E&P activities continue slowdown in the country

Despite three months in the current fiscal year 2011-12, Pakistan’s exploration and development (E&D) activities are continue to remain sluggish on account of circular debt, security challenges in rich hydrocarbon basins of Khaiber Pukhtoon Khawa and Balochistan and continuation of carry over well of last year.

During the current fiscal year only 3 exploratory wells has been drilled as against 4 wells in the comparable period last year, while 4 development well has been spudded versus 6 last year.

Amongst the listed companies, Pakistan Oilfields (POL) has initiate its 1st exploratory well of the year while Oil and Gas Development (OGDC) and Pakistan Petroleum (PPL) has yet to drill for new hydrocarbon reserve this year. Despite muted E&D activity, we maintain ‘Over-weight’ stance on the sector on account of sector’s attractive valuation and ability to yield the maximum from existing reservoirs. We recommend ‘Buy’ on PPL and POL, which are trading in the current fiscal year PE multiple of 6.9x and 5.9x, respectively.

As per Pakistan Petroleum Information Services (PPIS) latest drilling update, the sector has drilled 7 E&D wells achieving nine percent of the full year target of 76 wells. In the same period last year, the sector accomplished 13 percent target by drilling 10 wells versus target of 80 wells.

Further bifurcation of the numbers reveals that E&D activity continues to be tilted towards development activities, with 4 development well (full year target 45 well) and 3 exploratory well (target 31 well). Major reasons behind the muted E&D activity continue to remain the unending circular debt and high risk environment in KPK and Balochistan.

Noteworthy, is the conviction of operator (MOL) in country’s one of the most promising, hydrocarbon basin -Tal block. In addition to development plan of Manzalai, the operator has initiated appraisal well in its latest discovery Makori-east. Any positive news flow from the fields would primarily bode well for POL but will also augment PPL and OGDC earnings going ahead.

Amongst the last year wells, Chak Naurang South, supped by OGDC, is in production testing phase and we anticipate the news of 1st discovery this year. However, the progress on the highly anticipate, Zin Block, continue to progress on slow pace as the operator (OGDC) encountered with hard/difficult formation and we expect the news flow from the field by mid-to-end December, 2011.