E & P Sector Pakistan Oil Fields

SC SECURITIES (PVT) LTD.

Corporate Member: Karachi Stock Exchange (Guarantee) Ltd.

December 2005
Pakistan Oil Fields - BUY

12000 450

400
SHORT TERM 10000
KSE Vs POL
350
Buy on Weakness
8000 300

LONG TERM 6000

250

Buy 200

4000 150

FAIR VALUE PKR 465 2000

100

50

0 0
11/4/2003

3/24/2004

7/29/2004

12/9/2004

4/19/2005

8/25/2005
Current Price : PKR 420

EPS for FY05 : Rs 28.63 KSE-100 POL

EPS for FY06F : Rs 46.50 POL is involved in exploration and production in a total of 26

PER : 9 areas in Pakistan. Currently POL’s own operated Exploration

(based on expected earnings for Licenses include Hyderabad with working interest of (75%),
FY06)
Chakral (100%) and Ikhlas (100%). At present POL has nine
Development and Production Leases: Pariwali, Meyal, Joya
Market Capitalization:PKR 55,193.88m
Mair, Minwal, Dhulian, Khaur, Pindori, Turkwal and Balkassar.
Outstanding no of shares : 131.414m

Estimated free Float: 42%

Major Share Holder: 54%

Financial Highlights YE June
Price Performance 2004A 2005A 2006F 2007F
(Dividend Adjusted) Revenue(PkR mn) 6842 8998 16740 21245
52 week High/Low: 428/202 Net Profit(PkRmn) 2495.1 3762.7 6110.75 7648
18 week High/Low: 428/288 EPS (PkR) 18.98 28.63 46.5 58.2
EPS change 2.7% 50.8% 62.42% 25%
Price/Earnings 22.12 14.66 9.03 7.2
Research Department Dividend (PkR/share) 13 12.5 14 16
SC Securities (Pvt) Ltd. Dividend Yield 3.1% 2.98% 3.4% 3.4%
Tel: 92 21 111 111 721 (Ext 107,108)
Email: research@scsecurities.net

SC Securities (Pvt) Ltd. 1

 E & P Sector Pakistan Oil Fields

POL plants also manufacture LPG, Solvent Oil and Sulphur.

POL markets LPG under its own name of POLGAS as well as
through its subsidiary CAPGAS (Private) Limited. POL owns
and operates a drilling rig capable of drilling deep wells to +
16,000 feet.

As per the latest printed accounts, POL is currently producing

keeping conservative approximately 7000 barrels per day for 1Q FY06 as
view on the daily compared to 4926 barrels per day for the corresponding
production of oil and
period last year showing the growth of 43% YoY basis. The
international oil price, we impressive increase in production coupled with the jump in
expect POL to report an international oil prices, helped POL to post ever higher NPAT.
EPS of PkR 46.50 for FY06
With a view that the international oil prices would move in
the band of $50 - $55 coupled with the POL to maintain it’s
daily production not going below 6800 barrels per day, we
expect the company to post an EPS of Rs. 46.50.

Investment Highlights

Currently
Oil trading
prices are at theto
expected ?? Pakistan Oil Fields is currently trading at a discount of 11
remain around $52the
discounted PER to - $55 percent from our fair value of Rs 465 based on DCF
average of it’s PER band
mark valuation. POL seems to be the one of most discounted
share and therefore it is advised for long-term investors to
keep a positive stance on this stock and invest in the stock
with long term perspective.

?? POL is currently trading at the PER of 9 based on the

expected EPS of FY06 and offers a prospective yield of 3.4%.
POL has a PE band of 6.8 – 13, having conservative
approach, we apply an average PEx of 10 which is at a
discount to the E&P sector and Market as well, expecting the
company to report an EPS of Rs. 46.5, the fair value comes to
Rs. 465.

Financial Highlights
18000 7000
16000 6000
?? POL has achieved third consecutive record breaking ever
14000
12000
5000 highest results for FY05 which translates into the growth of
10000 4000 50.8%.
8000 3000
6000
4000
2000
?? In spite of the big hit from financial cost on P&L for the
acquisition of NRL, POL was able to post growth of 6% and
2000 1000

0 0
FY03A FY04A FY05A FY06F 118% on QoQ and YoY basis respectively for 1QFY06,
Sales NPAT translating into an EPS of PkR 10.96 against PkR 5.02 in the
corresponding period last year.

SC Securities (Pvt) Ltd. 2

 E & P Sector Pakistan Oil Fields

Production and Reserves

140 8000 POL produced 5555 barrels oil per day (BOPD) and 28.89
120 7000
MMcfd of gas on average for the year 2003-04 and
6000
100
80
5000 maintained it for the next financial year 2004-05 with an
60
4000 average daily production of 5540 BOPD and 31.39 MMcfd of
gas. The impressive increase in production from 5540 BOPD
3000
40
2000
20 1000 and 31.39 MMcfd of gas for the FY05 to 7043 BOPD and 46.5
MMcfd of gas for the first quarter of FY06, accompanied by
0 0
FY2004 FY2005 3M2006

the spike in international oil prices helped POL to post ever

MMcfd Gas MTLPG MTSulphur BOPD (Solvent Oil) BOPD (Crude Oil)

highest earnings.

POL shared 15.62% of total oil production of the country in

2004-05 whereas, it holds 8.16% of total oil oil reserves.

Oil Production 2004-05

OTHERS
6%

BP
25% OGDC
47%

PPL
6%
POL
16%

Oil Reserves 2004-05

OTHERS OGDC
20% 37%

BP
22%

POL
PPL
8%
13%

SC Securities (Pvt) Ltd. 3

 E & P Sector Pakistan Oil Fields

International Oil Scenario

Oil prices in about a years time has almost doubled this is

due to the fact that oil consumption across the world
Oil prices are expected to accelerated by far higher pace than the new reserves
remain around $55- $60 discovered. The falling production from the oil producing
mark countries, mainly in the Gulf of Mexico and the North Sea, is
supposed to be main reason for the high prices of oil. The
upsurge in demand is mainly attributed to the fast growing
economies of China and India. Other factors that have been
part of this steep rise in international oil prices are the political
instability in Middle East and the hurricanes like Katrina and
Emma hitting the Gulf of Mexico.

Though it looks like as if this steep rise in oil prices has already
seen its peak and is now settling down at $55 mark. Also if the
oil prices will continue to make new highs the global
economic growth will slow down consequently resulting in
lower demand for oil. This argument can also be backed by
the fact that rising trend in oil prices has resulted in increased
demand for alternative fuel sources like natural gas, and this
will lower the demand for oil.

Valuation and Recommendation:

POL is trading on the lower side of the PE band of the share

for the last two years. Based on the DCF valuation and
expectation for the handsome growth in earnings for the
years to come, we recommend a strong buy for long-term
investors and buy on dips for short-term investors.

DCF valuation
Discount rate
8.0% 10.0% 12.0% 13.5% 14.0% 16.0%

0% 612.2 473.0 381.3 330.8 268.6 231.8

Terminal growth

3% 904.4 625.4 471.5 395.2 307.9 259.6

4% 1,099.3 710.0 516.6 425.6 325.4 271.5

5% 1,424.0 828.5 574.6 464.5 346.0 285.3

6% 2,073.5 1,006.3 652.0 511.0 370.8 301.3

SC Securities (Pvt) Ltd. 4

 E & P Sector Pakistan Oil Fields

Share Holding in Exploration Licenses and D&P/Mining Leases

Exploration License Operator Interest %

Hyderabad POL 100
Ikhlas POL 100
Gurgalot OGDC 20
Kotra OGDC 28.50
Nawab Shah Block Tullow Pakistan 25
Tal Block MOL Pakistan Oil & Gas Co. 25
D&P/Mining Lease
Balkassar POL 100
Dhulian POL 100
Joyamair POL 100
Khaur POL 100
Meyal POL 100
Minwal POL 82.50
Pariwali POL 82.50
Soan(Pindori) POL 35
Turkwal POL 67.37
Adhi PPL 11
Chaknaurang OGDC 15
Soan(Bhangali) Orient Petroleum 7
Dhurnal Orient Petroleum 5
Ratana Orient Petroleum 4.54
Sara/Suri Tullow Pakistan 14.54

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SC Securities (Pvt) Ltd. 5