847) (857)
Capex (23,748) (25,788) (24,028) (26,327) (28,846) (31,920)
FCFF 5,234 21,446 30,344 32,158 33,935 32,975
PV of FCFF - 18,494 22,566 20,623 18,768 15,727
RFR 11%
Risk premium 5%
Beta 0.992
Terminal growth 6%
SOTP valuation
Cash value 11
Target price 209

Exploration option
2P NAV value 263,555
PPL's D&P acres (sq.km) 1,882
Value of acre (PKR mn) 140
Additional development acreage (sq.km) = (5.8% - 3.3%)*exploration acreage 1,068
Hydrocarbon impurity discount 15%
Exploration option value PKRmn 127,097
Exploration option value per share 64
Page 59 of 104
Owing to practical limitations of forecasting the production flows from unexplored fields, we (in our workings)
have incorporated the cost side of future exploration activities only. To account for the value generated from
the unexplored fields, we add the exploration option to our TP separately. We have calculated the exploration
option based on the 2P NAV proportionate to its development acreage. With regards to developed proportion
of total exploration, we expect the number to reach 5.5% in perpetuity for the company, which is conservative
in our opinion.
rate assumptions.
assumptions
Target Price in PKR

2% 3% 4% 5% 6% 7%
13% 149 155 161 168 176 186
Risk Free Rate
12% 159 165 173 181 191 204

11% 170 178 186 197 209 225
10% 183 192 203 216 232 251
9% 197 209 222 239 259 286
8% 214 229 246 267 295 331
Page 60 of 104
4. Pakistan Petroleum Ltd (PPL) Company analysis
We initiate coverage of Pakistan Petroleum (PPL) with a Buy rating, our TP of PKR209/share offers 28% upside
with a forward dividend yield of 6%. PPL underperformed the benchmark and the sector by 6% YTD, owing
to the recent decline in local bourse. The stock trades at an implied oil price of USD45/bbl, which is at a
discount of 15% from our FY18 Arabian basket oil price forecast of USD53/bbl; hence our Buy rating
In addition to the undemanding valuation we also like the stock due to:
Conversion of Sui Mining Lease (ML) into Development & Production Lease (D&P), which has
raised the Sui wellhead gas prices by over 60%, and will aid the company to augment its
operating margins by over 6% in FY17e. Since these prices are effective from Jun15, we expect
PPL to revise its FY16 earnings retrospectively, by ~PKR4.5/share. Notably, we have incorporated
the new prices into our forecasts from FY17 onwards
In addition to higher operating margins, these new prices will encourage the company to drill
deep in the field, where initial estimates suggest nearly 500bcf of gas reserves
Also, new discoveries from Gambat South, Tal and Nashpa leases, with ongoing developments
in Dhok Sultan block, should continue to support the companys hydrocarbon production
Furthermore, the company provides a currency hedge for investors who are cautious with respect
to over valuation of PKR against USD
Our valuation is based on a SOTP methodology, where the companys core 2P reserve based value,
exploration option, and cash value contribute PKR134, PKR64, and PKR11 per share, respectively.
Figure 92: PPL PER (x) band Figure 93: PPLs implied oil price comparison with Arabian
basket
USD per barrel
PPL PE Upper Band @ PE of 15x
Avg. Arabian Basket PPL Implied Oil Price
Lower Band @ PE of 5x Linear (PPL PE)
120
500
450 100
400
350 80
300
60
250
200
40
150
100
20
50
0 0
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Aug-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Jan-13
Apr-13
Jan-14
Jan-15
Jan-16
Jan-17
Apr-14
Apr-15
Oct-15
Apr-16
Apr-17
Oct-13
Jul-14
Oct-14
Oct-16
Jul-13
Jul-15
Jul-16
Source: Bloomberg, Company data, EFG Hermes estimates Source: Company data, OPEC, EFG Hermes estimates
Page 61 of 104
The tables below reflect the sensitivity analysis of oil and gas production flows, currency devaluation and oil
price movement on our earnings and target price forecast.
Figure 94: Target price sensitivity to production growth Figure 95: Earning per share sensitivity to oil price
TP in PKR EPS in PKR
Natural Gas Extraction Growth Earnings Per share
-5% -3% -1% 1% 3% 5% FY18 FY19 FY20 FY21 FY22
-5% 132 148 162 177 192 208 40.00 14.10 14.66 15.11 15.41 15.76
Arabian Basket
Oil Extraction
-3% 140 156 170 185 200 216 45.00 16.83 17.48 17.97 18.32 18.72
Growth
-1% 149 164 179 194 209 225 50.00 18.36 18.99 19.56 20.08 20.67
1% 158 173 188 203 217 234 55.00 19.76 20.37 21.19 21.72 22.34
3% 167 182 197 212 227 243 60.00 21.16 22.34 22.92 23.47 24.16
5% 177 192 207 222 237 253 65.00 22.57 24.10 24.81 25.47 26.26
1% 2% 3% 4% 5% 6%
40.00 128 135 142 150 157 165
Arabian Basket
45.00 151 158 166 174 182 191

50.00 172 181 189 198 207 216
55.00 191 200 209 219 228 238
60.00 210 220 230 239 250 260
65.00 229 239 250 260 271 282
Page 62 of 104
Pakistan Petroleum Ltd. (PPL) is engaged in exploration, prospecting, development and production of oil and
gas resources. The company has a portfolio of 47 exploratory assets, which include 27 operated blocks and
20 non-operated JV blocks. PPL operates eight producing fields across the country, which include Sui
(Pakistans largest gas field), Adhi, Kandkot Chachar, Mazarani, Adam, Adam West and Shadad.
Moreover, it holds working interest in fifteen partner operated producing fields, which also include Qadirpur,
the countrys second largest gas field. The Government of Pakistan holds 67.5% of the company as of Dec16.
Figure 97: Board of Directors

Brief Profile
Board of Directors Designation Profile

A seasoned oil and gas professional, Mr. Bokhari has over 31 years of experience, mainly with three international majors:
Mr. Syed Wamiq Bokhari MD & CEO Kuwait Foreign Petroleum Exploration Company (a subsidiary of Kuwait Petroleum Corporation), Eni S.p.A. and Atlantic
Richfield Company, USA.
Mr. Aftab Nabi is the CEO of Aftab Nabi & Associates, a specialist law firm and also acts as consultant to Al Hoqani
Independent, Non-Executive
Mr. Aftab Nabi Securities and Investment Corporation. Previously, he has held the position of CEO in GMS Limited. Mr. Nabi is the current
Director
President of the Karachi Boat Club and is on his second term.
A petroleum geologist by profession with vast experience in the industry, Mr. Shah has been associated with the Ministry
of Petroleum and Natural Resources for the last 31 years in different capacities, including Director General (Gas), Director
Mr. Saeed Ullah Shah Non-Executive Director
General (Oil) and Director General (Administration/ Special Projects), and is currently serving as Director General
Petroleum Concessions.
Independent, Non-Executive Mr. Baig Mohamed is the group CEO of Baig Mohamed Group of Companies and CEO of ABM Investments, a private
Mr. Asif Baig Mohamed
Director equity concern. The group has interests in various sectors including Oil and Gas, Security and Construction.
During his 52 years experience, Mr. Zaidi spent first 12 years with Esso Eastern Inc. in petroleum downstream industry in
marketing function. After a stint in the Middle East, he came back to Pakistan and spent six years in midstream industry as
Independent, Non-Executive Head of HR with Pakistan Refinery Limited. Mr. Zaidi then spent 14 years with PPL and LASMO (later acquired by Eni).
Mr. Imtiaz Hussain Zaidi
Director During his associations with these companies, he was responsible for introducing and setting up Human Resource
functions, based on international best practices. Mr. Zaidi has also served as Chief Executive Officer of Dadex Eternit Limited
and Samaa TV, a satellite News Channel.
Mr. Baluch is a political personality from Gwadar, Baluchistan. He pivoted and materialised demands of nationalist groups
Mr. Muhammad Ashraf Independent, Non-Executive
to build Gwadar Port, Coastal Highway and Mirani Dam. He was also part of Chief Minister Baluchistans advisory
Iqbal Baluch Director
committee.
In his career spanning more than 37 years, Mr. Qureshi has been involved in many entrepreneurial ventures. He started
Mr. Nadeem Mumtaz Independent, Non-Executive
and managed several companies in the Gulf region, as Chairman and CEO. These companies were mainly involved in the
Qureshi Director
supply of oilfield equipment and chemicals.
Mr. Mirza has vast experience in public administration and policy. Previously he has served as an Assistant Commissioner,
Mr. Arshad Mirza Non-Executive Director
Additional Deputy Commissioner and Deputy Commissioner in various cities.
Page 63 of 104
Sui Lease, a key trigger
Following the expiration of the Sui Mining Lease (ML) in May 2015, PPL exerted relentless efforts to engage
major stakeholders, which includes the provincial and federal government to convert the said lease, into a
D&P lease. The company finally received approval for conversion in Dec 2016 and, consequently, the revision
of Sui wellhead gas prices was announced in Jul 2017 by the regulator. The newly-revised Sui wellhead gas
prices are derived by applying a 45% discount to 2012 petroleum policy. Since 2012PP provides lucrative
premium to upstream companies for the gas extraction and sale, this revision has raised the Sui wellhead gas
prices by over 60% from previous levels; hence, improving yields by over ~6%
It is worth mentioning that previously wellhead gas prices of Sui field were derived on the basis of negotiated
settlement that was inked in early 2000 between the government and the company.
Since the new prices were announced on 7 July 2017 and are effective from Jun 2015, our understanding of
the IAS 8 and IAS 10 implies that the company will restate its FY16 and FY17 earnings up by PKR4.5/share
and PKR3.9/share, respectively. In our calculations, we have already incorporated the raised Sui wellhead gas
prices from FY17, and have not made any changes to the actual FY16 earnings.
Moreover, these raised prices will also encourage the company to drill deeper into the potentially rich
hydrocarbon zone, where initial deep estimates suggest nearly 500bcf of gas reserves.
Figure 98: Realised prices before and after Sui re-pricing Figure 99: Operating margins before and after Sui re-pricing
Realized prices of hydrocarbon sale (USD/BOE) Operating margins (%)
Before Sui re-pricing After Sui re-pricing Before Sui re-pricing After Sui re-pricing
18.00 50.00%
16.00 45.00%
14.00 40.00%
35.00%
12.00
30.00%
10.00
25.00%
8.00
20.00%
6.00
15.00%
4.00 10.00%
2.00 5.00%
0.00 0.00%
FY17E FY18F FY19F FY17E FY18F FY19F
Page 64 of 104
Exploratory efforts to support flows from matured fields
PPL along with its peers, have taken advantage of low servicing costs by expanding its exploration reach
through increase in seismic surveys. During 10MFY17, PPL conducted 1630 sq.km of 3D survey, up 119%YoY,
which will help the company effectively identify potential hydrocarbon zones. Furthermore, the company
stepped up its drilling activities during the period, where it drilled nearly 43.4K meters, up 39%YoY. We
believe the company will pursue exploration work more aggressively to offset the natural decline of its
matured fields.
The table below shows the current exploration activities pursued by PPL, where we believe Dhok Sultan
possess high probability of good reserve potential i.e. above 200bcf of gas.
Figure 100: Seismic activities

Reserve potential estimates
Original 2P reserves Reserve
Operator Leases Type Zone Province Nearby producing fields
of nearby fields potential
PPL Dhok Sultan 3D Zone 1 Punjab Dakhni: Oil prod. 747bopd; Gas prod. 25mmcfd Oil: 12.7mnbbls; Gas: 410bcf High
Meyal: Oil prod. 302bopd; Gas Prod. 2.2 mmcfd Oil: 42.7mnbblsl; Gas: 287bcf
PPL Sirani 3D Zone 3 Sindh Tajedi: Oil prod. 53bopd Oil: 2.8mnbbls; Gas: 0.16bcf Low
Ghunghro: Oil prod. 30bopd Oil: 7.8mnbbls; Gas:1.8bcf
PPL Kharan 2D Zone 1 Baluchistan Not available Not available Low
Figure 101: Drilling of exploratory wells

Exploratory efforts in unexplored leases
Nearby producing Original 2P reserves of nearby Reserve
Operator Leases Well name Zone Province
fields fields potential
PPL Kharan Kharan X1 Zone 1 Balochistan Not available Not available Low
PPL Kalat Kalat X1 Zone 2 Balochistan Not available Not available Low
The details pertaining to on-going efforts are mentioned below:
i. Dhok Sultan: PPL has a 75% working interest in Dhok Sultan, which is located in District Attock (Punjab),
and falls under Zone I. The block lies to the east of Nashpa (ORR: 80mnbbls & 0.45tcf) and south of
Dakhni Field (ORR: 14mnbbls & 0.40tcf).
In recent months, PPL made its first discovery namely DhokSultan-X1 in the block, where the well flowed
468bopd along with 0.617mmcfd of gas; which is expected to have an annualized earnings impact of
PKR0.20/share. Moreover, PPL plans to carry 350 sq.kms of 3D seismic survey in the block which is
expected to be completed by Aug17. Our channel checks suggest that company plans to drill additional
wells including X2 and X3 in the current calendar year
ii. Gambat South: The block is located to the west of Sinjhoro (ORR: 17mnbbls) and falls under Zone III.
PPL has a stake of 65% in Gambat South, with nine discoveries to-date; where the most recent Zafir
X1 was announced in April17. The initial testing results record a flow of 310bopd and 56mmcfd of gas.
We believe commercial production from Zafir X1 will commence from Nov17 having an annualized
earnings impact of PKR1.5/share. Notably, the block currently produces ~663bopd and 51mmcfd of gas
from Sharf field
Page 65 of 104
Figure 102: DhokSultan, Tal and Nashpa lease Figure 103: Gambat South lease
iii. Tal Block: With a working interest of 28%, PPL places itself as one of the beneficiaries of rising
production from Tal Block, where drilling activities are progressing in Mardan Khel 2, Makori East 6, and
Tolanj East 1. Furthermore, production from Mardan Khel 3 is expected to come online from Aug17,
adding ~55bopd and ~1.5mmcfd of gas to PPLs portfolio
iv. Nashpa and Mela: The ongoing development project in the block, which includes installation of well
head compressors, crude stabilisation unit and laying of 22km gas pipeline for transportation of gas from
Mela to Nashpa is expected to be completed by Aug17. Since PPL holds 29% interest in Nashpa and
Mela respectively, the project will add 330bopd, 2.9mmcfd and 102tpd of LPG to PPLs hydrocarbon
portfolio. Presently, the operator is drilling two development wells Nashpa 8 and Mela 5 and one
exploratory well Kacha Khel 1 in the block with anticipated completion by Aug 2017, Dec 2017 and Sep
2017 respectively
Page 66 of 104
Production flows to remain stable
PPL produced over 306bcf of gas and over 5mnbbls of oil in FY16 where nearly 72% of gas production came
from fully-owned leases, owing to the companys 100% stake in Sui (which contributes over 52% to the
companys and 11% to the countrys gas volumes); oil production remained more skewed towards non-
operated JVs.
Figure 104: PPLs gas production Figure 105: PPLs gas production contribution by field
Mmcf per annum % FY16
400,000
Others 18%
350,000
300,000 Makori East 3%

Nashpa 3%
250,000
Qadirpur 3%
200,000
Maramzai
150,000 4%
100,000
Kandhkot
50,000 17% Sui 52%
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18 FY19
Going forward, we expect its gas production to grow at a three-year CAGR (FY16-19) of 3% owing to
improved flows from Sui, Kandhkot and Nashpa. Moreover, recent production commencement from Mardan
Khel & Sharf is also expected to support overall production.
Figure 106: Gas production by field

Mmcf per annum
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

250,000
200,000
150,000
100,000
50,000
0
Sui Kandhkot Maramzai Qadirpur Nashpa
Page 67 of 104
Oil production is forecast to grow at a three-year CAGR (FY16-19) of

6%.
Figure 107: PPLs oil production Figure 108: PPLs oil production contribution by field
Barrels of oil per annum % FY16
7,000,000
Others 14%
6,000,000 Adhi 17%
Maramzai 9%
5,000,000
4,000,000
3,000,000
2,000,000
Nashpa 33%
1,000,000 Makori East 27%
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18 FY19
Oil production is anticipated to rise due to incremental flows from Adhi, Nashpa, Mardan Khel and Makori
East fields. It is worth noting that Nashpa and Makori East remained the major contributors to oil production
ramp-up post 2011, extracting a three-year CAGR (FY13-16) of 13% and 49%, respectively.
Figure 109: Oil production by field

Barrels of oil per annum
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Adhi Makori East Nashpa Maramzai Mardankhel
Page 68 of 104
COGS (54,171) (55,810) (58,949) (62,449) Change in working capital 14,490 (16,605) (6,659) (3,877)
SG&A N/A N/A N/A N/A CAPEX (33,348) (23,748) (25,788) (24,028)
Depreciation and amortisation (10,782) (12,120) (15,568) (17,229) Non-operating cash flow (10,450) (14,391) (20,803) (20,979)
Net operating profit (EBIT) 21,948 42,749 49,195 52,090 Cash flow before financing (624) (9,156) 643 9,365
Share of results from associates 0 0 0 0 Net financing (659) (491) (622) (646)
Net investment income (loss) 5,418 4,532 4,924 5,842 Change in cash (1,283) (9,648) 21 8,719
Net interest income (expense) (659) (491) (622) (646) Source: Pakistan Petroleum, EFG Hermes estimates
Other non-operating inc (exp.) N/A N/A N/A N/A
FX gains (loss)
Net provisions
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Ownership Structure (%)
Income before taxes or zakat 26,707 46,789 53,497 57,287
PPL
Taxes or zakat (9,465) (13,814) (15,794) (16,913) Employees
Net inc before minority interest 17,242 32,976 37,703 40,374 Empowerm
Minority interest N/A N/A N/A N/A ent Trust
9.8%
Reported net income 17,242 32,976 37,703 40,374
Adjusted net income 17,242 32,976 37,703 40,374
Balance Sheet (Jun Year End)

In PKRmn 2016a 2017e 2018e 2019e
Accounts receivable (current) 57,835 70,401 77,311 81,771 Government
Inventory N/A N/A N/A N/A of Pakistan
90.2%
Other debit balances (current) 11,483 15,530 17,163 18,492
PP&E (net) 127,920 139,476 149,615 156,326 Source: Pakistan Petroleum, EFG Hermes estimates
Goodwill & intangibles 415 408 401 393
Rating Distribution
Other debit balances (non-current) 1,545 1,745 1,945 2,145 Rating Coverage Universe%
Total non-current assets 180,858 194,439 211,199 223,674
Buy 45%
Total assets 272,462 293,008 318,332 345,316
Neutral 43%
Short term debt N/A N/A N/A N/A Sell 12%
Accounts payable (current) 31,670 31,803 33,687 35,599 Not Rated 0%
Other credit balances (current) 126 0 0 0 Under Review 0%
Total current liabilities 31,795 31,803 33,687 35,599
Other credit balances (non-current) 48,018 52,068 56,656 61,541
Total net worth 192,649 209,137 227,989 248,176
Total equity 192,649 209,137 227,989 248,176
Page 69 of 104
21 August 2017
Pakistan Oilfields Stock Rating

Buy
Production flow from Tal Block, remains the key catalyst Target Price
PKR538
Closing Price
PKR474
PKR538.32
Initiating coverage on POL with a Buy rating

We initiate coverage on Pakistan Oil Fields (POL) with a Buy rating based on our TP of PKR538/share, implying 14% upside with a
forward dividend yield of 8% (total return of over 21% for FY18). Our Buy rating is based on: i) decent valuation; since the stock is
trading at an implied oil price of USD48/bbl, that is at a 9% discount to our FY18 average Arabian basket oil price forecast of
USD53/bbl; ii) higher oil production from Tal lease, which is anticipated to grow at a three-year CAGR (FY16-FY19) of 4.5%; and iii)
expectation of favourable outcome from Gurgalot lease, which could improve fundamentals further. Moreover POL, similar to its peers,
provides a hedge against currency devaluation (IMF believes the PKR is c10% overvalued against USD). POL is our least preferred pick
in the E&P sector, owing to its low exploratory efforts and narrow hydrocarbon production base. Our SOTP derived valuation, values
its core 2P reserve, exploration option, cash and discounted portfolio at PKR402, PKR50, PKR45 and PKR41 per share, respectively.
Production flows to continue from non-operated JVs

POLs production mainly flows from its non-operated fields, which contribute over 81% and 87% to its oil and gas production,
respectively. Going forward, we expect production flows to continue from non-operated JVs, since it has a stake in one of the most
prominent production flow leases Tal Block (operated by MOL), where drilling activities in Tolanj East 1, Makori East 6 and Mardan
Khel 2 may further improve POLs hydrocarbon production profile. Apart from Tal Block, exploratory efforts in Gurgalot Lease operated
by OGDC, could surprise on the upside. On the other hand, POLs own operated leases and JVs constituted only 19% and 13% of its
oil and gas production in FY16, respectively. Since POL has curtailed exploratory efforts in its own operated zones, we believe
contribution from own operated leases will fall to 17% for oil and 10% for gas by FY19e.
POL is more susceptible to oil price volatility within the sector

While the company benefits the most (within the upstream sector) from upward oil price movement, owing to its revenue tilt towards
oil (four year avg. of ~51%) and relatively higher contribution of oil in the product mix (four-year avg. of 27%) against its peers; POL
also is highly susceptible to oil price decline where one dollar reduction in oil price results in a PKR8 decline in our target price.
Key Financial Highlights (Dec Year End) Stock Data

BH1,BWH1,CBH9
In PKRmn, unless otherwise stated 2016a 2017e 2018e 2019e Last Div. / Ex. Date PKR15.0 / 12 Feb 2017
Revenue 24,848 28,095 32,327 34,735 Mkt. Cap / Shares (mn) PKR112,139 / 236.5
EBITDA 11,340 14,988 17,577 18,995
Net income 7,234 9,421 10,977 11,747 Bloomberg / Reuters POL PA / PKOL.KA
Dividend yield 7.4% 7.4% 7.8% 8.4%
EV / EBITDA 10.9x 8.2x 7.0x 6.5x
BH1,BWH1,CBH9
Source: Pakistan Oilfields, Bloomberg and EFG Hermes estimates
Pakistan Oilfields 21 August 2017
Data Miner
Our buy rating is based on: i) decent valuation, since the stock is Our TP of PKR538/share is based on SOTP methodology, where
trading at an implied oil price of USD48/bbl, that is, at a 9% the companys core 2P reserve based value, exploration option,
discount to our FY18 average Arabian basket oil price forecast of cash and discounted portfolio value contributes PKR402, PKR50,
USD53/bbl; ii) higher oil production flows from Tal lease, which is PKR45 and PKR41 per share, respectively.
anticipated to grow at a three-year CAGR (FY16-19) of 4.5%; and Since oil and gas prices are based in USD, the upstream business
iii) expectations of favourable outcome from Gurgalot lease, provides a hedge to investors against currency devaluations.
which could improve fundamentals further. POL remains our least However, risk associated with intl oil prices, exploratory efforts,
preferred pick in the E&P sector, owing to its low exploratory extraction flows and regulatory policy framework can adversely
efforts and narrow hydrocarbon production base. affect profitability and investors returns. Since POL has curtailed
exploration activities in its own operated leases and JVs; its
managements strategy seems to ride along on the back of non-
operated joint venture production flows; therefore, we rate POL
as our least preferred stock in the upstream sector.
Dec Year End Dec Year End

Revenue 24,848 28,095 32,327 34,735 EPS (PKR) 30.6 39.8 46.4 49.7
EBITDA 11,340 14,988 17,577 18,995 DPS (PKR) 35.0 35.0 37.0 40.0
Change in working capital 513 1,342 (180) (2,939) Revenue growth (Y-o-Y) -19.5% 13.1% 15.1% 7.4%
Net financing N/A N/A N/A N/A Net operating profit (EBIT) margin 30.1% 37.9% 39.2% 38.7%
Change in cash 150 (582) 626 (1,509) Effective tax rate 18.5% 25.4% 25.8% 25.5%
Source: Pakistan Oilfields, EFG Hermes estimates Net Debt (Cash) / Equity (0.4)x (0.3)x (0.3)x (0.3)x
Source: Pakistan Oilfields, EFG Hermes estimates
Page 71 of 104
5. Executive summary
Initiating coverage on Pakistan Oilfields with a Buy rating
We initiate coverage on Pakistan Oil Fields (POL) with a Buy rating based on a TP of PKR538/share, offering
14% upside. The stock also offers a forward dividend yield of 8%, enhancing the expected total return to
over 21% for FY18. POL is our least preferred stock in the E&P sector, owing to its low exploratory efforts
and narrow hydrocarbon production base. Our valuation is based on SOTP methodology, where its core 2P
reserve based value, exploration option, cash and discounted portfolio value contributes PKR402, PKR50,
PKR45 and PkR41 per share, respectively.
Investment thesis
POLs share price shed over 11% YTD, underperforming KSE100 and sector by 4% YTD, owing to the recent
decline in the broader benchmark. We believe current valuations provide a good opportunity to make decent
returns, since the stock is trading at an implied oil price of USD48/bbl, that is, at a 9% discount to our FY18
average Arabian basket oil price forecast of USD53/bbl.
Apart from attractive valuations, our liking for the stock stems from:
Incremental flows of oil from Tal should support companys production growth, going forward.
The lease contributes 67% and 79% to the companys oil and gas production profile, where we
expect oil production from the block to grow at a three-year CAGR (FY16-19) of 4.5%
Apart from Tal Block, the outcome of the exploratory efforts carried out in Gurgalot Lease could
excite investors further with positive surprises
Unlike its peers, POL has curtailed its exploratory activities in its own operated fields to bring
down costs from USD25.5/boe in FY15 to USD19.5/boe in FY16, which has boosted profits in
the short term. However, this step is anticipated to lower down flows from its own operated
leases, going forward, where we expect contribution from own operated fields to decline to
17% and 10% for oil and gas production in FY19e against 19% and 13% recorded in FY16
POL, similar to its peers provide a hedge against currency devaluation. Its worth noting that the
local currency is estimated to be nearly 10% overvalued against USD.
Figure 110: POL PER (x) Band Figure 111: POL is trading at par to current Arabian basket
and 14% discount to our forecast oil price average
POL PE Upper Band @ PE of 18x
Lower Band @ PE of 5x Linear (POL PE)
1,200 600
1,000 500 $56/bbl

$48/bbl $48/bbl
800 400
300
600
200
400
100
200
0
0
price (1)
(1)
Page 72 of 104
Production to flow from non-operated JVs
POLs production mainly flows from its non-operated fields, which contributed over 81% and 87% of its oil
and gas production, respectively, in FY16. We believe production flows will continue from non-operated JVs
going forward, since the company has a stake in one of the most prominent production flow leases Tal
Block (operated by MOL), where drilling activities in Tolanj East 1, Makori East 6 and Mardan Khel 2 may
further improve the companys hydrocarbon production profile.
Figure 112: Oil production contribution from non-operated Figure 113: Gas production contribution from non-operated
leases is expected to rise leases is also expected to increase
% %
Operated Leases Non Operated Leases Operated Leases Non Operated Leases
90% 83% 100%
81% 81% 82% 89% 90% 90%
78% 85% 87%
80% 90% 83% 84%
73%
80%
70% 63%
70%
60%
60%
50%
50%
40% 37%
40%
30% 27%
22% 30%
19% 19% 18% 17%
20% 17% 16% 15%
20% 13% 11% 10% 10%
10% 10%
0% 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY13 FY14 FY15 FY16 FY17 FY18 FY19
POLs own operated leases contributed only 19% and 13% to the companys oil and gas production in FY16,
where we believe that recent curtailment of exploration costs will lower the contribution, going forward.
Currently, the company is drilling only one exploratory well Jhandial-1 in Ikhlas block. This block is
geographically located in Northern Punjab and falls under zone 1. The block is adjacent to Pariwali block,
which had Original Recoverable Reserves (ORR) of 126bcf of gas & 9.7mnbbls of oil and Ratana block with
ORR of 199.5bcf & 5.86mnbbls.
Page 73 of 104
Higher exposure to oil equals higher oil price volatility
Within the upstream space, POL is more susceptible to oil price volatility, owing to a higher proportion of
product mix skewed towards oil averaging ~27% in the past four years against 20% and 9% for OGDC and
PPL, respectively. This helps the company obtain better realised oil prices, but also increases operational costs;
hence, making it more susceptible to oil price volatility.
Figure 114: Operating costs (USD/boe) by company

POLs operating cost per boe is higher compared to its peers as its product mix is skewed towards oil
POL (RHS) OGDC (RHS) PPL (RHS) OPEC Basket (LHS)

120 30
100 25
80 20
60 15
40 10
20 5
0 0
FY12A FY13A FY14A FY15A FY16A FY17E FY18F FY19F
Figure 115: Net realised selling price by company

OPEC Basket (USD/bbl); POL,OGDC,PPL (USD/boe)
POL (RHS) OGDC (RHS) PPL (RHS) OPEC Basket (LHS)

120 50
45
100
40
35
80
30
60 25
20
40
15
10
20
5
0 0
FY12A FY13A FY14A FY15A FY16A FY17E FY18F FY19F
Page 74 of 104
Valuation and risks
We initiate coverage on Pakistan Oil Fields (POL) with a Buy rating based on our TP of PKR538/share, offering
upside of 14%. The stock also offers a forward dividend yield of 8% with an expected total return of over
21% for FY18. Our valuation is based on a SOTP methodology, where the companys core 2P reserve based
value, exploration option, cash and discounted portfolio value contributes PKR402, PKR50, PKR45 and PKR41
per share, respectively.
Since oil and gas prices are based in USD, the upstream business provides a hedge to investors against currency
devaluations. However, risk associated with international oil prices, exploratory efforts, extraction flows and
regulatory policy framework could adversely affect POLs profitability and investors return. Since POL has
curtailed exploration activities in its own operated leases and JVs, it is highly dependent on flows from non-
operated joint venture leases, particularly the Tal block; therefore, we rate POL as our least preferred stock in
the upstream sector.

(PKRmn) FY17e FY18e FY19e FY20e FY21e FY22e

EBITDA 17,593 20,480 22,144 23,268 23,903 24,611
Less Tax (3,201) (3,812) (4,022) (3,970) (3,986) (3,932)
Add: Increase in CL 2,665 1,055 (2,156) 633 614 631
Less: Increase in CA (1,323) (1,235) (783) (566) (352) (394)
Capex (7,103) (6,112) (6,765) (7,101) (7,794) (8,898)
FCFF 8,631 10,377 8,418 12,264 12,386 12,018
PV - 8,936 6,242 7,831 6,810 5,690
RFR 11%
Risk premium 5%
Beta 103%
Terminal growth 6%
SOTP valuation
Cash value per share 45
Portfolio value Per share 41
Target price 538

Exploration option
2P NAV Value (PKRmn) 95,049
POL's D&P acres (sq.km)+AA21 782
Value of acre (PkR mn) 122
Additional development acreage (sq.km) = (10.6% - 9.1%)*exploration acreage 129
Exploration option value 15,695
Hydrocarbon quality discount 25%
Exploration option value per Share 50
Page 75 of 104
Owing to practical limitation of forecasting the production flows from unexplored fields, we (in our
assumptions) have incorporated the cost side of future exploration activities only. To account for the value
generated from unexplored fields, we add the exploration option to our TP separately. We have calculated
the exploration option based on the 2P NAV proportionate to its development acreage.
Since nearly 9.1% of the exploration acreage of POL is already developed and producing (against developing
world average of over ~15%), therefore we believe that the company still has room to add 1.5% of its
exploration acreage to development in perpetuity.
rate assumptions.
assumptions
Target Price in PKR

2% 3% 4% 5% 6% 7%
13% 404 416 430 446 464 486
Risk Free Rate
12% 426 440 457 476 498 525

11% 451 467 487 510 538 572
10% 479 499 523 552 587 631
9% 512 537 567 603 648 706
8% 551 582 619 666 727 806
Page 76 of 104
6. Pakistan Oilfields (POL) Company analysis
Initiating coverage on POL with a Buy rating
Pakistan Oil Fields (POL) offers 14% upside based on our TP of PKR538/share. We initiate coverage on the
stock with a Buy rating. The stock also offers a forward dividend yield of 8%, enhancing the expected total
return to over 21% for FY18. We like the stock fundamentally due to:
POLs share price has shed over 11% YTD, underperforming the broader benchmark and sector
by 4% YTD, owing to the recent decline in the broader benchmark. We believe current
valuations provide a good opportunity to make decent returns as it is trading at an implied oil
price of USD48/bbl, which is a 9% discount to our FY18 average Arabian basket oil price forecast
of USD53/bbl
Notably, incremental oil production from Tal block (operated by MOL) is expected to support
volumes. Tal block contributes 67% and 79% of the companys oil and gas production, where
the operator is currently drilling three wells in the block, which include Tolanj East 1, Makori East
6 and Mardan Khel 2. Going forward, we expect oil production from Tal to grow at a three-year
CAGR (FY16-19) of 4.5%
Apart from the Tal Block, outcome of the exploratory efforts carried out in Gurgalot Lease could
surprise on the upside
Unlike its peers, POL has curtailed its exploratory activities in its own operated fields to bring
down costs from USD25.5/boe in FY15 to USD19.5/boe in FY16, which has boosted short-term
profits. However, this step is anticipated to lower flows from its own operated leases, going
forward, where we expect contribution from own operated fields to decline to 17% and 10%
for oil and gas production in FY19e against 19% and 13% recorded in FY16
POL, similar to its peers, provides a hedge against currency devaluation. It is worth noting that
the local currency is estimated to be nearly 10% overvalued against USD
POL is our least preferred Buy pick in the E&P sector, owing to its low exploratory efforts and narrow
hydrocarbon production base. Our valuation is based on a SOTP methodology, where the companys core 2P
reserve based value, exploration option, cash and discounted portfolio value contribute PKR402, PKR50,
PKR45 and PkR41 per share, respectively.
Figure 119: POL PER (x) band Figure 120: POLs implied oil price comparison with Arabian
basket
USD per barrel
POL PE Upper Band @ PE of 18x
Lower Band @ PE of 5x Linear (POL PE) Avg. Arabian Basket POL Implied Oil Price
1,200 120
1,000 100
800
80
600
60
400
40
200
20
0
0
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Aug-17
Aug-12
Aug-13
Aug-14
Apr-15
Aug-15
Aug-16
Apr-13
Apr-14
Apr-16
Apr-17
Jan-13
Apr-13
Oct-14
Jan-14
Apr-14
Jan-15
Apr-15
Jan-16
Apr-16
Jan-17
Apr-17
Oct-13
Oct-15
Oct-16
Jul-13
Jul-14
Jul-15
Jul-16
Source: Company data, EFG Hermes estimates Source: Company data, OPEC, EFG Hermes estimates
Page 77 of 104
The tables below reflect the sensitivity analysis of oil and gas production flows, currency
devaluation and oil price movement on our earnings and target price forecast.
Figure 121: Natural gas extraction growth Figure 122: Earnings sensitivity to oil prices
TP in PKR EPS in PKR; Crude in USD
Natural Gas Extraction Growth Earnings Per Share
-5% -3% -1% 1% 3% 5% FY18 FY19 FY20 FY21 FY22

-5% 434 447 460 474 490 506 35.00 32.91 33.62 34.24 34.73 35.13
Arabian Basket
Oil Extraction
-3% 461 474 487 501 517 533 40.00 36.67 37.62 38.47 39.00 39.43
Growth
-1% 490 502 516 530 545 562 45.00 40.42 41.63 42.72 43.22 43.68
1% 520 533 546 561 576 592 50.00 44.18 45.63 46.97 47.52 48.01
3% 553 566 579 594 609 625 55.00 47.93 49.63 50.90 51.53 52.05
5% 588 601 614 628 644 660 60.00 51.69 53.64 55.48 56.18 56.73
1% 2% 3% 4% 5% 6%
40.00 380 400 421 441 463 485
Arabian Basket
45.00 421 442 464 486 510 533

50.00 462 484 508 532 556 582
55.00 502 526 551 577 603 630
60.00 543 568 595 622 650 679
65.00 583 610 638 667 696 727
Page 78 of 104
Pakistan Oilfields Limited (POL) is involved in the exploration and production of Oil and Natural Gas resources.
The companys assets currently consist of seven exploration leases (three operated and four non-operated
JVs), whereas the Development and Production Lease portfolio comprises 18 leases (nine owned and operated
JVs and working interest in nine non-operated JV blocks). Moreover, POL also markets LPG under its own
brand named POLGAS, as well as through its subsidiary CAPGAS (Private) Limited. The company produced
2.2mnbbls and 27.4bcf of gas in FY16, contributing nearly 7% and 2% to the countrys production numbers.
Attock Oil Company Ltd. an associate of the company holds a 52.7% stake in POL.
Figure 124: Board of Directors

Brief profile
Board of
Designation Profile
Directors
Chairman & Chief Mr. Malik has been associated with Attock Group of companies for around four decades. He has vast experience
Mr. Shuaib A. Malik
Executive related to various aspects of upstream, midstream and downstream petroleum business.
Mr. Nawaz has almost 11 years of experience with the company in Sr. management positions. He also has over
Mr. Sajid Nawaz Managing Director
30 years of experience in services with GoP at various management positions both within the country and abroad.
A businessman and an international investor who has financial and trading interests in Pakistan and other parts
Mr. Laith G. of the world in various sectors like petroleum, power generation, chemical, real estate and cement etc. Mr. Laith
Director
Pharaon holds a graduate degree from the University of Southern California. He is also a director on the boards of various
companies in the group.
A businessman and an international investor who has financial and trading interests in Pakistan and other parts
Mr. Wael G.
Director of the world in various sectors like petroleum, power generation, chemical, real estate and cement etc. Mr. Wael
Pharaon
holds a graduate degree. He is a director on the boards of various companies in the Attock Group of Companies.
Mr. Abdus Sattar has over 35 years of financial management experience in key positions of responsibility in various
Mr. Abdus Sattar Director Government organisations / ministries, commercial organisations. He has served as a Financial Advisor for MPNR
and Mari Petroleum and in the past has been a director of OGDCL, PPL, SNGPL, SSGCL, PSO, PARCO etc.
Mr. Tariq Iqbal Khan is a member of the Institute of Chartered Accountants Pakistan, with diversified experience
of more than 40 years. He was pivotal in founding Islamabad Stock Exchange, where he subsequently served as
Mr. Tariq Iqbal Khan Director
President as well. Presently, he is a member of the Boards of Gillette Pakistan Limited, International Steels Limited,
Lucky Cement Limited, National Refinery Limited, Packages Limited, Silk Bank Limited and PICIC Insurance Limited
Mr. Nihal Cassim is Chief Executive of Safeway Fund Limited, an asset management company managing two
equity funds in Karachi. Before taking this position, he was engaged in his own corporate finance practice in
Mr. Nihal Cassim Director
Pakistan and concluded various assignments including advisory services to the seller of Crescent Leasing and
certain sellers of PICIC including NIT.
Page 79 of 104
Production flows to rise from non-operated leases
Following the decline in international oil prices, POL has curtailed exploratory activities in its own operated
leases, which constituted ~19% and ~13% of the companys oil and gas production profile, respectively, in
FY16. We anticipate that lower exploratory efforts will further curtail production contribution from own
operated fields to 17% and 10% in FY19e.
Currently, the company is pursuing efforts in just the Ikhlas lease, where it is drilling an exploratory well named
Jhandial-1, which is expected to contain reserve potential in the range of 100-200bcf of gas. Ikhlas is
geographically located in Northern Punjab and falls under zone 1. The block is adjacent to Pariwali, which had
original recoverable reserves (ORR) of 126bcf & 9.7mnbbls and Ratana with ORR 199.5bcf & 5.86mnbbls.
Figure 125: Oil production Figure 126: Gas production

barrels per annum Mmcf per annum
3,000,000
30,000.0
2,500,000 25,000.0
2,000,000 20,000.0
1,500,000 15,000.0
1,000,000 10,000.0
500,000 5,000.0
0 0.0
FY13A FY14A FY15A FY16A FY17F FY18F FY19F FY13A FY14A FY15A FY16A FY17F FY18F FY19F
Figure 127: Oil production contribution from non-operated Figure 128: Gas production contribution from non-operated
leases is expected to improve leases is also expected to increase
Operated Leases Non Operated Leases Operated Leases Non Operated Leases
90% 83% 100%
81% 81% 82% 89% 90% 90%
78% 85% 87%
80% 90% 83% 84%
73%
70% 80%
63%
70%
60%
60%
50%
50%
40% 37%
40%
30% 27%
22% 30%
19% 19% 18% 17%
20% 20% 17% 16% 15% 13% 11% 10% 10%
10% 10%
0% 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Page 80 of 104
The charts below represent POLs production by fields where Tal contributes the major chunk of flows to the
companys profile. POL has relatively narrow production base with five fields contributing nearly 94% and
96% to oil and gas production, respectively, which increases the risks pertaining to individual field flow
incident. Any production mishap, or maturity decline in any of the major producing field, could jeopardise
POLs overall hydrocarbon production volume; hence, affecting profitability.
Figure 129: Oil production by field Figure 130: Gas production by field
% contribution to FY16 production flows % contribution to FY16 production flows
Others 6%
Meyal 5% Meyal 4% Others 4%
Pariwali 6%
Pariwali 5%
Balkassar 5% Adhi 7%
Adhi 12%
Tal 67%
Tal 79%
Figure 131: Geographical presence
Page 81 of 104
Ongoing efforts in leases with greater hydrocarbon reserves

potential
The leases (detailed below) are currently under exploratory or development phase, which could aid the
company in building up its reserves and production flows going forward.
i. Tal Block: Pakistan Oil Fields holds nearly a 21% interest in the Tal block. Discovery in the block was
first made when MOL Group Pakistan (operator) achieved success in Manzalai Field. Currently,
Mardan Khel 2, Makori East 6 and Tolanj East 1 wells are under drilling phase. Also, flows from
Mardan Khel 3 are expected to come online from Aug 2017, which is expected to add 43bopd of oil
and 1.1mmcfd of gas to POLs portfolio. As of FY16 end, Tal concession contributed ~67% and 79%
to POLs total oil and gas volumes
Figure 132: Tal and Gurgalot leases Figure 133: Balkassar and Adhi Block
Exploration Map Exploration Map
Source: PPIs,Company data Source: PPIS, Company data
ii. Gurgalot: The lease has sizable hydrocarbon potential since it lies between Tal (ORR 1.5tcf &
65mbbls), Dakhni (ORR Gas: 410bcf & Oil: 12.67mnbbls) and Mela (ORR Gas: 67.4bcf & Oil:
17.9mnbbls). POL holds a 20% stake in the block, therefore any discovery in Gurgalot would aid the
company in unlocking long-term revenue growth. Presently, an exploratory well Surqamar-1 is under
drilling with a target depth of 16,299ft, the operator (OGDC) has already achieved the target depth,
but extensive testing with different options are in progress to map the potential of the well
iii. Balkassar D&P Mining Lease: POL with a 100% interest in the lease has evaluated 2D/3D seismic
data and has identified two possible leads related to potential hydrocarbon reserves. Company plans
to carry a quality 3D seismic survey to confirm the leads before carrying out any drilling activities in
the area. Presently, Balkassar has balance recoverable reserves of 3mnbbls of oil
iv. Adhi: Following the recent production enhancements from Adhi-22, 23, 24, 25, 26 & 27, PPL
(operator) is in process of drilling Adhi-28 and 29. The operator has completed the target depth of
Adhi 28, where the well is currently in the testing phase. However, Adhi 29s target depth is expected
to be achieved by Aug 2017. POL has an 11% interest in the field
Page 82 of 104
POL is relatively more susceptible to oil price volatility

Within the upstream space, POL is more susceptible to oil price volatility owing to relatively higher proportion
of product mix skewed towards oil averaging at~27% in the past four years against 20% and 9% for OGDC
and PPL, respectively. While this helps the company obtain better realised oil prices, it also increases
operational costs, hence making it more susceptible to oil price volatility.
Figure 134: Product mix by company Figure 135: Operating cost breakup by company
POLs product mix is skewed towards oil, which increases its operating costs USD/boe; FY16
and realised prices per boe
Exploration and Prospecting Expenditure
POL OGDC PPL Operating Expenses
100% Royalty
25.00
90%
80%
20.00
70%
60%
15.00
50%
40%
10.00
30%
20% 5.00
10%
0% 0.00
Oil Sales (K.bbl) Gas Sales (K.BOE) LPG Sales (K.BOE) PPL OGDC POL
We expect POL to report operating costs of USD19.3/BOE in FY17e (down 1%YoY). It is worth mentioning
that in FY15, higher exploration expenditures were fueled by impairment charges of PKR~3.8bn against
Pindori and Ikhlas dry wells. Moreover, since POL has curtailed its exploratory activities, we expect the
exploration related costs to fall from USD2.5/boe in FY16 to USD0.9/boe (down 64%Y-o-Y) in FY17e.
Figure 136: Revenue mix skewed towards oil Figure 137: Operating margins are expected to improve due
to better realised prices and lower exploration cost
POL is more susceptible to oil price volatility since oil sales represent greater Realised price (LHS, USD/BOE); total operating costs (LHS, USD/BOE);
proportion in revenue mix (%) operating margins (RHS, %)
Crude Oil Gas POLGAS - Refill of cylinders Others Realized Prices Operational Costs Operating Margins
60% 45.00 45.0%
40.00 44.0%
50%
43.0%
35.00
42.0%
40% 30.00
41.0%
25.00 40.0%
30%
20.00 39.0%
20% 38.0%
15.00
37.0%
10.00
10% 36.0%
5.00 35.0%
0% 0.00 34.0%
FY15A FY16A FY17F FY18F FY19F FY15A FY16A FY17F FY18F FY19F
Page 83 of 104
Income Statement (Dec Year End) Cash Flow (Dec Year End)
COGS (13,605) (14,864) (16,420) (17,815) Change in working capital 513 1,342 (180) (2,939)
SG&A (140) (155) (171) (188) CAPEX (4,995) (7,103) (6,112) (6,765)
Depreciation and amortisation (3,872) (4,336) (4,899) (5,535) Non-operating cash flow (7,434) (9,213) (9,751) (9,926)
Net operating profit (EBIT) 7,469 10,651 12,678 13,459 Cash flow before financing 150 (582) 626 (1,509)
Share of results from associates N/A N/A N/A N/A Net financing N/A N/A N/A N/A
Net investment income (loss) 1,411 1,971 2,110 2,310 Change in cash 150 (582) 626 (1,509)
Net interest income (expense) N/A N/A N/A N/A Source: Pakistan Oilfields, EFG Hermes estimates
Net provisions N/A N/A N/A N/A Ownership Structure (%)
Income before taxes or zakat 8,880 12,622 14,788 15,769 Allied Bank S.M Naveed
Limited 2.0%
Taxes or zakat (1,646) (3,201) (3,812) (4,022)
5.9% Shahzad
Net inc before minority interest 7,234 9,421 10,977 11,747 State Life Naseer
Minority interest N/A N/A N/A N/A Insurance 2.3%
Corp. Of
Reported net income 7,234 9,421 10,977 11,747 Pakistan
Adjusted net income 7,234 9,421 10,977 11,747 8.7%
Balance Sheet (Dec Year End)

In PKRmn 2016a 2017e 2018e 2019e The Attock
Oil
Company
Accounts receivable (current) 3,336 4,214 4,849 5,210 Limited
Inventory 376 562 485 521 81.1%
Other debit balances (current) 5,700 6,032 6,786 7,252
PP&E (net) 10,421 11,723 13,156 14,761
Goodwill & intangibles 15,486 17,341 17,892 17,947 Source: Pakistan Oilfields, EFG Hermes estimates
Rating Distribution
Other debit balances (non-current) 13 15 17 19
Total non-current assets 35,542 38,701 40,687 42,349 Rating Coverage Universe%
Total assets 55,717 59,691 63,616 64,632 Buy 45%
Short term debt N/A N/A N/A N/A Neutral 43%
Accounts payable (current) 5,551 7,716 8,521 6,115 Sell 12%
Other credit balances (current) 3,545 4,045 4,295 4,545 Not Rated 0%
Total current liabilities 9,096 11,761 12,816 10,660 Under Review 0%
Other credit balances (non-current) N/A N/A N/A N/A
Total net worth 30,154 31,296 33,993 36,988
Total equity 30,154 31,296 33,993 36,988
Page 84 of 104
21 August 2017
Pakistan State Oil Co. Stock Rating

Buy
Volume growth to drive profitability Target Price

PKR508
Closing Price
PKR448
PKR507.51
Initiating coverage on PSO with a Buy rating

We initiate coverage on Pakistan State Oil (PSO) (the largest Oil Marketing Company in Pakistan) with a Buy rating based on our TP of
PKR508/share, offering 13% upside with a forward dividend yield of 6% (overall expected total return of 19%). At a forward P/E of
6.1x, PSO is trading at a 23% discount to the broader benchmark. Our Buy recommendation is based on: i) healthy growth in high
speed diesel (HSD), motor gasoline (MOGAS), and furnace oil (FO) volumes, where we expect industry numbers to grow at a 5-yr
CAGR (FY16-FY21) of 5.8%, 10.2% and 1.3%, respectively; ii) HSD and MOGAS margins are linked to the annual inflation average,
and we expect this to rise 5% annually. These products contribute over 28% and 19% to PSOs volumes, respectively, and therefore
a rise in margins will bode well for PSO; iii) moreover, we believe the government will clear its partial dues of circular debt in the pre-
election year to curtail load shedding and lure voters, which would provide sufficient finance for PSO to meet its due payments.
Volumes to remain buoyant: We forecast healthy growth in high speed diesel (HSD) and motor gasoline (MOGAS) volumes, where
we expect PSOs volume to grow at a 5-yr CAGR (FY16-FY21) of 4.7% and 8.6%, respectively, owing to strong automobile sales
forecast (5-yr CAGR of 8%), backed by low oil prices and rise in commercial transport demand to meet China Pakistan Economic
Corridor (CPEC) trade transit requirements. We also expect PSOs furnace oil volumes to grow at 5-yr CAGR (FY16-21) of 1.6%, owing
to subdued oil prices and govt policy changes to reduce dependence on imported coal-based power projects.
Margins are expected to improve: Margins on diesel and motor gasoline, which constitutes over 33% and 24% of the total
industrys petroleum products volume, respectively, are linked to inflation, which is expected to bode well for the whole sector. Notably,
FO margins are fixed at ~3.5% of ex-refinery prices, owing to which, any recovery in oil prices would boost absolute core profits, along
with inventory gains.
Pre-election year is expected to aid in clearing partial circular debt: Circular debt has, again, started to rise northwards, reaching
a whopping level of PKR460bn (similar to 2013 elections when Nawaz govt. came into power). However, we are confident that GoP
will reduce circular debt in the pre-election year to curtail load shedding and lure voters, but, going forward, this issue will keep coming
up until long-term fixes are made to improve efficiencies.

BH1,BWH1,CBH9
In PKRmn, unless otherwise stated 2016a 2017e 2018e 2019e Last Div. / Ex. Date PKR10.0 / 13 Jun 2017
Revenue 677,967 878,802 976,710 941,505 Mkt. Cap / Shares (mn) PKR121,590 / 271.7
EBITDA 10,964 24,486 27,300 23,804
Net income 10,273 18,177 19,829 18,451 Bloomberg / Reuters PSO PA / PSO.KA
Dividend yield 2.8% 5.2% 5.7% 5.3%
Net debt (cash) / Equity 1.1x 1.2x 0.6x 0.6x
EV / EBITDA 16.0x 7.2x 6.4x 7.4x
BH1,BWH1,CBH9
FCF yield 4.1% 8.4% -6.0% 4.1% danish.owais@efg-hermes.com
Source: Pakistan State Oil Co., Bloomberg and EFG Hermes estimates
Pakistan State Oil Co. 21 August 2017
Data Miner
PSO offers an upside of 13% based on our TP of PKR508/share; We initiate coverage on Pakistan State Oil (PSO) with a Buy rating
the stock also offers a forward dividend yield of 6%, taking the based on our target price of PKR508/share. Our valuation is based
cumulative expected total return to 19%. We initiate coverage on on a SOTP methodology, where companys discounted cash flow
PSO with a Buy rating, and this recommendation can be explained (DCF) contributes PKR500/share and discounted market value of
by the following: i) Healthy growth in high speed diesel (HSD), Pakistan Refinery (PRL) stake contributes PKR8/share. Some of the
motor gasoline (MOGAS) and furnace oil (FO) volumes, where we risks that investors should focus on before investing in the
expect industry numbers to grow at a 5-yr CAGR (FY16-21) of company are the following: i) rising circular debt issue, which
5.8%,10.2% and 1.3%, respectively; ii) HSD and MOGAS could pose a threat in the long run, since PSOs market share in
margins were recently linked to annual inflation average, and as the FO segment still stands over 70%; ii) PSO is exposed to foreign
they constitute over 47% of sales volume, this inflation-link exchange risks, since the company imports majority of its products
should support core profitability, going forward; and iii) moreover, and also borrows debt in foreign currency; hence, currency
we believe the government will clear its partial dues of circular devaluation would be negative; iii) Volatility in oil prices exposes
debt in the pre-election year to curtail load shedding and lure the company to inventory gains and losses, which could have a
voters, which would provide enough running finance for PSO to significant impact on the bottom line; and iv) regulatory policy
meet its liability payments. changes with respect to product pricing can also impact its core
margins.

Revenue 677,967 878,802 976,710 941,505 EPS (PKR) 37.8 66.9 73.0 67.9
EBITDA 10,964 24,486 27,300 23,804 DPS (PKR) 12.5 23.4 25.5 23.8
Balance Sheet Price to cash flow N/M N/M 2.2x 8.4x
Cash and cash equivalents 5,736 10,372 10,476 4,242 FCF yield 4.1% 8.4% -6.0% 4.1%
Total net debt (cash) 99,377 121,565 66,740 71,134 ROAIC 3.0% 5.1% 5.6% 5.2%
Change in working capital (7,976) (33,488) 28,984 (9,738) Revenue growth (Y-o-Y) -25.8% 29.6% 11.1% -3.6%
CAPEX (1,203) (2,100) (2,251) (2,700) EBITDA growth (Y-o-Y) 13.5% 123.3% 11.5% -12.8%
Free cash flow 4,955 10,167 (7,351) 5,037 EBITDA margin 1.6% 2.8% 2.8% 2.5%
Net financing 4,355 (5,531) 7,455 (11,270) Net operating profit (EBIT) margin 1.5% 2.7% 2.7% 2.4%
Change in cash 9,310 4,636 104 (6,234) Effective tax rate 36.9% 35.0% 35.0% 35.0%
Source: Pakistan State Oil Co., EFG Hermes estimates Net Debt (Cash) / Equity 1.1x 1.2x 0.6x 0.6x
Net Debt (Cash) / EBITDA 9.1x 5.0x 2.4x 3.0x
Source: Pakistan State Oil Co., EFG Hermes estimates
Page 86 of 104
Initiating coverage on PSO with a Buy rating
Pakistan State Oil (PSO) is the largest Oil Marketing Company (OMC) in Pakistan, whose 25.5% stake rests
with the Government of Pakistan (GoP). We initiate coverage on Pakistan State Oil (PSO) with a Buy rating,
based on our TP of PKR508/share, offering an upside of 13%. The stock also offers a forward dividend yield
of 6%; hence, augmenting the expected total return to 19%. Our valuation is based on SOTP methodology,
where the companys discounted cash flow (DCF) contributes PKR500/share and discounted market value of
Pakistan Refinery (PRL) stake contributes PKR8/share.
Investment thesis
PSOs share price has outperformed the sector by 3% YTD and the broader market by 11% YTD, owing to
recent price surge backed by improved 4QFY17 result announcement and recovery in international oil prices.
It is currently trading at a forward P/E of 6.1x, which is at a 23% discount to the broader benchmark.
Our BUY recommendation is based on:

We forecast healthy growth in high-speed diesel (HSD) and motor gasoline (MOGAS) volumes, where we
anticipate these to grow at a 5-yr CAGR (FY16-21) of 4.7% and 8.6%, respectively, for the company,
owing to strong automobile sales (expected to grow at a 5-yr CAGR of 8%), backed by low oil prices and
rise in commercial transport demand to meet China Pakistan Economic Corridor (CPEC) trade transit
requirements
Moreover, we expect furnace oil volumes to grow at a 5-yr CAGR (FY16-21) of 1.6% for the company,
projects
Recent linkage of HSD and MOGAS margins to annual inflation is expected to bode well for the company.
Notably, these products contribute over 28% and 19% to the companys volumes, and we forecast
inflation numbers to average at 5%, going forward
Circular debt has increased to PKR460bn, where PSOs trade receivables from WAPDA, HUBCO and
KAPCO have also surged from ~PKR146bn in FY16 to ~PKR175bn in 9MFY16, despite a PKR20bn
payment by the government in Feb17. Encouragingly, we believe the government will clear its partial
dues in the pre-election year to curtail load shedding and lure the vote bank
Figure 138: PSO PER (x) band Figure 139: PSO TP sensitivity to average Arabian basket oil
prices
PSO PE Upper Band @ PE of 19x 540
Lower Band @ PE of 4x Linear (PSO PE)
2,000
520
1,500 500
480
1,000
460
500
440
0
Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 420
US$40 US$50 US$56 (1) US$60

Page 87 of 104
Figure 140: PSOs geographical presence

FY16
Page 88 of 104
Volumes are expected to drive growth
Furnace Oil (FO), resumption of volumes in sight: The recent uptick in FO numbers suggest that
subdued oil prices, along with governments policy to curtail new power projects, based on imported coal
has started to support furnace oil consumption; therefore, we anticipate PSOs FO consumption to rise at
a 5-yr CAGR of 1.6% (FY16-21), going forward.
CPEC is anticipated to support High Speed Diesel (HSD) consumption: HSD, which contributes over
33% to the industrys volume, has posted meager growth of ~2% p.a over five years (FY11-16); we
believe ongoing CPEC projects should increase automobile sales and its use for transport of goods to and
from China; thereby, fueling industrys and PSOs HSD consumption at a 5-yr CAGR of 5.8% and 4.7%
(FY16-21), respectively
Motor Gasoline (MOGAS) sales expected to remain buoyant: With over 19% contribution to PSOs
volume, MOGAS sales volume has grown at a 5-yr CAGR of over 16% (FY11-16), where consumption
for fuel largely emanates from the Transport sector. Since automobile sales are expected to continue its
growth trajectory at a 5-yr CAGR of 8% during 2016-21, owing to improved disposable income, trickle
down effects of CPEC and subdued oil prices, we expect the industrys and companys MOGAS
consumption to normalise at a 5-yr CAGR (FY16-21) of 10.2% and 8.6%, respectively.
Figure 141: Industry vs. PSOs sales volume Figure 142: PSOs product mix
000s MT % contribution to total volume in FY17e
Industry PSO
30,000 JP 3% Others 1%
MOGAS
25,000 19%
20,000 FO 49%
15,000
10,000
HSD 28%
5,000
0
FY13 FY14 FY15 FY16 FY17 FY18 FY19
Page 89 of 104
Margins are expected to support fundamentals
Motor gasoline and diesel margins are linked with the CPI: The margins on motor gasoline (petrol)
and diesel are regulated, where previously, GoP linked the motor gasoline and diesel margins to CPI,
resulting in the hike from PKR2.35/ltr to PKR2.41/ltr for both products. Next revision is expected in Aug
2017, where we believe average margins will be revised upwards, based on inflationary expectations of
5%
High-octane fuel margins are deregulated: Following the introduction of higher quality fuels,
government has deregulated margins on Ron95 high octane product, allowing OMCs to charge different
margins. Currently V Power by Shell sells at ~PKR86/ltr, PSOs Altron X sells at ~PKR84/ltr and HASCOLs
Hasron 95 is priced at PKR79/ltr
Furnace oil margins: OMCs charge ~3.5% of the import equivalent ex-refinery prices on HSFO. Any rise
in oil prices would expand the margins, in absolute terms, but would also intensify the circular debt pile-
up, which already stands at daunting levels
Non-energy product margins: Margins on non-energy products, such as Lube and Solvent Oil are also
deregulated. Lube oil has double-digit margins; therefore, recently, we have been seeing more push from
OMCs toward this fuel segment
Figure 143: Revenue mix contribution by product Figure 144: Core profit contribution by product
FY17e FY17e
35%
Others 5%
30%
LNG 14%
FO 29%
25%
20%
15%
MOGAS
10%
21%
5%
HSD 31%
0%
FO HSD MOGAS Others
Page 90 of 104
LNG business is expected to shift to PLL in Dec 2017

The Government of Pakistan (GoP) has recently formed Pakistan LNG Limited (PLL) to shift the mandated LNG
imports from PSO to PLL, which is expected to wipe out the LNG business from PSO books from Dec 2017
(1H18) onwards. PLL has already commenced its operations and has opened bids for the supply of roughly
240 shipments of LNG. It is worth noting that GoP, during 2014-15, designated PSO to procure LNG from
international counterparties, which generated over PKR80bn revenues (contributing 9% to total revenues) for
the company in FY16. As per our workings, this exclusion is expected to curtail annualised earnings by
PKR3.7/share.
Circular debt is increasing

Since PSO is the main supplier of furnace oil, with over 70% market share, the rising circular debt, which has
increased to a substantial level of PKR460bn (similar to 2013 elections when Nawaz govt. came into power),
affects the companys liquidity position. PSOs trade receivables from WAPDA, HUBCO and KAPCO have shot
up from ~PKR146bn in FY16 to ~PKR175bn in 9MFY16, despite a PKR20bn payment by the government in
Feb 2017. Going forward, we believe the GoP will exert efforts to make quick fixes by partially clearing the
circular debt amount this year to curtail load shedding and lure voters.
Additional investments in Pakistan Refinery (PRL)

PSO is one of the primary sponsors of PRL, with a 22.5% stake, along with Shell (30% stake) and Chevron
(7.5% stake). Notably, PSO plans to further stretch its holdings from 22.5% to 49.16% by acquiring 84mn
right shares allotted to Shell. It is worth noting that in FY15, PRL issued 800% rights shares, owing to which,
Shell was allotted 84mn rights, but due to Shells unwillingness to further invest in PRL, it offered its rights to
PSO. Recently, Competition Appellate Tribunal granted unconditional approval to PSO for acquisition of these
right shares in PRL. Following the acquisition, PSO is planning to upgrade and expand PRLs existing refinery
plant.
FY17 result review - Healthy volumes along with higher inventory gains supported
earnings growth
PSO announced its FY17 results recently, where the company reported net earnings of PKR18.2bn (EPS:
PKR67.08), up 76%, against PKR10.3bn (EPS: PKR37.81) in FY16. The companys strong performance is
attributable to 1) a 30% increase in revenues owing to higher fuel sales of furnace oil, jet fuel and motor
gasoline volumes by 11%, 19% and 9% respectively and 2) inventory gains of PKR1bn against net inventory
losses of PKR5.2bn during FY16. PSOs share in the liquid fuel market was 54.8%.
The company also announced a final cash dividend of PKR15 per share (150%) and stock dividend of 20% in
addition to the interim cash dividend of PKR10 per share (100%), which was already distributed. The total
payout for FY17 equates to a PKR25 per share (250%) cash dividend and 20% stock dividend.
Since the detailed accounts are not available yet, we havent incorporated the recent results in to our forecasts.
However, we will update our assumptions and release an update once the detailed accounts are disclosed.
Page 91 of 104
Valuation and risks
We initiate coverage on Pakistan State Oil (PSO) with a Buy rating, based on our target price of PKR508/share.
Our valuation is based on a SOTP methodology, where the companys discounted cash flow (DCF) contributes
PKR500/share, and discounted market value of Pakistan Refinery (PRL) stake contributes PKR8/share. Some of
the risks that investors should focus on before investing in the company are the following: i) rising circular
debt issue, which could pose a threat in the long run, since PSOs market share in the FO segment still stands
above 70%; ii) company is exposed to foreign exchange risks, since it imports the majority of its products and
also borrows in international currency from foreign banks, where any devaluation could curtail profitability;
iii) Volatility in oil prices exposes the company to inventory gains and losses, which could have a significant
impact on the bottom line; and iv) regulatory policy changes, with respect to product pricing could also have
an impact on the companys core margins.

Target Price in PKR per share
Valuation (PKRmn) FY17F FY18F FY19F FY20F FY21F FY22F
Net income 16,582 20,003 18,621 19,352 20,690 22,048

Dep and amortization 1,062 1,145 1,235 1,332 1,440 1,557
Change in WC (31,831) 29,300 (11,711) (6,971) (2,116) (3,252)
Capex (2,100) (2,251) (2,700) (2,009) (2,758) (2,953)
Share of profit from PRL (307) (338) (372) (409) (450) (495)
ST debt 26,181 (54,255) (1,662) 1,335 4,609 5,992
FCFE 9,586 (6,396) 3,412 12,630 21,416 22,897
PV of FCFE - (5,492) 2,516 7,998 11,646 10,692
RFR 11%
Risk premium 5%
Beta 1.09
Terminal growth 6%
SOTP valuation
DCF value 500
Discounted MV of PRL stake 8
Target price 508
Page 92 of 104
rate assumptions.
assumptions
Target price in PKR

2% 3% 4% 5% 6% 7%
13% 325 342 361 383 409 439
Risk Free Rate
12% 354 374 396 423 454 491

11% 386 410 437 469 508 554
10% 424 452 486 525 573 632
9% 468 503 544 593 655 732
8% 520 563 614 678 758 864
The below graphs shows the sensitivity of currency depreciation, oil price movement and interest rates on our
FY18 earnings forecast.
Figure 147: FY18 earnings sensitivity to oil price and currency Figure 148: FY18 earnings sensitivity to oil price and interest
devaluation rate movement
FY18 EPS in PKR; Arabian basket in USD/bbl FY18 EPS in PKR; Arabian basket in USD/bbl
Currency Devaluation Interest rate rise

1% 2% 3% 4% 5% 6% 1% 2% 3% 4% 5% 6%
40.00 60.97 60.09 59.21 58.34 57.46 56.58 40.00 57.97 56.1 54.28 52.47 50.65 48.84
Arabian Basket
Arabian Basket
45.00 65.83 64.99 64.16 63.33 62.5 61.67 45.00 62.8 60.97 59.14 57.37 55.49 53.66
50.00 70.68 69.9 69.11 68.33 67.54 66.75 50.00 67.69 65.85 64.01 62.17 60.33 58.49
55.00 75.54 74.8 74.06 73.32 72.58 71.84 55.00 72.58 70.72 68.87 67.02 65.16 63.31
60.00 80.4 79.7 79.01 78.32 77.62 76.93 60.00 77.46 75.6 73.73 71.87 70 68.14
65.00 85.25 84.61 83.96 83.31 82.66 82.02 65.00 82.35 80.47 78.6 76.72 74.84 72.96
Page 93 of 104
8. Pakistan State Oil (PSO) Company analysis
Initiating coverage on PSO with a Buy Rating
PSO offers upside of 13% based on our TP of PKR508/share. The stock also offers a forward dividend yield of
6%, taking the cumulative expected total return to 19%. We initiate coverage on PSO with a Buy rating, and
this recommendation can be explained by the following:
PSO has outperformed the sector by 3% YTD and the broader market by 11% YTD. However, at a
forward P/E of 6.1x, PSO is still trading at a 23% discount to the broader benchmark
We forecast healthy growth in motor gasoline (MOGAS) and high speed diesel (HSD) volumes, where we
expect the primary products to grow at a 5-yr CAGR (FY16-21) of 8.6% and 4.7%, respectively, for the
company, owing to strong automobile sale forecasts (5-yr CAGR of 8% during FY16-21), which is backed
by low oil prices and rise in commercial transport demand to meet China Pakistan Economic Corridor
(CPEC) trade transit requirements
Moreover, we expect furnace oil volumes to grow at a 5-yr CAGR (FY16-21) of 1.6% for the company,
projects
Since MOGAS and HSD margins are linked to the annual inflation average, and we expect this to rise 5%
annually, going forward. Notably, these products contribute over 28% and 19% to the companys
volumes
As circular debt is on the rise again and has now reached PKR460bn, PSOs trade receivables from
WAPDA, HUBCO and KAPCO have also surged from ~PKR146bn in FY16 to ~PKR175bn in 9MFY16,
despite a PKR20bn payment by the government in Feb 2017. Encouragingly, we believe the government
will clear its partial dues in the pre-election year to curtail load shedding and lure voters
Our valuations are based on a SOTP methodology, where the companys discounted cash flow (DCF)
contributes PKR500/share and discounted market value of Pakistan Refinery (PRL) stake contributes
PKR8/share.
Figure 149: PSO PER (x) band
PSO PE Upper Band @ PE of 19x Lower Band @ PE of 4x Linear (PSO PE)

1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Jun-14
Dec-12
Jun-13
Dec-13
Dec-14
Jun-15
Dec-15
Jun-16
Aug-16
Dec-16
Jun-17
Aug-12
Aug-13
Aug-14
Aug-15
Aug-17
Feb-13
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Oct-12
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Feb-17
Page 94 of 104
The figures below highlight the sensitivity of oil prices to our earnings and target price forecast.
Figure 150: Earnings sensitivity to oil price Figure 151: TP sensitivity to average Arabian basket oil prices
Arabian basket in USD/bbl; EPS in PKR
Earnings Per Share 540
FY18 FY19 FY20 FY21 FY22 520
40.00 59.73 59.64 61.41 66.59 71.65 500
45.00
Arabian Basket
64.63 62.11 64.10 69.30 74.39 480

50.00 69.53 64.58 66.78 72.01 77.13 460
55.00 74.43 67.06 69.46 74.72 79.87 440
60.00 79.33 69.53 72.14 77.43 82.61 420
65.00 84.23 72.00 74.82 80.14 85.35 US$40 US$50 US$56 (1) US$60

average oil forecast price is USD55.7/bbl.
Since PSO is exposed to inventory gains and losses emanating from oil price volatility, its actual profits could
vary significantly from our base case forecast. As can be seen from the graph below, PSO recorded hefty
inventory losses in FY15 and FY16, which wiped out a big chunk of its core earnings.
Figure 152: Earnings composition

EPS in PKR; core EPS in PKR; inventory gain and loss in PKR; and Arabian basket avg. in USD/bbl
EPS (LHS) Core EPS (LHS) Inventory Gain/Loss per share (LHS) Arabian Basket Avg. (LHS)
120.00
100.00
80.00
60.00
40.00
20.00
(20.00)
(40.00)
FY14A FY15A FY16A FY17F FY18F FY19F
Page 95 of 104
Business Description
Pakistan State Oil (PSO) is Pakistans largest Oil Marketing Company, which is engaged in marketing and
distribution of various POL products, including motor gasoline, high speed diesel, furnace oil, jet fuel,
kerosene, compressed natural gas, Liquefied Petroleum Gas, Liquefied Natural Gas, Petrochemicals and
Lubricants. Moreover, PSO has i) 49% stake in Asia Petroleum Pvt. Ltd., which has been established to
transport residual fuel to the Hub Power Company (HUBC); ii) 22.5% stake in Pakistan Refinery (PRL), situated
near coastal belt of Karachi and is designed to process various imported and local crude to meet strategic and
domestic fuel requirements; and iii) 22% stake in Pak Grease Manufacturing Co. engaged in the
manufacturing and selling of petroleum grease products. Government of Pakistan, with 25.5% of holdings,
remains the largest single shareholder of the company.
Figure 153: PSOs market share by product Figure 154: Revenue mix contribution by product
FY17e FY17e
80%
73%
Others 5%
70%
LNG 14%
FO 29%
60% 57%
49% 48%
50% 44%
40%
30% 26%
MOGAS
20% 21%
10% HSD 31%
0%
FO HSD MOGAS JP KERO LDO
Page 96 of 104
Brief profile of board members
Sheikh Imran ul Haque, MD & CEO: Mr. Imran served as Chief Executive Officer of Engro Vopak
Terminal Limited (2006) and Senior Vice President of Engro Corporation Limited (2014). He has also served
on the Boards of Inbox Technologies, Avanceon, Engro Energy and Pakistan Steel Mill, EETL, EVTL and
ETPL. He was Chairman of Petroleum Institute of Pakistan in 2015 and serves on the Boards of PRL, Pak
Grease, PAPCO, OCAC and PIP and joined PSO in September 2015
Dr. Musadik Malik: Dr. Malik has extensive international experience in public policy, with a focus on
economic transformation, industrial development, labour reform, employment generation, education,
and healthcare. He is a Professor of Strategy at King Saud University (Saudi Arabia) and Visiting Professor
at the National School of Public Policy (Pakistan). Until recently, he was the Managing Director of a leading
public sector strategy consulting firm. He has served as an advisor to government bodies in North America,
Middle East and South Asia. He has also advised private sector organizations ranging from Fortune 500
companies in the US to the largest publically traded corporations in the GCC through various stages of
transformation
Mr. Zahid Mir: Mr. Mir is a petroleum engineer, with over 27 years of experience in the oil and gas
industry. He has had significant exposure to field operations, including production, project development,
development planning, conceptual engineering and operational support
Abdul Jabbar Memon: Mr. Memon holds the position of Director General (Oil), Policy Wing, Ministry of
Petroleum and Natural Resources, Islamabad. He joined the Ministry of Petroleum and Natural Resources
in 1992 and has experience in the midstream and downstream oil sector, with over 25 years of diversified
experience at Policy Wing of Ministry of Petroleum and Natural Resources. His area of expertise is
technical/operational issues of oil refineries, including country demand/supply of petroleum products. In
addition, he has vast experience in allocation/prices of local crude/condensate, installation of oil refinery
and storage projects, as well as policy methods pertaining to downstream oil sector.
Page 97 of 104
Primary products to support fundamentals
Furnace Oil (FO), resumption of volumes in sight: PSO has a dominant (over 70%) market share in
the furnace oil segment, where fuel constitutes over 48% of the companys total volumetric sales. The
sale of FO has weakened in the past two years, owing to GoPs focus shifting towards coal- and LNG-
based power generation; however, recent policy changes to reduce dependence on imported-coal-based
power projects should aid FO demand, since the country is facing an energy deficit. FO margins are
deregulated, where PSO currently makes a margin of ~3.5% of the ex-refinery import parity price; any
sudden hike in intl oil prices should improve overall company margins.
Motor gasoline and diesel sales are expected to remain strong: Since the transport sector continues
to be a major key driver of petrol and diesel consumption growth, the rise in transport use, owing to
CPEC trade transit should support fuel numbers. Moreover, we believe automobile sales, which had
previously grown at a 10% 5-yr CAGR (FY11-16) will grow at a 5-yr CAGR of 8% (FY16-21), owing to
subdued oil prices, improved disposable income and entry of international manufacturers like KIA and
Renault into the Pakistani market. Moreover, recent linkage of petrol and diesel margins, with inflation,
should also bode well for PSO in augmenting its bottom line.
Figure 155: Industry growth by product Figure 156: PSO market share
FY17e %
FO HSD MOGAS FO HSD MOGAS
25% 80%
20% 70%
15% 60%
50%
10%
40%
5%
30%
0%
20%
-5% 10%
-10% 0%
FY14A FY15A FY16A FY17F FY18F FY19F FY14A FY15A FY16A FY17F FY18F FY19F
Figure 157: Product contribution to core gross earnings

% of core gross profit
FY14A FY15A FY16A FY17F FY18F FY19F

60%
50%
40%
30%
20%
10%
0%
FO HSD MOGAS Other
Page 98 of 104
LNG business is expected to shift to PLL in Dec 2017
In order to curtail the gas deficit in the country, GoP during 2014-15 designated PSO to procure LNG from
international counterparties, which generated ~PKR80bn revenues for the company in FY16. However, the
govt. has recently formed Pakistan LNG Limited (PLL) to shift the mandated LNG imports from PSO to PLL,
which is expected to wipe out the LNG business from PSO books post Dec 2017. As per our workings, this
transfer will have an annualized after tax impact of ~PKR3.7/share. Notably, PLL has already commenced its
operations and opened bids for the supply of roughly 240 shipments of LNG.
Figure 158: Sales composition

Billion rupees (PKRbn)
Gross Sales exc. LNG LNG Revenue

2019
2018
2017
2016
2015
2014
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000
Page 99 of 104
Pre-election year is expected to aid in clearing partial circular debt
In an effort to support the liquidity position of PSO (and other OMCs) that supply furnace oil to power
generation companies, the GoP introduced a seven-day credit mechanism, under which power producers
were required to pay their due amounts within seven days from the date of purchase of fuel. However, as per
the news reports, the step has not yielded the desired results, as circular debt has restarted its move
northwards, reaching PKR460bn (similar to 2013 elections, when Nawaz govt. came into power). PSOs trade
receivables from WAPDA, HUBCO and KAPCO have shot up from ~PKR146bn in FY16 to ~PKR175bn in
9MFY16, despite a PKR20bn payment by the government in Feb 2017.
It is worth noting that in 2012, the GoP partially resolved the circular debt issue by issuing PIBs at 11.5% to
the companies involved, where PSO received 5-yr PIBs worth ~PKR45bn. Since these PIBs have already
matured in Jul17, the company has recently announced to use all the proceeds to pay off its short term debt,
hence reducing the debt load on the companys financials. Moreover, we are confident that GoP will reduce
the circular debt amount in the pre-election year to curtail load shedding and lure the vote bank, but going
forward this issue will keep coming up until long-term fixes are made to improve efficiencies.
Figure 159:Trade receivable vs. payables

In PKR bn
Receivables Payables
250
200
150
100
50
0
FY14A FY15A FY16A FY17F FY18F FY19F FY20F
Page 100 of 104

COGS (655,104) (841,730) (935,242) (900,352) Change in working capital (7,976) (33,488) 28,984 (9,738)
Gross profit 22,863 37,072 41,468 41,153 Cash flow after change in WC 6,159 12,267 (5,100) 7,737
SG&A (10,849) (11,609) (12,469) (13,511) CAPEX (1,203) (2,100) (2,251) (2,700)
EBITDA 10,964 24,486 27,300 23,804 Free cash flow 4,955 10,167 (7,351) 5,037
Depreciation and amortisation (936) (1,062) (1,145) (1,235) Non-operating cash flow N/A N/A N/A N/A
Net operating profit (EBIT) 10,028 23,425 26,155 22,569 Cash flow before financing 4,955 10,167 (7,351) 5,037
Share of results from associates 613 733 806 864 Net financing 4,355 (5,531) 7,455 (11,270)
Net investment income (loss) 12,798 10,325 7,792 9,477 Change in cash 9,310 4,636 104 (6,234)
Net interest income (expense) (7,150) (6,519) (4,247) (4,523) Source: Pakistan State Oil Co., EFG Hermes estimates
Net provisions N/A N/A N/A N/A Ownership Structure (%)
Income before taxes or zakat 16,289 27,964 30,506 28,386
Employees
Taxes or zakat (6,016) (9,787) (10,677) (9,935) Cdc Old age
Net inc before minority interest 10,273 18,177 19,829 18,451 Trustee Benefits
Minority interest N/A N/A N/A N/A Picic Institution
Growth 8.3%
Reported net income 10,273 18,177 19,829 18,451
10.1%
Adjusted net income 10,273 18,177 19,829 18,451 Federal
State life
Source: Pakistan State Oil Co., EFG Hermes estimates Fund Govt of
Insurance Pakistan
Balance Sheet (Jun Year End) Corp. Of 44.0%
In PKRmn 2016a 2017e 2018e 2019e Pakistan National
Cash and cash equivalents 5,736 10,372 10,476 4,242 11.7% Bank of
Pakistan
Accounts receivable (current) 178,271 201,319 171,752 182,275
(Trustee
Inventory 50,834 65,910 78,137 80,028 Wing)
Other debit balances (current) 39,414 79,204 35,180 35,119 25.9%
PP&E (net) 6,607 7,645 8,753 10,218
Goodwill & intangibles 47 48 45 45 Source: Pakistan State Oil Co., EFG Hermes estimates
Other debit balances (non-current) 11,276 12,021 12,305 12,601 Rating Distribution
Total non-current assets 68,064 24,102 56,936 64,339 Rating Coverage Universe%
Total assets 342,319 380,906 352,481 366,004
Buy 45%
Short term debt 105,113 131,937 77,216 75,377
Neutral 43%
Accounts payable (current) 137,890 137,000 149,770 152,379
Sell 12%
Other credit balances (current) 1,500 1,716 1,667 1,672
Not Rated 0%
Total current liabilities 244,503 270,652 228,653 229,428 Under Review 0%
Other credit balances (non-current) N/A N/A N/A N/A
Total net worth 91,581 103,396 116,285 128,278
Total equity 91,581 103,396 116,285 128,278
Source: Pakistan State Oil Co., EFG Hermes estimates
Page 101 of 104

Disclaimer
Analyst Certification
I, Danish Owais, hereby certify that the views expressed in this document accurately reflect my personal views about the securities and companies that are the subject of this report.
I also certify that neither I nor my spouse(s) or dependents (if relevant) hold a beneficial interest in the securities that are subject of this report. I also certify that no part of my
respective compensation, was, is, or will be directly or indirectly related to the specific ratings or view expressed in this research report.
Important Disclosures
EFG Hermes Holding, or any of its subsidiaries or officers (other than the authors of this report) may have a financial interest in one or any of the securities that are the subject of
this report. Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, EFG Hermes) for third parties may own the securities that are the subject of
this report. EFG Hermes may own shares in one or more of the aforementioned funds, or in funds managed by third parties. The author(s) of this report may own shares in funds
open to the public that invest in the securities mentioned in this report as part of a diversified portfolio, over which the author(s) has/have no discretion. The Investment Banking
division of EFG Hermes may be in the process of soliciting or executing fee-earning mandates for companies (or affiliates of companies) that are either the subject of this report or
are mentioned in this report. Research reports issued by EFG Hermes are prepared and issued in accordance with the requirements of the local exchange conduct of business rules,
where the stock is primarily listed.
Investment Disclaimers
This research report is prepared for general circulation and has been sent to you as a client of one of the entities in the EFG Hermes Group, and is intended for general information
purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any security.
It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. This research report must not be considered as
advice nor be acted upon by you unless you have considered it in conjunction with additional advice from an EFG Hermes entity, with which you have a client agreement. We
strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.
Our investment recommendations take into account both risk and expected return. We base our long-term target price estimate on fundamental analysis of the companys future
prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendation(s) and target price estimate(s) for
the company or companies mentioned in this report. Readers should understand that financial projections, target price estimates and statements regarding future prospects may
not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without prior notice.
Although the information in this report has been obtained from sources that EFG Hermes believes to be reliable, we have not independently verified such information, and it may
not be accurate or complete. EFG Hermes does not represent or warrant, either expressly or implied, the accuracy or completeness of the information or opinions contained within
this report, and no liability whatsoever is accepted by EFG Hermes or any other person for any loss, howsoever arising, directly or indirectly, from any use of such information or
opinions or otherwise arising in connection therewith.
The decision to subscribe to or purchase securities in any offering should not be based on this report and must be based only on public information on such security and/or
information made available in the prospectus or any other document prepared and issued in connection with the offering.
Investment in equities or other securities are subject to various risks, including, among others, market risk, currency risk, default risk and liquidity risk. Income from such securities,
and their value or price may, therefore, fluctuate. Basis and levels of taxation may change, which would affect the expected return from such securities. Foreign currency rates of
exchange may affect the value or income of any security mentioned in this report. Investors should, therefore, note that, by purchasing such securities, including GDRs, they
effectively assume currency risk.
This report may contain a short- or medium-term recommendation or trading idea, which underscores a near-term event that would have a short-term price impact on the equity
securities of the company or companies subject of this report. Short-term trading ideas and recommendations are different from our fundamental equity rating, which reflects,
among other things, both a longer-term total return expectation and relative valuation of equity securities relative to other stocks within their wider peer group. Short-term trading
recommendations may, therefore, differ from the longer-term stocks fundamental rating.
For Entities and Clients in the United States
Hermes Securities Brokerage is not registered as a broker-dealer with the US Securities and Exchange Commission, and it and its analysts are not subject to SEC rules on securities
analysts certification as to the currency of their views reflected in the research report. Hermes Securities Brokerage is not a member of the Financial Industry Regulatory Authority
(FINRA), and its securities analysts are not subject to FINRAs rules on Communications with the Public and Research Analysts and Research Reports and the attendant requirements
for fairness, balance and disclosure of potential conflicts of interest.
This research report is only being offered to Major US Institutional Investors and is not available to, and should not be used by, any US person or entity that is not a Major US
Institutional Investor. Hermes Securities Brokerage cannot and will not accept orders for the securities covered in this research report placed by any person or entity in the United
States. Hermes Securities Brokerage is an affiliate company of Financial Brokerage Group (FBG), located at B129, Phase 3, Smart Village KM28 Cairo, Alexandria road 6 of October
12577 Egypt. FBG has a 15a-6 chaperoning agreement with Brasil Plural Securities LLC, a FINRA member firm, located at 545 Madison Avenue, suite 801, ZIP 10023, NYC NY,
USA. Orders should be placed with our correspondent, Brasil Plural Securities LLC 212-388-5600.
A Major US Institutional Investor who may receive and use this report must have assets under management of more than USD100,000,000 and is either an investment company
registered with the SEC under the US Investment Company Act of 1940, a US bank or savings and loan association, business development company, small business investment
company, employee benefit plan as defined in SEC Regulation D, a private business development company as defined in SEC Regulation D, an organization described in US Internal
Revenue Code Section 501(c)(3) and SEC Regulation D, a trust as defined in SEC Regulation D, or an SEC registered investment adviser or any other manager of a pooled
investment vehicle.
Investment Banking Business
EFG Hermes, or any of its subsidiaries, does and seeks to do business with companies mentioned in its research reports or any of their affiliates. As a result, investors should be
aware that the firm, or any of its subsidiaries, may have a material conflict of interest that could affect the objectivity of this report.
Page 102 of 104

Guide to Analysis
EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic
environment.
In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding target price.
For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms:
Rating Potential Upside (Downside) %
Buy Above 15%

Neutral (10%) and 15%
Sell Below (10%)
EFG Hermes policy is to update research reports when appropriate based on material changes in a companys financial performance, the sector outlook, the general economic
outlook, or any other changes which could impact the analysts outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term
rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been
outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating.
Copyright and Confidentiality
No part of this document may be reproduced without the written permission of EFG Hermes. The information within this research report must not be disclosed to any other person
if and until EFG Hermes has made the information publicly available.
Contacts and Statements
Report prepared by Hermes Securities Brokerage (main office), Building No. B129, Phase 3, Smart Village, KM 28, Cairo-Alexandria Desert Road, Egypt 12577, Tel +20 2 35 35 6140
| Fax +20 2 35 37 0939 which has an issued capital of EGP225,000,000. The information in this document is directed only at Institutional investors. If you are not an institutional
investor you must not act on it.
Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company), which is commercially registered in Riyadh with Commercial Registration number 1010226534, EFG
Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE and EFG Hermes Pakistan Limited.
EFG Hermes Pakistan Limited (Research Entity Notification No. REP-192), incorporated in Pakistan with registered number 0040559, and has its address at Office No. 904, 9th
Floor, Emerald Tower, Plot No. G19, Block-5, Clifton, Karachi, Pakistan.
www.JamaPunji.pk
BLOOMBERG EFGH REUTERS PAGES .EFGS .HRMS .EFGI .HFISMCAP .HFIDOM

efghermesresearch.com
EFG Hermes Offices

Egypt Office Dubai Office Saudi Arabia Office Jordan Office Kuwait Office Oman Office
Building B 129, Phase 3, Level 6, The Gate, West Third Floor, Sky Towers, Building No. 85 Al Sharif Kuwait Stock Exchange Hormuz Building 3rd Floor,
Smart Village - km 28 Cairo Wing - DIFC Sheikh Zayed Northern Tower, Olaya, Nasser Bin Jameel St., Building, 4th Floor, Mubarak Ruwi, Sultanate of Oman
Alex. Desert Road, 6th of Road - P.O. Box 30727, Riyadh, KSA Shmeisani Amman, Al Kabir Str., P.O. Box 22695 P.O Box 1857, P.C. 114,
October, 12577, Egypt Dubai, UAE Jordan Safat, 13083, Kuwait Oman
Tel: +20 2 3535 6140 Tel: +971 4 363 4008 Tel: +9661 279 8628 Tel: + 9626 5543 200 Tel. +965 2226 5000 Tel: +968 2476 0023
Fax: +20 2 3537 0939 Fax: +971 4 362 1170 Fax: +9661 211 0049 Fax: + 9626 5543 207 Fax: +965 2244 0637 Fax: +968 2479 7471
Page 103 of 104

Sales Contact
Institutional Sales
Cairo Office: Dubai Office: London Office New York Office
Mohamed Aly Ramy EL Essawy Sruti Patel Karim Baghdady
+20 2 35 35 6052 +971 4 363 4093 +44 207 518 2903 +1 212 388 5607
maly@efg-hermes.com ressawy@efg-hermes.com spatel@efg-hermes.com Karim.baghdady@efghermes-brasilplural.com
Wael El Tahawy Ayah Abou Steit Ali Khalpey Miljana Asanovic

+20 2 35 35 6359 +971 4 363 4091 +44 7818 444 210 +1 212 388 5636
weltahawy@efg-hermes.com asteit@efg-hermes.com akhalpey@efg-hermes .com Miljana.asanovic@efghermes-brasilplural.com
Yasser Wally
+20 2 35 35 6339
ywaly@efg-hermes.com
GCC High Net Worth Sales

Hatem Adnan Hany Ghandour Rami Samy Loay Abdel Meneam
+20 2 35 35 6083 +20 2 35 35 6007 +971 4 363 4099 +9665 488 00544
hadnan@efg-hermes.com hghandour@efg-hermes.com rsamy@efg-hermes.com labdelmeneam@efg-hermes.com
Individual Sales
Bassam Nour
+20 2 35 35 6069
bassam@efg-hermes.com
Page 104 of 104

Pakistan Oil & Gas Sector (Initiation) - Attractive Valuations Time To Fill Up PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Pakistan Oil & Gas Sector (Initiation) - Attractive Valuations Time To Fill Up PDF

Uploaded by

Copyright:

Available Formats

21 August 2017

Attractive valuations; time to fill up

Pakistan upstream - attractive entry point

Strong structural demand for petroleum products

Low operating costs provide a buffer against subdued oil prices 7

Pakistan upstream; attractive entry point 8

Pakistan downstream; overly discounted 9

2. Pakistan Oil & Gas upstream exploration activities 13

Improving technology for geological studies 18

3. Pakistan Oil & Gas Production flows 19

4. Pakistan oil & gas downstream sector 24

Pakistan oil marketing companies 24

Volumetric growth of primary products to remain strong 25

Circular debt is rising again despite low oil prices 27

5. Appendix : Global oil outlook 28

Supply expected to keep oil prices subdued 28

Re-aligning pricing power 29

I. OPEC and non-OPEC curbs to restrain their own excess supply 29

II. US shale revolution is driving out old rulers 30

III. Iran sanction uplift - Additional stress to global oil market 32

Tight and shale hydrocarbon reserve potential in Pakistan 33

The rise of the circular debt, creating bottlenecks 34

Oil & Gas Development Co. 35

Pakistan State Oil Co. 85

Attractive valuations; time to fill up

Figure 1: Valuation snapshot

OGDC PE Upper Band @ PE of 13x PPL PE Upper Band @ PE of 15x

Figure 4: POL PE (x) band Figure 5: PSO PE (x) band

POL PE Upper Band @ PE of 18x PSO PE Upper Band @ PE of 19x

Avg. Arabian Basket POL Implied Oil Price

Low operating costs provide a buffer against subdued oil prices

Figure 13: Operating costs by company

Source: Company data, EFG Hermes estimates

Pakistan upstream; attractive entry point

Pakistan downstream; overly discounted

1. Oil and Gas Development Company (OGDC) - Buy

2. Pakistan Petroleum Limited (PPL) - Buy

3. Pakistan Oil Fields (POL) - Buy

1. Pakistan State Oil (PSO) Buy

Consumption of petroleum products to remain strong

Figure 14: Supply chain and consumption of petroleum products

Source: Energy Year Book (FY15)

2. Pakistan Oil & Gas upstream exploration activities

Exploration drive to continue

Figure 15: Wells drilled

Exploratory Wells Development Wells

Source: Energy Year Book (FY15), PPIS, EFG Hermes estimates

Improved security situation is helping exploration activity

Civilians Security Forces Terrorists

Source: South Asia Terrorism Portal, EFG Hermes estimates

Improving technology for geological studies

Figure 24: Contribution of 3D studies to total geological surveys

Contribution of 3D surveys Linear (Contribution of 3D surveys )

Source: Pakistan Petroleum Information Service (PPIS), EFG Hermes estimates

3. Pakistan Oil & Gas Production flows

Oil and gas flows are expected to grow at a five-year CAGR of 3%

Figure 27: Major Oil fields

4,000 MOL 7% POL 0%

3,500 ENI 11%

2,000 PPL 16%

Figure 30: Major gas fields in Pakistan

Growth in oil flows from Khyber Pakhtunkhwa (KPK) is expected

Figure 31: Pakistan oil production by province (mnbbls)