Pakistan Oil and Gas - The Undiscovered Value (Detailed Report)

Foundation Research Equities Pakistan Oil and Gas

PAKISTAN

The undiscovered value

September 07 2009

Sticking to the basics We present our investment thesis for Pakistan oil and gas exploration sector. We stick to the basic determinants of value of exploration companies, highlighting attractive reserve based values, low valuation multiples, attractive yields, production efficiency, healthy near-term volumetric growth, zero-debt balance sheets, and a stable regulatory framework with improving pricing policies as core value drivers of Pakistan oil and gas exploration sector.

Oil demand stability enforces price upgrade

Inside The undiscovered value Favorable industry dynamics Improving pricing policies and regulatory framework Oil: Searching for equilibrium Oil & Gas Dev. Company Pakistan Petroleum Pakistan Oilfields Appendices

2 5 14 18 25 39 52 64

The global oil demand has stabilized, falling at a slower pace in 2QCY09 compared to previous quarter, because emerging market demand has shown signs of recovery. Though the oil demand is still dwindling in the developed regions, it is likely that the rate of decline in the developed regions will also diminish. Global oil inventories have grown to a high level which can trigger some cut in crude prices. However, additional supply cuts can keep oil prices in check in short to medium term whereas global demand recovery can support long-term oil prices. We raise our FY10 oil price assumption by $10/barrel to $60/barrel, and $5/barrel for FY11 and FY12 to $65 and $75/barrel, respectively.

Focus on growth, earnings certainty, and project execution certainty We recommend investor to focus on three key determinants of future price performance of Pakistani E&P companies, 1) growth in revenues and bottom line, 2) probability of occurrence of that growth, and 3) probability of successful execution of expansion and maintenance projects. Where the first factor may be the primary determinant of reward potential, the other two factors are key determinants of reward variability.

Preferred exposure: PPL and POL We recommend investors to invest in PPL and POL. Though PPL’s price performance in 1HFY10 will be hampered by expected gas price cut of 25-30%, we advise investors to consider it a buying opportunity as subsequent growth and growth certainty in PPL’s earnings are unmatched by other listed E&P firms. POL offers high earnings growth potential though lacks slightly on earnings certainty. OGDC has high project execution and earnings uncertainty thus ranks last in our preferred E&P play We have revised our earnings forecast and target prices for OGDC, PPL, and POL after incorporating, 1) revised oil price assumptions, 2) information obtained from management meetings with the E&P firms

Fig 1 Summary of key changes to TP, earning and recommendations TP

Analyst Asim wahab Khan 92 21 5612290-94

Ext 335

[email protected]

Oil and Gas Dev Co. Pakistan Petroleum Pakistan Oilfields

108.3 274.0 261.0

Earnings Revision FY10 FY11

New

0% -1% 2%

Neutral Outperform Outperform

3% 0% 10%

Reccommendation Old Neutral Outperform Outperform

Source: FSL Research, September 2009 Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. FSL may, to the extent permissible by aNBPicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. FSL, their respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may have recently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.

Pakistan Oil and Gas - Report

September 07, 2009

The undiscovered value Investment argument based on attractive values, operational strength, and improving regulations

We present our investment thesis for Pakistan oil and gas exploration sector. We stick to the basic determinants of value of exploration companies, highlighting attractive reserve based values, low valuation multiples, attractive yields, production efficiency, healthy near-term volumetric growth, zero-debt balance sheets, and a stable regulatory framework with improving pricing policies as core value drivers of Pakistan oil and gas exploration sector. We favor stocks that have highest certainty in earnings and significant and visible price catalysts in the sector as opposed to those that lack earnings visibility and timely project delivery. A comparison with global peers suggest that Pakistani E&P firms trade at a significant discount on several valuation measures such as PER, PBV, P/FCF, EV/boe, EV/EBITDA, EV/DACF, and dividend yield. We also highlight the key operational and production efficiency measures for Pakistani E&Ps which signal strong cost controls and excellent return generation capacity. Based on above mentioned criteria, we rate PPL as our preferred stock owing to highest earnings certainty and visibility, and superior project delivery. However, we expect significant cut in gas prices in this half (to be announced soon by Oil and Gas Regulatory Authority) which might lead to depressed price performance in near term. POL is our second favorite as the completion of phase-2 of Tal expansion seems close at hand. Despite having highest price upside, we don’t rate POL as our top pick as 36% of its value comes from future production additions. OGDC ranks last in our preference list owing to limited upside potential, poor project delivery, and several ongoing litigations which add to project delivery risk.

Fig 2 Breakup of value in terms of developed, developing, and exploration assets PKR 300.0 0

PPL our preferred pick as it trades at discount to developed value, POL is runner up

0

46.1

250.0

97.3

200.0 150.0 100.0

0 22.1

227.9 162.7

50.0

86.2

PPL

POL Developed

Developing

OGDC Exploration

Source: FSL Research, Sep09

A primary factor that makes PPL our favorite pick is that the value of its already developed and producing assets (including cash and investments) comes to PKR227.9/share, whereas the stock currently trades at 6.5% discount to this value. 83% of PPL’s value comes from existing cash, investments, and existing production capacity, as against 80% for OGDC and 64% for POL. Moreover, OGDC trades at premium to both developed and producing assets value whereas POL currently trades at premium to existing asset base but discount to developing asset base. We have not incorporated exploration upside for any company in our valuation models. The recent increase in oil prices will also benefit the sector – though its impact will vary from company to company based on production mix and pricing structure, which is more favorable for POL and OGDC. POL provides the highest leverage to oil prices. Owing to stability witnessed in oil demand, we have revised our FY10 oil price assumption by $10/barrel to $60/barrel, and $5/barrel for FY11 and FY12 to $65 and $75/barrel, respectively.

2

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 3 Revision in oil price assumptions, summary of changes in earnings and valuations FY08

FY09

FY10E

FY11E

FY12E

LT

New oil price (US$/bbl)

92.09

63.21

60.00

65.00

75.00

75.00

Old oil price Change - %

92.09

63.21

50.00 20%

60.00 8%

70.00 7%

75.00 0%

Updated earnings PPL (PKR)

FY08

FY09E

FY10E

FY11E

Valuation

Target Price

Recommend

Updated EPS

23.75

33.38

28.91

35.67

274.0

274.0

Outperform

Previous EPS Change - % POL (PKR)

23.75 0%

33.38 0%

29.20 -1%

35.70 0%

Updated EPS

36.43

24.37

27.21

34.12

260.0

260.0

Outperform

Previous EPS Change - % OGDC (PKR)

36.43 0%

24.37 0%

26.71 2%

31.00 10%

Updated EPS

11.54

12.91

12.00

13.42

108.3

108.34

Neutral

Previous EPS Change - %

11.54 0%

12.91 0%

12.01 0%

13.05 3%

Source: Company Data, FSL Research, Sep09

Fig 4 Comparison of discount to total NAV vs developed NAV

OGDC

POL

PPL

-30%

-20%

-10%

0%

10%

Discount to developed NAV

20%

30%

40%

Discount to total NAV

Source: FSL Research, Sep 09

Fig 5 Comparative valuations of Pakistan E&Ps Target Price

Market cap

EPS FY10 FY11

ROE FY10 FY11

P/E FY10 FY11

EV/EBITDA FY10 FY11

EV/DACF FY10 FY11

OGDC

108.1

6,032

12.0

13.4

38%

37%

9.6

8.6

5.8

5.1

5.78

5.31

PPL

274.0

2,157

28.9

35.7

32%

32%

7.4

6.0

4.1

3.3

3.49

3.83

POL

260.0

580

27.2

34.1

22%

24%

7.4

5.9

3.8

3.0

4.45

3.78

34%

34%

8.8

7.5

5.1

4.3

4.95

4.77

Sector

8,770

Source: FSL Research, Sep09

3

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 6 Pakistan E&Ps attractive against global peers

200

30 25

150

20 15

100

10

50 5 0

0

-50 2yr fwd EPS CAGR (%)

18

1yr fwd EV/EBITDA (x) 6

16 5

14

12

4

10

3

8 6

2

4 1

2 0

0

2yr fwd PER (x)

70

1yr fwd P/BV (x) 40

60

35

50

30

40

25 20

30

15 20

10

10

5

0

0

EBITBA Margin (%) 1yr fwd RoE (%)

Source: Bloomberg, FSL Research, Sep09

4

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Favorable industry dynamics Pakistan’s E&P sector enjoys extremely favorable dynamics. Successful operational performance of this sector is key to country’s economic growth. The rising energy deficit, high vulnerability to oil prices, and expensive energy import options, all have resulted in significant government attention and incentives for the sector. The government has been providing improving economic terms for investment in oil and gas exploration via its Petroleum Policies (discussed in next section in detail). Owing to these measures, the Pakistan E&P sector enjoys high FDIs and diversity of numerous local and foreign exploration firms. Several high potential areas in Pakistan’s basin remains largely unexplored due to security concerns, whereas the offshore basin, hitherto untapped, also offers attractive exploration opportunities.

Rising consumption and energy deficit: Exploration catalysts Pakistan’s economy has grown at average rate of 6.4% pa in real terms from FY03 to FY08 whereas the energy consumption has bettered that, rising at an average rate of 7.5% during the same period, twice touching double digit growth rates. Though the economy has grown at only 2% during FY09, the IMF expects Pakistan’s economy to grow at an average rate of around 5.2% from FY10 to FY14. Owing to the strong correlation between energy consumption and economic growth, we expect energy demand to grow by 6% during the same period. Fig 7 High correlation between GDP growth and energy consumption 12.0%

10.0%

8.0%

6.0%

4.0%

GDP growth

2.0%

Energy Consumption

0.0% FY03

FY04

FY05

FY06

FY07

FY08

Source: SBP, Energy Year Book 2008, FSL Research, Sep09

Lots of energy demand, dearth of supply: Pakistan is already facing significant energy deficit. The country imports 85% of its oil needs whereas gas shortage is evident in winter seasons when significant shortage of gas due to increased domestic usage causes industries to switch to alternate sources of fuel. The Gas Purchase Agreements signed between government and several industries are only for 6-9 months for a year, owing to shortage of gas. As per the prefeasibility report prepared by Price Waterhouse Coopers (PWC) and Hagler Bailly on IPI gas pipeline, the country’s gas deficit, currently estimated at 200mcfd, is expected to grow to 2.7bcfd by 2015, 5.8bcfd by 2020, and a mammoth 10.3bcfd by 2025, almost three times the current gas production of Pakistan. The existing gas supplies are expected to deplete rapidly from 2015 whereas the production additions will not be able to keep up with the rising energy demand. PPL estimates the gap to be around 5.8bcfd by 2030 with gas supplies touching mere 1.1bcfd and demand growing to 6.9bcfd.

5

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 8 Gas demand-supply gap as per PWC /Hagler Bailly

Source: PWC /Hagler Bailly Pakistan IPI Pre-Feasibility Report – 2007, Sep09

Fig 9 PPL estimates of gas demand-supply gap bcfd 7.0 6.0

Demand

5.0 4.0 3.0 Supply 2.0 1.0

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

-

Source: PPL, FSL Research, Sep09

Import options extremely expensive: Owing to the massive energy deficit faced by the country, the Ministry of Petroleum and Natural Resources has been pursuing the import of gas through pipeline and LNG projects from the neighboring region that is Iran, Turkmenistan and Qatar. However, Turkmenistan and Qatar projects are presently in the negotiations stage and no material development has taken place on the two projects. Investment would take considerably longer time before any supply can be expected from them. The Iran-Pakistan (IP) Gas Pipe-line, however, has been in the limelight recently. Pakistan and Iran signed a bi-lateral gas salespurchase agreement in Turkey on 5th June, 2005. The project cost is estimated at $1.25bn (within Pakistan boundaries) with debt equity composition of 70:30. The target date for completion is 2013 and the pipeline is expected to deliver 750mmcfd gas. The pricing of IP Gas Pipe-line has been settled at 80% of Japanese Crude Cocktail (JCC). This pricing arrangement seems very expensive to us. For crude price of $70/barrel, local gas fields under Petroleum Policy 2001 in Zone – 1 (Zone-1 is the most attractive zone in terms of pricing) are priced at $3/mmbtu, whereas the recently announced Petroleum Policy 2009 offers $4.62/mmbtu.

6

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 10 Imported gas to be several times more expensive $/mmbtu 18.0

16.0

IP Gas pipeline

14.0 12.0 10.0 8.0 6.0

PP2009

4.0

PP2001

2.0 $/barrel

-

10

20

30

40

50

60

70

80

90

100

110

120

Source: SSGC, MNPR, FSL Research, Sep09

This is in sharp contrast to $9.82/mmbtu price applicable for IP gas pipeline at crude price of $70/barrel. Moreover, there is no cap on crude prices so the cost of gas from IP pipe line can potentially be several times the cost of gas under Petroleum Policy 2009. Development of tight gas reserves a more viable option: Considering the cost of imported gas could go as high 4-5 times that of local gas (and 3-4 times the cost of gas under 2009 policy), we feel that development of unconventional hydrocarbon resources such as tight gas could offer significantly better economic terms to the country, not only in terms of lower gas prices compared to imported gas but on multitude of macroeconomic factors such as lower inflation, increased employment, lower pressure on balance of payments etc. Owing to the recent news flow regarding tight gas reserves development by OMV in Sawan and Miano fields, we have provided a detailed discussion on the potential of tight gas reservoirs in Pakistan in Appendix C Multiple power expansion projects in pipeline: Pakistan is expected to add 6,400MW to the national grid by December 2012. Around 65% of the projects are FO based whereas the rest are gas based power projects. Gas projects are expected to consume around 300mmcfd gas whereas FO based projects will consume around 7,285tpd of FO. These projects will put significant pressure on country’s external account and foreign reserves, which are already extremely sensitive to changes in oil prices.

7

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 11 Large Number of power projects = Rising energy consumption Projects OIL Sheikhupura (Atlas) Power Project* Nishat Power Project Karkey Rental Project Walters Power Rental Project Reshma Power Rental Project Ruba Energy Rental Project Premier Energy Rental Power Project Gulf Rental Project Independent Power Rental Project Sialkot Rental Power Project Tapal Rental Power Project HUBCO-Narowal Project Nishat Chunian Power Project Liberty Power Tech Project Reshma Power Generation Gujranwala (Gulistan) Project Shahkot (Leading) Power Project Engro Power Generation Saba Power Generation Shahpur Power Project PIPELINE QUALITY GAS/DUAL-FUEL Orient Power Project* Muridke (Sapphire) Power project Sahiwal (Saif) Power Project Bhikki (Halmore) Power Project

Location

Capacity (MW)

Expected COD

Sheikhupura, Punjab Near Lahore Mauripur, Karachi Korangi, Karachi Near Manga-Raiwind Road, LESCO Near Batapur Grid, LESCO Lahore Sheikhupura Road, LESCO Eminabad, Gujranwala Gojra, near Faisalabad Sialkot, GEPCO Area Kamoki, Gujranwala, GEPCO Narowal, Punjab Near Lahore Faisalabad Gujranwala-Lahore Road, Punjab Gujranwala Faisalabad Near Bhikki, Punjab Near Jhang, Punjab Shahpur, Near Sargodha Sub Total

225 200 249 230 220 170 64 81 221 85 74 220 200 200 172 200 200 627 171 150 3959

Jul-09 Sep-09 Nov-09 Dec-09 Dec-09 Dec-09 Jan-10 Feb-10 Feb-10 Feb-10 Feb-10 Mar-10 Mar-10 Dec-10 Mar-11 Jun-11 Dec-11 Mar-12 Mar-12 Dec-12

Balloki, Punjab Muridke, Punjab Sahiwal, Punjab Bhikki, Punjab Sub Total

229 225 231 225 910

Jul-09 Oct-09 Dec-09 Oct-10

185 227 180 134 450 188 1364 6233

Sep-09 Dec-09 Dec-10 Nov-11 Dec-11 Dec-11

DEDICATED GAS FIELDS Fauji Mari Power Project Engro Power Project Grange Holdings Power Project Star Thermal Power Project Uch II Power Project Green Power Project

Daharki, Sindh Qadirpur, Sindh Arifwala, Punjab Daharki, Sindh Dera Murad Jamali, Balochistan Dadu, Sindh Sub Total Grand Total * Delayed till August-September 2009, 80% utilzation assumed

Fo/Gas req. tons/day 414.0 368.0 458.2 423.2 404.8 312.8 117.8 149.0 406.6 156.4 136.2 404.8 368.0 368.0 316.5 368.0 368.0 1,153.7 314.6 276.0 7,284.6 mmcfd 30.2 29.7 30.4 29.7 119.9 24.4 29.9 23.7 17.7 59.3 24.8 179.7

Source: PPIB, FSL Research , Sep09

Rising E&P activity Owing to the importance of timely development and efficient utilization of Pakistan’s Hydrocarbon reserves, Pakistan government has made significant efforts (offering better economic terms, foreign investor safety rules, and minimizing regulatory hassles) to boost local oil and gas production. This has led to significant growth in the exploration and development activity and much improved success ratio for Pakistan. The number of foreign players, their production contribution and exploration activity has picked up significantly. Owing to country’s attractive exploration profile and improving policies, the FDIs in the sector have witnessed noticeable appreciation. Healthy growth in FDIs elucidates foreign interest: Owing to the liberal and improving policies of the government, FDIs in the exploration sector of Pakistan have grown at 7-year CAGR of 27%, from $151mn in FY02 to $756mn in FY09. The monthly average FDI in FY09 stood at $63.0mn as against $12.6mn in FY02. This growth has been possible owing to increasing number of foreign oil and gas companies and their rising share in country’s hydrocarbon production.

8

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 12 Rising FDIs reveals foreign interest $ mn 140.0

FY09 Avg: $62.98mn

120.0

FY08 Avg: $52.92mn

FY07 Avg: $45.33mn

100.0 FY06 Avg: $27.69mn

80.0 60.0

FY03 Avg: $14.74mn

FY02 Avg: $12.6mn

40.0

FY04 Avg: $16.87mn

FY05 Avg: $16.61mn

20.0

Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09

0.0

Source: SBP, FSL Research, Sep09

Boost in exploration activity has led to hydrocarbon reserve build-up: At the time of independence (1947), the country had zero gas reserves and oil reserves of around 90mn barrels. The 1952 discovery of Sui by PPL led to significant exploration activity in the country. By 1960, the country had discovered nearly 25.6tcf of gas, which is more than 49% of country’s total original recoverable reserves discovered to date. A significant slowdown in exploratory activity was witnessed during 1960s-1980s. From 1984, however, exploration activity kicked back strongly which led to significant addition in country’s gas reserves. The story of oil is even more encouraging if we are to talk of country’s hydrocarbon potential. More than 75% of country oil reserves were discovered from 1984 onwards due to increased exploration activity, improved understanding of geology, and better exploration techniques. Around 45% of country’s gas reserves were also discovered during the period. The impact of rise in exploration activity is quite evident; more than 80% of country exploration activity (in terms of number of wells drilled) was carried out from 1984-present, and more than 45% of country’s gas and 75% of oil reserves were discovered during the same period. Fig 13 Oil and gas reserve build up vs. exploration activity No. of wells

BCF 60,000

40 35

50,000

No. of wells

mn barrels 1,000

40

900

35

800 30

30 700

40,000

Gas reserve build up

25

600

20

500

Exploratory wells 30,000

15

20,000

25

Oil reserve build up Exploratory wells

20

400

15

300 10

10 200

Source: Energy Year Book, PPIS, FSL Research, Sep09

9

Foundation Securities (Pvt) Limited

FY07

FY03

FY99

FY95

FY91

FY87

FY83

FY79

FY75

FY71

FY67

FY63

0 FY59

-

FY55

FY07

FY03

FY99

FY95

FY91

FY87

FY83

FY79

FY75

FY71

FY67

FY63

FY59

FY55

FY51

0

FY47

0

5

100

FY51

5

FY47

10,000

Pakistan Oil and Gas - Report

September 07, 2009

We have provided a consolidated map of oil and gas discoveries in Pakistan in Appendix D Apart from the encouraging exploration success from 1980s onwards, which was the fruit of increased exploration activities, the recent performance of Pakistan’s E&P sector has also been exciting. The development expenditures have grown at a 6-year CAGR of 13.2% from PKR31bn in FY02 to PKR 64bn in FY08, whereas exploration expenditures have grown at CAGR of 20.3% during the same period to PKR32bn. The share of exploration expenditure as percentage of total expenditures (exploration + appraisal + development) has grown from 25% to 33% during the period. This increase in expenditures has been full of returns for the E&P companies, as they have managed to increase gas production from 2.5bcf in FY02 to 4bcfd in FY08 and oil production from 64kbpd to 70kbpd. Significant oil production addition is expected from FY10 once production from Tal block and Mela-03 starts. Fig 14 Rising oil and gas production and increased exploration expenditures kbpd

bcfd

PKR mn 100

70

4.0

69

3.8

90

68

3.6

80

67

3.4

70

66

3.2

60

65

3.0

50

64

2.8

40

63

2.6

30

62

2.4

20

61

2.2

10

60

2.0

-

FY02

FY03

FY04

FY05

Gas production

FY06

FY07

FY08

Oil production

34% 32% 30% 28% 26% 24% 22% 20% FY02 FY03 FY04 Exp. Expenditure Exp expenditure %

FY05

FY06 FY07 FY08 Dev. Expenditure

Source: PPIS, Energy Year Book, FSL Research, Sep09

Impressive reserve replacement though declining reserve life: Pakistan’s oil and gas reserve replacement has been impressive during the last decade. The country has managed to clock a reserve replacement ratio of 196% for gas and 230% for oil, during 1998-2008. Oil and gas exploration firms have managed to discover 50% of country’s total oil and gas reserves from 1980 onwards. In the last decade, 18% of country’s total gas reserves were discovered owing to significant increase in exploration activity, improved knowledge of the sedimentary basin, and utilization of better exploration techniques. The reserve life of oil and gas, however, has been on a consistent decline in Pakistan owing to significant increase in oil and gas production. Country’s gas production has more than doubled since 1998, thus the gas reserve life fell from gradually from 35 years in 1998 to 23 years by 2008. The oil reserve life has remained stagnant at 12.5years.

10

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 15 Impressive gas reserve replacement in Pakistan bcm 900

550%

450%

800

350%

700 250% Average RRR at 191% 600 150% 500

50%

400

-50% 1997

1998

1999

2000

2001

2002

2003

Remaining reserves

2004

2005

2006

2007

2008

RRR (%)

Source: SBP, FSL Research, Sep09

Significant foreign interest confirms attractiveness: Of the 26 total operators in Pakistan’s exploration sector, 16 are foreign players whereas 10 are local. The exploration and development expenditures carried out by foreign operators have increased by 48% to PKR43bn in FY08 compared to PKR29bn in FY02. Despite overall increase in oil production of the country, foreign operators’ oil production has fallen primarily due to more than two-thirds decline in oil production by BP. Consequently, the foreign operators share in oil production has halved to 24% in FY08 compared to 48% in FY98. The story of gas production by foreign operators, however, is much more heartening as it has increased seven times from 88bcf gas in FY98 to 618bcf in FY08. The production share has also nearly tripled to 42% in FY08 from 13% in FY98. The rise has primarily been driven by increase in number of foreign gas producers from 3 in FY98 to 8 in FY08. The new operators include OMV and BHP, presently ranked 1st and 3rd, respectively, amongst foreign operators in terms of gas production. The overall share of foreign operators in country’s hydrocarbon production has increased from 17.6% in FY98, to 40.8% in FY08, primarily due to increased gas production. Fig 16 Foreign E&P firms’ oil and gas production 000 barrels 35

60%

30

50%

bcft 700

45%

40%

600

35% 500

25

30%

40% 20

400

25%

300

20%

30% 15 20% 10

15% 200 10%

5

10%

0

0%

oil production

Share in oil production

Source: Energy Year Book, FSL Research, Sep09

11

Foundation Securities (Pvt) Limited

100

5%

0

0%

Gas production

Share in gas production

Pakistan Oil and Gas - Report

September 07, 2009

Fig 17 Share of operators in Pakistan oil and gas production Others Foreign, 5%

Others Foreign, 1%

BP, 6%

BP, 14% PPL, 7%

ENI, 10%

OGDC, 23%

POL, 9%

BHP, 10%

Oil

Gas PPL, 21% OMV, 13%

OGDC, 59%

Other local, 2% MGCL, 12%

Source: Energy Year Book, FSL Research, Sep09

April 2009 Basin Study – less encouraging than local estimates OGDCL hired Fugro Robertson to conduct a study to estimate the hydrocarbon potential of Pakistan. The £2.9mn study started in October 2005 and was finalized in April 2009. The project covers the sedimentary basins of the country. The study has produced a consistent overview of all the basins to develop a country wide review of the main prospective petroleum play fairways of Pakistan. The conclusion of this work is embodied in series countrywide play fairway maps that are accompanied by a mega-regional reappraisal and re-mapping of the relevant reservoir facies. The earlier estimates of hydrocarbon potential, based on a local study published in local research journal in 1994, seemed rather farfetched at 282tcf gas and 27bn barrels of oil. The results of the April 2009 basin study, though encouraging from a standalone perspective, were quite a dampener when compared to the local estimates. The study puts Pakistan’s reserve potential at 67tcf gas and 3.7bn barrels of oil. Fig 18 Pakistan E&P key statistics & April 2009 basin study snapshot EXPLORATION WELLS APPRAISAL/DEVELOPMENT WELLS TOTAL SEDIMENTARY AREA (SQ KM) DRILLING DENSITY (WELL/1,000 SQ.KM) TOTAL DISCOVERIES OIL Oil & GAS/GAS/GAS CONDENSATE OVER ALL SUCCESS RATE AREA UNDER EXPLORATION (SQ KM) NUMBER OF OPERATORS

742 990 1732 827,268 2.09 221 54 167 1 : 3.3 247,925 26

OIL RESERVES (Mn Barrels) ORIGINAL RECOVERABLE

934

CUMULATIVE PRODUCTION

621

BALANCE RECOVERABLE

313

GAS RESERVES (BCF)

Oil potential (mn barrels)

Local estimates

April 2009 Basin study

27,000

3,675

Untapped (%)

97%

75%

Gas Potential (bcf)

282,000

67,000

ORIGINAL RECOVERABLE

53,561

Untapped (%)

81%

20%

CUMULATIVE PRODUCTION

23,889

Combined oil & gas (Bn Boe)

76,068

15,333

BALANCE RECOVERABLE

29,671

Untapped (%)

87%

34%

Source: MPNR, PPIS, FSL Research, Sep09

12

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

As per the April 2009 Basin Study, 75% of oil reserves and 34% of gas reserves remain to be tapped. We feel that the study offers a significantly conservative estimate of country’s hydrocarbon potential owing to three reasons, a) large area of Pakistan remains unexplored, especially Baluchistan and offshore basins, b) improved exploration techniques and knowledge of Pakistan basin has resulted in number of successful recent discoveries and the country has found nearly 50% of its total gas reserves and 75% of its oil reserves in the latter half of its existence, c) the Basin Study marks all the reservoir areas of Pakistan as potentially viable hydrocarbon plays. Fig 19 April 2009 basin study- marking all basins as potentially viable Proven Kohat Potwar Basin Central Indus Platform Basin Lower Indus Platform Basin Sulaiman Fold Belt Basin Kirthar Fold Belt Basin Northern Punjab Basin Pishin Fold Belt Basin Balochistan Fold Belt Basin Makran Fold Belt Basin (including Makran offshore) Offshore Indus Basin Source: MPNR, FSL Research, Sep09

13

Foundation Securities (Pvt) Limited

Potentially viable

Unviable

Pakistan Oil and Gas - Report

September 07, 2009

Improving pricing policies and regulatory framework From early 2000, an ambitious, pro-market, reform program is being implemented, and gradually, the straightjacket under which the industry used to operate is being dismantled. As a result, the sector has changed dramatically over the past three years, and Pakistan now leads South Asia in sector reform. The government actions have focused on promoting private investments in the upstream, and it has gradually reduced its stake in key enterprises in the sector (including OGDC and PPL), deregulated most of the market for petroleum products, established a regulatory agency for the gas sector, and introduced market-related price caps for petroleum products. Oil and gas is produced in Pakistan under one of five broad set of Petroleum Policies which are Pre 1985, 1985-93, 1993-1994,1994/7 and 2001. Petroleum Policies outline fiscal terms and pricing regimes and each individual Petroleum Policy has a stabilization clause to ensure that the terms are maintained for any license awarded (and field developed) under the duration of the policy, irrelevant of future Petroleum Policies. The fiscal terms have gradually become more attractive with the level of government’s working interest gradually decreasing over time and now being abandoned. Onshore exploration entails a fixed tax rate regime where the overall tax rate has been reduced from 50-55% in the 1994 Policy to 40% in the 2001 Petroleum Policy which has been maintained in 2009 petroleum policy.

Continuously improving pricing policies To enhance exploration and production activity in the country, govt has felt need to announce new petroleum policies to make investment in the sector lucrative for local and foreign firms. The GoP’s policy initiatives have improved pricing structure on oil and gas to offer better returns to the E&P companies. Crude oil pricing: Under the 1991 and 1993 petroleum policies, oil prices for onshore fields entail a discount to a basket of Middle Eastern crude oil prices with the specific discount varying by geographical region (southern fields entail higher discount compared to northern fields). In 1994/1997 and 2001 petroleum policies, this discount factor has been completely removed, and onshore oil prices are only adjusted to reflect any quality differential vs the Middle East crude oil benchmarks. There is no discount for offshore production of crude. However, windfall levy at 50% is applicable on crude price of over $30/barrel in 2001 and 2009 policies. Wellhead Gas pricing: Pre-1985 Cost plus/Rate of Return: In 1950/60s the gas producer prices in the country were set on cost plus basis. These included Sui/ Kandhkot & Mari fields. In 1982 a Gas Price Agreement (GPA) was signed for Sui/Kandhkot Gas with Pakistan Petroleum Limited (PPL) and for Mari Gas in 1985, which ensured guaranteed rate of return on their equities i.e. 25% and 22.5% respectively in addition to meeting all their costs. PPL’s GPA for Sui/Kandhkot of 1982 has been dismantled. The Mari Gas GPA is still intact though the guaranteed rate of return has been increased to 30% effective from October 2001. Post 1985: The wellhead Gas Pricing Policy i.e. gas price paid to the producer has been revised from time to time since 1985 to attract foreign/private investments in the oil/gas exploration. The major improvement was the linkage of wellhead prices with international prices instead of cost plus or Rate of Return mechanism, with the objectives (a) to provide incentive for risky exploration, (b) impart efficiency instead of guaranteed rate of return. 1985-1991: Wellhead prices were linked to 66% of High Sulphur Fuel Oil (HSFO) price less negotiated discounts. 1991-1992: Linkage increased to 75% of HSFO price less negotiated discount. 1992-1993: Linkage further increased to 100% of HSFO price less negotiated discount. 1993-1994: Linked to 100% of HSFO price with floor price of US $ 80 per ton and 50% beyond US $ 80 per ton. 1994/1997 Petroleum Policies : Based on geological prospects and available gas transmission infrastructure network, country was divided into three prospective zones. Lower discount, and thus higher pricing was available for high risk areas. Moreover, wellhead gas prices were linked to crude oil from HSFO. Zone – 0 for offshore exploration was introduced

14

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 20 Zonal discounts introduced in 1997 still applicable Zone

Discount (%)

Risk factor

Areas

Zone III

67.5

Low Risk Low Cost

Lower Indus Basin

Zone-II

72.5

Medium Risk High to Medium Cost

Kirthar, East Balochistan, Punjab platform, and Suleman Basins

Zone- I

77.5

High Risk High Cost

West Balochistan, Pashin and Potowar Basins

Zone-0

77.5/PSA

High Risk High Cost

Indus Basin and Mekran Basin

Source: MPNR, FSL Research, Sep09

Fig 21 Zone distribution of Pakistan Basin introduced in 1997

Source: MPNR, Sep09

1999: Same zonal discounts but sliding scale ruling price introduced: Fig 22 Ruling price based on C&F crude prices introduced in 1999 Ruling Price ($ /BBL)

Applicable Price ( $ /BBL)

$ 10 or below Between $ 10 to $ 15 Between $ 15 to $ 20 Between $ 20 to $ 25 Above $ 25

100% or $ 10 100% of ruling price $ 15 plus 50% of the amount by which the price exceeds $ 15 / BBL $ 17.5 plus 30% of the amount by which the price exceeds $ 20 / BBL $ 19 plus 20% of the amount by which the price exceeds $ 25 / BBL

Source: MPNR, Sep09

15

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

2001: In terms of gas pricing, 2001 policy was less lucrative compared to 1994-97 policy as a cap at $36/barrel was introduced: Fig 23 Ruling price based on C&F crude prices revised in 2001 Marker Price ($ /BBL)

Applicable Price ( $ /BBL)

$ 10 or below Between $ 10 to $ 16 Between $ 16 to $ 21 Between $ 21 to $ 26 From $26 to $36

100% or $ 10 100% of ruling price $ 16 plus 50% of the amount by which the price exceeds $ 16 / BBL $ 18.5 plus 30% of the amount by which the price exceeds $ 21 / BBL $ 20 plus 20% up to $36 / BBL

Source: MPNR, Sep09

2007: Wellhead gas prices formula was completely reorganized by replacing the regressive pricing mechanism, with subsequent unit conversion and zonal discounts, with a single stage pricing formula. Gas price gradient was also introduced in this policy. However, the policy failed to gain acceptance in the E&P industry owing to several grey areas and thus was not implemented. The policy was modified and 2009 policy was introduced. 2009: The government unveiled the new Petroleum Policy 2009 on March 20, 2009. Post the failure of 2007 policy, the government reintroduced the regressive pricing mechanism of 2001 policy. New pricing slabs up to $100/barrel are introduced in this policy. At current crude price of $70/barrel, the new policy provides 54% higher gas prices compared to 2001 policy. Fig 24 Ruling price based on C&F crude prices as applicable in 2009 policy Marker Price ($ /BBL)

Applicable Price ( $ /BBL)

$ 20 or below Between $ 20 to $ 30 Between $ 30 to $ 40 Between $ 40 to $ 70 From $70 to $100

100% with floor of $10 $20 plus 50% of incremental price $ 25 plus 30% of the incremental price $ 28 plus 20% of the incremental price $ 34 plus 10% up to $100 / BBL

Source: MPNR, FSL Research, Sep09

The impact of the 2009 Petroleum Policy will be neutral in short-to-medium term considering a normal licensing-production cycle of 8-10 yrs. However, significantly higher gas prices offered in the new policy should spur investment in the sector. The government is diligently marketing the investment appeal of the new policy to foreign investors and has organized several conferences to attract more foreign investment in Pakistan E&P sector. We have provided a detailed map of Pakistan’s hydrocarbon basins in Appendix E

16

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 25 Pricing comparison of 2001, 2007, and 2009 policies Crude Price ($/barrel)

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Pet.Poilcy 2001

1.20

2.10

2.55

2.62

2.62

2.62

2.62

2.62

2.62

2.62

PP2007 (GPG 0.2)

1.50

2.50

2.70

PP2007 (GPG 1.0)

1.50

2.50

2.70

2.90

3.02

3.06

3.10

3.14

3.18

3.22

2.90

3.10

3.30

3.50

3.70

3.90

PP2009 Zone 2

1.18

2.37

4.10

2.96

3.32

3.55

3.79

4.03

4.14

4.26

4.38

Pet.Poilcy 2001

1.29

PP2007 (GPG 0.2)

1.50

2.26

2.74

2.82

2.82

2.82

2.82

2.82

2.82

2.82

2.57

2.84

3.11

3.27

3.31

3.35

3.39

3.43

PP2007 (GPG 1.0)

3.47

1.50

2.57

2.84

3.11

3.35

3.55

3.75

3.95

4.15

4.35

PP2009 Zone 1

1.27

2.54

3.18

3.56

3.82

4.07

4.32

4.45

4.58

4.71

Pet.Poilcy 2001

1.38

2.41

2.92

3.00

3.00

3.00

3.00

3.00

3.00

3.00

PP2007 (GPG 0.2)

1.50

2.66

3.01

3.37

3.57

3.61

3.65

3.69

3.73

3.77

PP2007 (GPG 1.0)

1.50

2.66

3.01

3.37

3.65

3.85

4.05

4.25

4.45

4.65

PP2009

1.36

2.72

3.40

3.81

4.08

4.35

4.62

4.76

4.89

5.03

Zone 3

$/mmbtu

Source: MPNR, FSL research, Sep09

17

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Oil: Searching for equilibrium It took oil (Arab Light Crude) more than three and a half years to propel from $32.7/barrel in Dec 2004 to touch its peak of $143.1/barrel in July 2008. However, it took less than half a year for oil to free-fall back to $32.7/barrel mark, elucidating at least two key points, a) the concerns for peak oil and incremental supply challenges were overplayed, and, b) leverage products and reckless credit exacerbated several folds the impact of speculation on oil prices. Oil prices have bounced back to $70/barrel in another half year (from Dec 2008 to June 2009). Such volatile price movement is typical of an excessively leveraged market, where gains are sharp and losses are even sharper (and higher than that justified by fundamentals, due to forced selling), followed by a sharp recovery to what may be a justified price level. Considering the oil price movement of last five years, we feel that apart from world GDP growth and supply challenges (such as declining non OPEC supply and falling global spare capacity), recovery in global credit off-take and consequent increase in leverage utilization via commodity futures will greatly affect oil price movements. With return of leverage, volatility in oil prices will increase and oil prices may not be able to find a sustainable equilibrium.

Global demand recovery to support oil prices The global oil demand has stabilized, falling at a slower pace in 2QCY09 compared to previous quarter, because emerging market demand has shown signs of recovery. Though oil demand is still dwindling in the developed regions, it is likely that the rate of decline in the developed regions will also diminish. Global oil inventories have grown to a high level which can trigger some cut in crude prices. However, additional supply cuts can keep oil prices in check in short to medium term whereas global demand recovery can support long-term oil prices. Unlike the last run up to $147/barrel, we don’t feel that the oil prices will be going that far any time soon. In 1974, the oil prices shot up which lead to immediate dip in oil demand and world GDP. The same trend was witnessed in 1980 and again in 2008. The oil price super spike, brought emerging economies to their knees, whereas the financial crisis ensured that the developed world get a new taste of recession. However, expected recovery in global demand for oil and world GDP in 2010 should provide stability to oil prices at current levels. As per IMF’s latest world economic outlook, the global economy is beginning to pull out of recession, but stabilization is uneven and the recovery is expected to be sluggish. Economic growth during 2009–10 is now projected to be about 0.5 percentage points higher than previous forecast, reaching 2.9 percent in 2010. The IMF expects oil prices to average $62.5/barrel in 2010. Fig 26 World GDP and oil demand highly correlated 10.0% 8.0%

Oil demand growth

6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0%

Source: IMF, BP, IEA, FSL Research, Sep09

18

Foundation Securities (Pvt) Limited

world GDP growth

Pakistan Oil and Gas - Report

September 07, 2009

Rig oversupply => Falling rig rates = Low extraction cost Another reason why we don’t see a super spike in oil prices any time soon is the heavy over supply in oil rigs market, especially in the Jack-up segment. During mid 2008 when oil had peaked, many argued that the extraction cost of oil has increased dramatically especially in the offshore areas. New rig contracts at that time were being made at exorbitant rates, labor costs were running extremely high, and materials were also at all time high. However, the costs ran high due to high oil prices, not the other way around. Fig 27 Rig prices following oil Rig index 600

$/barrel 140 contractual time lag before rig rates respond to oil prices

500

120 100

400 80 300 60 200

40 100 Jack-Up day rate index

20

oil-Arab Light

0

-

Source: ODS-Petro data, Reuters, FSL Research, Sep09

After enjoying excellent day rates in during end 2008, drillers operating in shallow waters (jack up rig operators) now find themselves in a tight spot. Oil-services providers have sought to cut costs as clients have opted to scale back planned investment post decline in their fat margins. Schlumberger Ltd., the world’s largest oilfield-services provider, trimmed this year’s capitalspending plan 13 percent to $2.6 billion from the previously announced $3 billion budget on Jan. 23. With many contracts up for renewal and a bout of new rigs coming online in 2009 (addition of 90 jack-up rigs expected this year), rates for jackup rigs have fallen much earlier than those for their deepwater counter parts. Fig 28 Jackup and floating rates have come down sharply 500

1000 950

19

Foundation Securities (Pvt) Limited

Jul-09

May-09

Jan-09

Mar-09

Nov-08

Sep-08

Jul-08

Mar-08

May-08

Jan-08

Nov-07

Sep-07

Jul-07

Floating rig day rate index

May-07

Jul-09

Mar-09

Source: ODS –Petro Data, FSL Research, Sep09

May-09

Jan-09

Nov-08

Sep-08

Jul-08

700

Mar-08

200

May-08

750

Jan-08

250

Nov-07

800

Sep-07

300

Jul-07

850

Mar-07

350

May-07

900

Jan-07

400

Mar-07

Jack-Up day rate index

Jan-07

450

Pakistan Oil and Gas - Report

September 07, 2009

The total number of oil and natural gas rigs operating worldwide has fallen from peak of 3,557 rigs in Sep 2008 to 1,987 rigs in June 2008, a decline of 44%. This is the lowest number of rigs employed since 2003. U.S. rig count has declined even more sharply at 55%, from 2,014 rigs employed in September 2008 to only 895 rigs in June 2009, primarily due to sharp decline in demand of jack up rigs from Gulf of Mexico. Fig 29 Global decline in rigs utilization Rig count 3,500

3,000

2,500

2,000

1,500

1,000

500

0 2000

2001 Latin America

2002

2003

Europe

2004

Africa

2005

Mid East

2006 Far East

2007 Canada

2008

2009

U.S.

Source: Baker Hughes, FSL Research, Sep09

Crude futures and leverage; the all important factor Considering the oil price movement of last five years, we feel that apart from world GDP growth and supply challenges (such as declining non OPEC supply and falling global spare capacity), recovery in global credit off-take and consequent increase in leverage utilization via commodity futures will greatly affect oil price movements. With return of leverage, volatility in oil prices will increase and oil prices may not be able to find a sustainable equilibrium Fig 30 The leverage bubble pushed oil to unprecedented levels Open positions (000 contracts) 1,200 Speculative dollar spread

1,000

800

600

400

200 1998

2000

Source: CFTC, FSL Research, Sep09

20

Foundation Securities (Pvt) Limited

2002

2004

2006

2008

2010

Pakistan Oil and Gas - Report

September 07, 2009

Analysis of futures positions at the Nymex exchange crude futures reveal that while all types of positions grew during 2004 to 2008, the COT data suggests that it is the spread positions of noncommercial traders that had the fastest growth rate. While overall open interest more than tripled from 2004 to 2008, growing from 600k contracts (each contract worth of 1000 barrels) to 1.5mn contracts, non-commercial spread (spread positions involve long positions in one month combined with short positions in another month so that spread traders are speculating on differences between futures prices in different months rather than the overall price level of crude oil) positions increased more than six-fold. Since 2004, both the long and short positions of noncommercial traders increased. Over that time period, the positions of non-commercial traders have been net long and have also increased. Speculation definitely had a part in oil rally, a big one!: Numerous debates were made during 2008 whether speculative element was involved in oil price rally. The report of U.S. Commodity Futures Trading Commission (CFTC) in June 2008 concluded that there was fundamental reason for oil price rise and there was little evidence of speculation. By 2009, the landscape had totally changed. The number of speculative spread position (in number of contracts) fell by 40% by June 2009, and the dollar value of the position fell by more than 65%. It took oil (Arab Light Crude) more than three and a half years to propel from $32.7/barrel in Dec 2004 to touch its peak of $143.1/barrel in July 2008. However, it took less than half a year for oil to free-fall back to $32.7/barrel mark, elucidating at least two key points, a) the concerns for peak oil and incremental supply challenges were overplayed, and, b) leverage products and reckless credit exacerbated several folds the impact of speculation on oil prices. Oil prices have bounced back to $70/barrel in another half year (from Dec 2008 to June 2009). Such volatile price movement is typical of an excessively leveraged market, where gains are sharp and losses are even sharper and higher than that justified by fundamentals, due to forced selling. The new chairman of CFTC, Gary Gensler, holds the same view, even though it may be driven by Obama administration mentality of coming down hard on Wall Street. The today’s talk is that the June 2008 CFTC report was flawed, and proposals of strict position limits on members are under heavy debate. In case the regulations are made stricter, the international market would definitely see more stable oil prices, if not lower oil prices.

Demand and supply: The price cap and floor determinants In our opinion, the simple rule of demand-supply is what determines the oil price cap and floor, as is evident by the peak and bottom set touched by oil prices during last year. As oil price peaked at $147/barrel during July 08, oil suppliers were happy to make supply increments as they were making unprecedented profits (and occasional statements from oil exporting nations that oil can touch $250 added an amusement angle to all the turmoil). The dip in demand certainly shattered $250/barrel dreams, as oil from that point began its sharpest free fall in history. Demand to fall for first time since 1993, recovery ahead: As per International Energy Agency, the global oil demand in 2010 is expected to rebound by +1.7% or +1.4 mb/d year‐on‐year to 85.2 mb/d, largely led by non‐OECD countries. The outlook for global oil demand in 2009 remains effectively unchanged (‐2.9% or ‐2.5 mb/d versus 2008), given much weaker‐than‐anticipated preliminary data in the OECD. The decline in crude demand will be for the first time in 15 years, as the last demand decline was witnessed in 1993. Starting from 1950s, the 2009 expected demand decline of 2.4mn bpd is the sharpest (in absolute terms) since 1980 demand drop of 2.5mn bpd. Fig 31 Global oil demand by region Global oil demand by region

CAGR

m.BPD

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009e

2010e

00-08

07-10

Africa Americas Asia/Pacific Europe FSU Middle East

2.5 28.9 20.9 15.8 3.8 4.9

2.5 28.8 21 16.1 3.8 5.1

2.6 28.9 21.5 16 3.8 5.2

2.7 29.2 22.3 16.2 3.9 5.3

2.8 30.4 23.6 16.2 3.9 5.7

2.9 30.7 24.1 16.4 3.9 6

3.0 30.7 24.7 16.4 4.1 6.2

3.1 31.1 25.1 16.1 4.1 6.5

3.2 30.1 25.6 16 4.2 7.1

3.2 28.9 25.1 15.4 4 7.2

3.3 29.3 25.5 15.3 4.1 7.6

3.1% 0.5% 2.6% 0.2% 1.3% 4.7%

1.6% -1.3% -0.2% -2.2% -1.2% 3.5%

World Total YoY Growth

76.8 1.1%

77.3 0.7%

78.0 0.9%

79.6 2.1%

82.6 3.8%

84.0 1.7%

85.1 1.3%

86.0 1.1%

86.2 0.2%

83.8 -2.8%

85.1 1.6%

1.5%

-0.6%

0.80

0.50

0.70

1.60

3.00

1.40

1.10

0.90

0.20

(2.4)

1.30

∆ (m.BPD)

Source: IEA, FSL Research, Sep09

21

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

The expectation and subsequent materialization of demand dip in oil certainly played a key role in destroying oil prices. However, as the oil prices fell below $40/barrel, supply concerns took the driving seat. At such low oil prices, oil exploration companies did not find it viable to invest in high cost high risk projects to boost oil supply Fig 32 Global oil supply by region Global oil Supply m.BPD Africa Americas

2000

2001

2002

2003

2004

2005

2006

2007

2008

1Q09

2Q09

2009e

2010e

2.8

2.8

3.0

3.0

3.4

3.7

3.9

2.5

2.5

2.5

2.5

2.5

2.5

18.0

18.2

18.4

18.6

18.7

18.4

18.6

18.5

18.0

18.5

18.2

18.4

18.7

Asia/Pacific

6.4

6.5

6.7

6.7

6.8

6.9

7.0

7.0

8.1

8.1

8.1

8.1

8.4

Europe

7.0

6.9

6.8

6.5

6.3

5.8

5.3

5.1

4.9

5.0

4.5

4.5

4.2

FSU

8.0

8.6

9.5

10.4

11.4

11.8

12.2

12.8

12.8

12.8

13.1

13.0

13.2

Middle East

2.1

2.1

2.1

2.0

1.9

1.8

1.7

1.7

1.6

1.6

1.6

1.6

1.6

Processing gains/bio fuels

1.8

1.8

1.8

2.0

2.0

2.1

2.3

2.4

2.6

2.6

2.6

2.6

2.6

Non-OPEC total

46.1

46.9

48.3

49.2

50.5

50.5

51.0

50.0

50.5

51.1

50.6

50.7

51.2

OPEC crude

27.8

27.2

25.4

27.1

28.9

29.7

29.7

30.7

31.2

28.5

28.5

28.5

29.0

OPEC NGLs

3.2

3.3

3.5

3.7

4.2

4.5

4.6

4.8

4.7

4.9

5.1

5.1

5.1

OPEC Total

31.0

30.5

28.9

30.8

33.1

34.2

34.3

35.5

35.9

33.4

33.6

33.6

34.1

World Total YoY Growth

77.1 3.5%

77.4 0.4%

77.2 -0.3%

80.0 3.6%

83.6 4.5%

84.7 1.3%

85.3 0.7%

85.5 0.2%

86.4 1.1%

84.5 -2.2%

84.2 -0.4%

84.3 0.1%

85.3 1.2%

2.6 40.2% 59.8%

0.30 39.4% 60.6%

(0.20) 37.4% 62.6%

2.80 38.5% 61.5%

3.60 39.6% 60.4%

1.10 40.4% 59.6%

0.60 40.2% 59.8%

0.20 41.5% 58.5%

0.90 41.6% 58.4%

(1.90) 39.5% 60.5%

(0.30) 39.9% 60.1%

0.10 39.9% 60.1%

1.00 40.0% 60.0%

∆ (m.BPD) OPEC-Composition Non OPEC composition

Source: IEA, FSL Research, Sep09

Enough capacity to spare: At the time the oil prices were peaking, a very frequent argument to justify the inflated oil prices was the falling spare capacity. The spare capacity indeed fell by nearly 50% from 4mn bpd in Jan-07 to 2.3mn bpd in Jul-08 (the month where oil prices peaked). In our opinion, had spare capacity played any significant role in determination of oil prices, oil prices would have kept on increasing after July-08 when the spare capacity was lowest. However, oil prices experienced their sharpest free fall from July-08. It is actually the oil prices that are determining supply, rather than supply dictating oil prices. OPEC is willing to cash on its spare capacity during high oil prices, and cuts its production during low oil prices to provide cushion to the prices. From Jan-07 to Jun-09, OPEC spare capacity and crude price (Arab Light) had correlation of -0.78. If we take correlation for Jan-07 to Dec-08 (month where oil prices bottomed out), it comes to -0.93. Fig 33 Spare capacity vis-à-vis oil prices $/bbl 140

OPEC spare capacity

Oil price(Arab Light)

120

6.0

100

5.0

80

4.0

60

3.0

40

2.0

20

1.0 -

Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09

0

Source: CFTC, FSL Research, Sep09

22

M.bpd 7.0

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Relatively lower correlation for Jan-07 to Jun-09 (-0.78) as against Jan-07 to Dec-08 (-0.93) is due to the fact that oil prices started improving from Jan-09 yet the spare capacity kept increasing, as 1) OPEC kept making production cuts to ensure oil prices of $60+, 2) demand recovery expectations and fear of substantial cut in oil capacity enhancement projects also drove the prices north. Oil price cap = $100-110/bbl, floor = $30-40/bbl: We feel that oil supply and demand have determined the floor of $30-40/barrel and a cap of $100-110 for oil prices. Below the floor price of $30-40/barrel, incremental supply projects seem unviable and the available supply is curtailed to a large extent. The oil consumers, on the other hand, are happy to import and book in future huge quantities of oil due to benefits of lower inflation and favorable impact on Balance of Payments position. Above the cap price of $100-110/barrel, riskiest and most costly supply addition projects become viable, and more supply enters the market as suppliers attempt to profit from high prices. On the other hand, several nations end up facing rampant inflation and twin deficit crisis at such prices, restricting demand growth.However, as we have mentioned before, return of excessive and reckless credit coupled with increased speculative positions in oil derivatives can temporarily boost oil above the cap, or pull it below the floor. Curbs on speculation will certainly benefit global consumers in form of more stable prices, if not lower oil prices. Oil price assumptions revised: Considering expectation of demand recovery in 2010, coupled with recent stability in demand decline, we are revising our oil price forecast. Fig 34 Revised oil price assumptions FY07

FY08

FY09

FY10E

FY11E

FY12E

LT

New oil price (US$/bbl)

61.58

92.09

63.21

60.00

65.00

75.00

75.00

Old oil price Change - %

61.58

92.09

63.21

50.00 20%

60.00 8%

70.00 7%

75.00 0%

Source: Company Data, FSL Research, Sep09

High oil prices = High E&P earnings ≠ High E&P stock prices Earnings of Pakistan E&P sector have direct positive correlation with oil prices, with high oil prices resulting in high E&P earnings. The recent increase in oil prices will also benefit the sector – though its impact will vary from company to company based on production mix and pricing structure, which is more favorable for POL and OGDC. PPL has 95% gas production thus it benefits relatively less from oil increase, though most of PPL’s gas fields have no caps on oil prices so it does not completely lose out on the benefit. Earnings sensitivity to oil prices: It is not unlikely that oil prices end up very different than our assumptions. We have provided a earnings sensitivity to changes in oil prices. As per our analysis, the earnings of Pakistan E&P sector will increase by 8.9% in case oil prices end up at $70/barrel for FY10, $10 above our assumption. Earnings of PPL, POL and OGDC will increase by 10.1%, 5.9%, and 10.4% respectively Fig 35 Earnings sensitivity of Pakistan E&P companies to oil prices Oil OGDC PPL POL

$50.0 11.01 27.44 24.03

FY10 $60.0 12.27 29.24 26.81

$70.0 13.52 30.96 29.59

$55.0 12.12 33.62 30.29

FY11 $65.0 13.36 35.70 33.42

$75.0 14.98 37.69 36.56

Source: FSL Research, Sep09

Extremely high oil prices –ve for Pakistan E&Ps stock prices: Reasonably high oil prices will benefit Pakistan E&P companies in form of higher earnings and resultant higher share prices. Oil and gas prices in Pakistan are determined in dollar terms, thus E&P sector also provide hedge against PKR depreciation. Since higher oil prices would also result in PKR depreciation, Pakistan E&P firms get dual earnings benefit of oil price increase. However, beyond a certain level ($90/barrel in our opinion), oil prices will actually result in lower E&P stock prices. If oil prices cross $90/barrel, we feel that macroeconomic concerns regarding the twin deficits, balance of payment, and unexpectedly high rate of inflation and PKR depreciation will take the driving seat. This is exactly what happened in the recent oil run price

23

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

run up. E&P scrips failure to positively respond to rising oil prices was on back of macroeconomic concerns. The global financial and banking system crisis had no direct linkage with Pakistan’s economy and its impact was only restricted to indirect component (e.g. slowdown in exports and FPIs owing to recession in EU and U.S). The primary concern for Pakistan was exorbitant commodity prices, particularly oil, which had put tremendous strain on BoP and fiscal positions and had led to significant rise in inflation. Fig 36 Pakistan E&Ps market performance vis-à-vis oil prices $/bbl 150.0

oil prices

E&P sector performance

120 110

135.0

100

120.0

90

105.0

80 90.0 70 75.0 60.0

visible disconnect at extremely high prices as macroeconomic concerns take precedence

60 50

45.0

40

30.0

30

Source: Reuters, FSL Research , Sep09

The correlation between E&P sector price performance and oil prices comes out to 0.7x for the oil price range of below $100/barrel, whereas for oil price range of above $100/barrel, the correlation comes to –0.1. Though the period under study is too small to propose an absolute relation between levels of oil prices and E&P sector performance, there is still a compelling economic rationale behind this relation. The –ve correlation during high oil price period is owing to broad based selling in the market, not E&P sector specific selling. However, even the relative performance of E&P sector is no better than the market, implying that investors completely discount any gains in earnings due to high macroeconomic risks faced by the country during periods of extremely high oil prices. With Pakistan greatly dependent on oil imports (80% of oil is imported) to meet its energy needs, local economy is extremely sensitive to global oil prices. In fact, acute macroeconomic stresses faced by the country in FY08 and early FY09 were, to a large extent, brought about by superspike in international oil prices. Driven by substantial increase in goods and services deficit, country’s current account deficit widened to US$14.0bn or 8.4% of GDP in FY08. Excessive subsidies caused fiscal deficit to balloon to 7.4% of GDP Further, after delayed pass on of global commodity prices to domestic consumers, consumer price inflation increased to 25.0% in 1HFY09. For FY10, we expect current account deficit at US$7.6bn or 4.3% of GDP with crude oil prices expected to hover around US$60/barrel. Assuming everything else remains constant, every US$10 increase in oil prices would increase current account deficit by US$1.2bn. International oil prices, through direct and direct channels, are also an important determinant of the inflationary trend in Pakistan. According to one study, US$5 increase in oil prices would cause 1.45% increase in headline inflation (holding all other things constant).

24

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Oil & Gas Dev. Company

PAKISTAN

07 September 2009 OGDC PA

Neutral

Stock price as of 04 Sep June 10 target Upside/downside Valuation

Rs Rs % Rs

115.0 108.3 (5.8) 108.3

- Reserve based DCF

Oil and gas exploration Market cap 30-day avg turnover Market cap Number shares on issue

Rs bn US$m US$m m

494.6 14.2 6,032 4,301

2008A

2009E

2010E

2011E

Total revenue

m 125,848

EBIT

m

EBIT Growth

%

28.6

3.5

Recurring profit

m

44,338

55,540

51,600

57,716

Reported profit

m

44,338

55,540

51,600

57,716

Rs

10.31

12.91

12.00

13.42

EPS rep

83,232

EPS rep growth % EPS rec

Rs

130,794

134,478

153,514

86,113

76,101

85,032

(2.8) 10.31

(11.6)

25.3

(7.1)

12.91

12.00

11.7

11.9 13.42

EPS rec growth %

(2.8)

25.3

(7.1)

11.9

PE rep

x

11.2

8.9

9.6

8.6

PE rec

x

11.2

8.9

9.6

8.6

Total DPS

Rs

9.50

8.25

9.00

9.00

Total div yield

%

8.3

7.2

7.8

7.8

ROA

%

29.1

31.2

26.6

25.5

ROE

%

40.16

44.02

37.52

37.12

x

5.5

5.3

5.8

5.2

%

-0.17

-0.07

-0.06

0.02

x

4.5

3.9

3.6

3.2

EV/EBITDA Net debt/equity Price/book

OGDC PA rel KSE100 performance KSE-100

120

Event  OGDC is currently trading at FY10 PE, EV/DACF, and EV/EBITDA multiples of 9.6x, 5.8x and 5.8s respectively, which translates to a premium of 10-17% over the sector. At current levels, the value of developed and developing assets of the company is fully incorporated in its price. However, company’s massive exploration program can add potential upside, which is seconded by company’s recent success in Kohat plateau.

Impact

Investment fundamentals Year end 30 Jun

Fairly priced – exploration success to drive value

 Successful project delivery will be the core value driver: OGDCL’s track record of project delivery over the past 4-5 years has been poor because of several barriers, most of which pertain to legal and supply issues. Several key projects such as Qadirpur, Kunnar and Pasakhi deep, Tando Yar, and Sinjhoro which are expected to add a total of 425mmcfd gas and 7500bpd oil are pending in courts. Nearly all of its projects under development have been delayed, with the average delay being 36 months. Delays on new projects will ultimately impact near term production performance, revenues and earnings. Failure of early resolution of pending litigations will erode the company value and investor trust.

 Dividend cuts, leveraging must for capex targets: OGDCL intends to spend $750mn for FY10 for exploration and development purposes. We feel this target is not achievable unless significant dividend cuts are made and debt financing is utilized. We have incorporated a capex plan of $2.5bn over the next five years and to fund this capex, we have reduced our expected payout ratio to 75% for FY10 and 70% from FY11 onwards. We also expect that OGDC will require debt financing from FY11 onwards. Thus we incorporate PKR6bn debt financing in FY11 and PKR10bn debt financing in FY12.

Earnings Revision  We are raising our FY11 earnings estimates for OGDC, which reflects the production from new discovery, Nashpa.

Price catalyst

OGDC

 Jun-10 price target: Rs108.3 based on Reserve Based DCF methodology.

100

 Catalyst: Resolution of Qadirpur pricing issue and resolution of circular debt

80

coupled with materialization of production enhancement plans.

60 40

Action and recommendation Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

20

Source: Bloomberg, Foundation Research, Sep 2009 (all figures in PKR unless noted)

Analyst Asim wahab Khan 92 21 5612290-94 Ext 335

25

[email protected]

 Revising our target price from Rs105.3 to Rs108.3: Increase in our June-10 target price reflects the impact of Nashpa discovery.

 Expensive relative to other E&Ps: OGDC’s attractiveness relative to other E&Ps has certainly reduced owing to its recent outperformance. Significant drop in payout ratio may lead the stock to underperform its peers, as most of the local investor base prefers OGDC owing to its attractive yield. The scrip, however, is amongst the primary investment options for foreign investors owing to familiarity, high float, and liquidity which may lead to its continued out performance.

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fairly priced – exploration success to drive value Owing to recent upsurge in stock price of OGDC, we feel that the company is adequately priced on risk-return framework. The recent upsurge has primarily been driven by massive foreign interest in the scrip. OGDC is currently trading at FY10 PE, EV/DACF, and EV/EBITDA multiples 9.6x, 5.8x and 5.8x respectively, which translates to a premium of 10-17% over the sector. At current levels, the value of developed and developing assets of the company is fully incorporated in its price. Though we have not incorporated any exploration value in our valuation for OGDC, it is a common practice to include exploration upside as E&P companies are expected to make continued expenditures in order to maintain their reserves. Several factors need to be considered in determining exploration value of a company such as its exploration acreage, potential of the exploration acreage, drilling and seismic targets, historical success rate, exposure to high potential areas, and expected composition of hydrocarbons in case of discovery. However, owing to significant subjectivity involved in the process, we have not included exploration value in our target price for OGDC, or any other Pakistani E&P firm. Fig 37 Break up of OGDC’s value PKR 150.0 130.0

11.8 120.2

110.0 22.1

108.3

90.0 86.2 70.0 50.0 30.0 10.0 (10.0)

Developed assets Developing assets

Target price

Exploration upside Target price with exploration upside

Source: FSL Research, Sep09

Further delays in expansion projects a key risk OGDCL’s track record of project delivery over the past 4-5 years has been poor because of several barriers, most of which pertain to legal and supply issues. Several key projects such as Qadirpur, Kunnar and Pasakhi deep, Tando Yar, and Sinjhoro which are expected to add a total of 425mmcfd gas and 7500bpd oil are pending in courts. Nearly all of its projects under development have been delayed, with the average delay being 24-36 months. Delays on new projects will ultimately impact near term production performance, revenues and earnings. Failure of early resolution of pending litigations will erode the company value and investor trust. We have provided a discussion on company’s key fields and development projects below. Qadirpur: Qadirpur gas field is OGDC’s largest producing gas field, and country’s second largest gas field in terms of production. The field currently produces 550mmcfd gas which is around 41% of company’s gas production. Oil contribution from the field is nominal at 1.8% of total oil production. The field is located 80 km northeast of Sukkur Town and is a joint venture among OGDCL, PKP Exploration Ltd, KUFPEC and PPL (holding 75.0%, 9.5%, 8.5% and 7.0%, respectively). Initial discovery at this field was made in 1990. The field was developed in three phases, starting

production in 1995 at the initial capacity of 235mmcfd, before increasing to 400mmcfd and then to 500mmcfd. Raw gas of 50 MMcf per day is provided to SNGPL which takes the total output to 550mmcfd gas. The management expects Qadirpur field to start depleting in near future and in order to maintain the plateau, compression facilities are required to be installed which will help

26

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

maintain the production plateau to 650mmcfd of gas supply up to 2013. The company is installing compression facilities to increase pressure to 880 psig (pounds-force per square inch gauge) and deliver this pressure to an existing gas processing plant, as well as the extension of header and gas gathering systems. The Contract for Engineering, Procurement & Construction on lump sum turnkey basis was awarded to M/s China Petroleum Engineering & Construction Corporation (CPECC) in November 2006. The activities were held up due to litigation however, an alternate arrangement (Reciprocating Compressors) for a period of 3 years is being worked out. The Reciprocating Compressors are expected to start work by May 2010. The original completion date of the project was targeted for Feb 2008, which indicates a delay of nearly 25 months. The reciprocating compressors will cost $44mn to the company whereas the front end compression system targeted for 2013 will cost $150mn. Uch: Uch is OGDC’s and country’s largest gas field in terms of remaining gas eserves, which stand at 4.3tcf. The current production from field is around 200mmcfd gas, which is 19% of company’s gas production. The field is located about 67 km southeast of Dera Bugti in Balochistan province and is 100% owned by OGDC. It was discovered in 1955 by Pakistan Petroleum. However, it was abandoned because of its low BTU content. OGDC reactivated the Uch gas field in the 1980s. The field currently supplies gas to Uch Power via a 47 km pipeline. After carrying out detailed study of UCH gas field, UCH-II development project was undertaken by the Company. After the completion of the project, the sale of gas from UCH gas field will be enhanced from 250 MMcfd to 410 MMcfd. Basic Engineering and tender documents to engage Engineering, Procurement, Construction and Commissioning (EPCC) Contractor has been completed and Gas Sale Agreement (GSA) is being negotiated between OGDCL and UPL. Bidding process in connection with hiring of EPCC Contractor is in process. Locations for six wells have been marked on ground and drilling at Well No. 21 is in progress. This project was initially targeted for June 2008, though the revised date is now Dec 2011 as indicated by PPIB, which translates to a delay of 42 months. The project is expected to cost $210mn. Kunnar-Pasakhi-Tando Allah Yar: The Kunnar & Pasakhi Deep (KPD) fields are Hyderabad District about 25 Kms away from Hyderabad city in Sindh Province. The two fields are 100% owned by OGDC. The Tando Allah Yar (TAY) field is located in the Tando Allah Yar Hyderabad District, Sindh Province, and is an operated joint venture between OGDCL (77.5%) and GHPL (22.5%). OGDC intends to undertake KPD-TAY Integrated Development Project with objective to install a Gas Processing Facility to process raw gas from KPD and TAY gas / condensate fields to supply processed sale gas to SSGC.The expected production will be 278 MMcfd of gas, 4,700 bopd and 361 M.Tons/day of LPG. The TAY development project was targeted for Jan 2007, whereas KPD was targeted for 2010. These projects are under litigation and their development will require 24 months after resolution of litigation. Thus we expect the projects to be completed by 2011. The cost of project will be $250mn.

27

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 38 OGDC expansion projects summary Projects

Location

Qadirpur Front end compression Alternate reciprocators Relocation of Pirkoh compressors

Ghotki, Sindh

Initial date

Expected date

Delay

Expected cost

Expected production

Jun-09

CY13

48 months

$150mn

May-09

May-10

12 months

$45mn

To maintain plateau of gas production to 650mmcfd

Jun-08

Dec-11

42 months

$210mn

Gas: 160mmcfd

48months +

$250mn

Oil: 4300bpd, Gas:278mmcfd, LPG: 361M. Tons/day, NGL: 400bpd

Uch-2 Development Project

Dera Bugti, Balochistan

KPD-TAY Integrated Project

Hyderabad, Sindh

Jan-07

Under litigation (24 months upon settlement

Attock, Punjab

Mar-07

Aug-10

41 months

$30mn

Oil: 720bpd, Gas:12mmcfd, LPG: 12M. Ton/day, Sulphur: 80M.Tons/day

Sanghar, Sindh

Jan-07

Under litigation (24 months upon settlement

48months +

$120mn

Oil: 2100bpd, Gas: 31mmcfd, LPG: 138MTD

Invitation to Bid in progress

NA

NA

$25mn

Gas:15mmcfd

Sep-10

Sep-10

NA

NA

Dakhni Expansion Project

Sinjhoro Development Project

Jhal Magsi Development Project

Nashpa Development Project*

Dera Murad Jamali, Balochistan Kohat, NWFP

Oil: 3500bpd, Gas: 12mmcfd

*Based upon discussion with management, numbers and dates subject to change Source: OGDC, Annual reports, MPNR, FSL Research, Sep09

Heavy capex plan to result in reduced payout, fresh borrowing OGDCL has an excellent history of investments in exploration assets. The company holds largest exploration acreage in Pakistan, covering 28% of the total acreage awarded. The company has stake in 71 fields, 41 of these being 100% Owned & Operated by OGDC. As of June 30, 2009 OGDCL operated in 35 Exploration Blocks (22 blocks with 100% share and 13 blocks as operated JVs) including 4 Offshore Blocks, covering an area of 68,310.92 Sq. Kms. On the operational front, Company was able to complete 5,129 L. Kms of 2-D and 1,128 Sq. Kms of 3-D Seismic Survey in the various exploration blocks and spudded 14 new exploratory and 16 new appraisal and development wells $750mn capex for 2009 – an overstretched target: OGDC’s planned Capex for FY10 is approx. USD 750 million and this includes spending on exploratory efforts (less seismic survey), projects, development spending and contingencies. Company’s FY10 business plan involves acquisition of around 4,313 L.kms 2-D seismic and 968 Sq k.m of 3-D seismic, and drilling of 51 well out of which 32 will be exploratory and appraisal wells and 19 will be development wells. This includes 9 wells in security dependent areas and 11 contingent wells (whose drilling depends upon results of seismic interpretation

28

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 39 OGDC FY10 key targets Activities Seismc Acquisition 2-D L.Kms 3-D Sq.Kms Planned Wells* Exploratory/ Appraisal Wells Development Wells Total Discoveries Reserve addition (mmboe) Average discovery size (mmboe) Production Oil (bopd) Gas (mmcfd)

OGDC Targets

FSL estimates

4313 968

4313 968

32 19 51 7 98 14

14 17 31 5 70 14

39,700

39,500

1,000

1,025

* 9 security and 11 contingency wells Source: MPNR, OGDC, FSL Research,Sep09

In our opinion, company will not be able to meet its drilling targets, as this has been the case in recent past. In previous three years, the company has been unable to meet its drilling targets. For this year also, we expect the company to drill 32 wells and thus do not foresee a capex of USD750mn materializing. As per our estimates, the company is likely to spend USD425mn for capex, and from FY10-FY14, we expect OGDC to spend a cumulative amount of USD2,500mn for exploration and development. The development expenditure, which is contingent upon materialization of the above mentioned projects, will be around USD930mn. Fig 40 Expected capex program of OGDC USD mn $ 600

Cumulative capex: USD2,500mn

$ 500

$ 400

$ 300

$ 200

$ 100

$FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: FSL Research, OGDC accounts, Sep09

Dividend cuts and borrowing on the cards: Our read of company’s balance sheet position is that it would not be possible for OGDC to maintain the above mentioned capex program of USD2,500mn in next five years (which is 62.5% of company’s envisaged capex of USD4,000mn for the same period) unless company goes for borrowing and slashes its dividend payout. In FY09, company’s dividend payout dropped to 63% (as against 85% historical payout ratio) owing to circular debt problem. As we expect circular debt issue to be resolved in this year, company will easily meet our estimated capex target of USD425mn, increase its payout to 75%-80%, and maintain adequate cash balances for the year. From FY11 onwards, we expect the payout to drop to 70% owing to increased exploration and development expenses. We also expect the company to go for debt borrowing to the tune of PKR6,000mn, which will increase to PKR10,000mn for the next year

29

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 41 OGDC’s payout and debt estimates PKR bn 12,000

100% 95%

10,000

90% 85%

8,000

80% 6,000

75% 70%

4,000

65% 60%

2,000

55% -

50% FY04

FY05

FY06

FY07

FY08

FY09

Interest bearing debt Source: FSL Research, OGDC accounts, Sep09

FY10

FY11

FY12

Payout ratio

Trade debts going north, cash going south! Company’s cash has been eroding fast since FY05 owing to the mounting circular debt in the energy chain. As of FY09 accounts, company had cash of only PKR9bn (PKR2.1/share) as against trade debts of PKR56bn (PKR13/share). This is in sharp contrast cash balance of nearly PKR40bn and trade debts of PKR20bn during FY05. Till now, company has been able to make ends meet by withholding dividend payments of the government, which are eventually settled off against receivables. The circular debt issue has also forced the company to slash its dividend payout ratio from 85% historical average to 64%, a drop of 21%. Fig 42 OGDC’s cash eroding fast owing to rising trade debts PKR bn 70

60 50 40 30 20 10

Trade debts Source: OGDC accounts, FSL Research, Sep09

May-09

Jan-09

Mar-09

Nov-08

Jul-08

Sep-08

May-08

Jan-08

Mar-08

Nov-07

Jul-07

Sep-07

May-07

Jan-07

Mar-07

Nov-06

Jul-06

Sep-06

May-06

Jan-06

Mar-06

Nov-05

Jul-05

Sep-05

May-05

Jan-05

Mar-05

Sep-04

Nov-04

-

Cash and investments

The government has promised to clear the circular debt before end of this month, and we expect the resolution to come within next 10-15 days in form of a TFC issue of PKR90bn with likely interest rate of Kibor + 2% which will be borne by the government. The government has already issued a TFC of PKR80bn at interest rate of Kibor + 1.75% to address the circular debt problem. However, the PKR80bn TFC did not benefit OGDC as the cash was consumed in the energy chain by OMCs and IPPs before it could reach the last recipients in line, the E&P companies.

30

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 43 Circular debt chain- amounts in PKR bn

39

24

IPPs 77 49

112

15 78 27

Private

44

Refineries 2 2

PDC Source: PSO, FSL Research, Sep09

As of August 11, 2009, the core circular debt amounted to PKR233bn, whereas total circular debt amounted to PKR469bn. A TFC issue of PKR90bn would reduce the core circular debt to PKR143bn whereas the total circular debt will be reduced to PKR289bn. The worrisome fact for OGDC is that if the new TFC issue is dealt with in the same way as previous TFC issue, OGDC is unlikely to get any benefit, as this time also the cash will be consumed before it reaches kitty of the company. The management indicates that this will not be the case as government has promised that all parties will be left with some cash this time. Though this will partially and temporarily solve the problem, government needs to develop a strategy to reduce T&D losses and eliminate subsidy on power, so as to solve this crisis once and for all.

OGDC going global There are two aspects of OGDC’s globalization; first the company is actively involved in exploring possible overseas joint ventures. OGDC visited data room for evaluation of ENI offered Yemen Blocks 06 & 17 for farm-in. In addition, Company also evaluated prospectivity of the ENI offered West Timor Indonesia Block and Vietnam Offshore Block of Premier Oil for farm in. The company also evaluated Louga Block of Senegal offered by M/s. Blackstairs Energy. Presently, OGDC is evaluating an oil field (heavy oil) in Sakhlin Island, Russia. The second aspect is that it has become the ‘apple of the eye’ for foreign investors, in terms of investment options in Pakistan. The foreign investors suffer with the ‘familiarity bias’ when it comes to OGDC. Foreign investors are more comfortable in investing with a company whose management they have met in road shows, which is listed on London Stock Exchange, holds conference calls, has an investor relations department available to transmit information, and has a higher degree of disclosures. Moreover, the company is also the index heavy weight, with largest market capitalization of over $6bn, which makes the company a must investment for index

31

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

tracker funds, and a favored investment for other investment institutions such as hedge funds. This is evident in the recent rally witnessed in OGDC, which has purely been driven by foreign investors

The upside triggers – Kohat plateau, exploration success, and Qadirpur price resolution Kohat plateau: Since the discovery of Chanda in 1999 by OGDC, Kohat plateau has become a discovery galore. The region boasts an astonishing 70% success rate post the discovery of Chanda. Success rate in NWFP province, prior to Chanda was 0%. 10 wells have thus far been drilled out of which 7 wells have been hydrocarbon producers. 4 discoveries have been made in Tal block, 2 in Nashpa, and 1 in Chanda. The recent discovery by OGDC at Nashpa confirms the potential of the region. OGDCL has stake in all the seven discoveries in the Kohat Plateau. The company plans to drill an appraisal well, Nashpa-02 and another exploratory well in the Nashpa concession during current fiscal year. Positive news flow from the Kohat plateau can trigger target price upgrades for the company. Exploration success: Though we do not consider OGDC an attractive investment option, we do love it for its exploration vigor. As mentioned in the beginning of our discussion on OGDC, we have not incorporated any exploration upside in our valuation for Pakistan E&Ps. However, all companies, especially OGDC, are expected to make significant investments in exploratory drilling in coming years, so we now mention our estimates for the exploration value of OGDC. Fig 44 Exploration value for OGDC comes to PKR11.8/share

PV of exploratory capex/share Total PV of exploratory capex/share Exploratory wells Success rate Discoveries

FY10

FY11

FY12

FY13

FY14

(3.5)

(3.9)

(3.4)

(2.9)

(2.5)

14 30% 4

16 25% 4

16 25% 4

16 25% 4

16 25% 4

14.0

13.3

12.6

12.0

11.4

56

53

51

48

46

3

3

3

3

3

(16.2)

Average discovery size (mmboe) Reserve addition (mmboe) EV/boe (USD) - new discoveries Exchange rate Value of discoveries (PKR bn) Discount rate

84

89

92

96

99

14,189 19%

14,150 19%

13,980 19%

13,812 19%

13,515 19%

Time line PV of Discoveries Total PV of discoveries

-

1

2

3

4

14,189

11,891

9,872

8,196

6,740

50,888

Exploration value

11.8

NPV of exploration program

(4.4)

Developed and developing value

108.17

TP with exploration upside

120.00

Source: FSL Research, Sep09

We estimate OGDC’s exploration upside to be PKR11.8/share. The present value of capex for exploration comes to PKR16.2/share. Thus the actual NPV of exploration is negative which is intentional on our part as we want to remain conservative on the exploration option value. We have assumed USD3/boe for valuation of reserves, which is very conservative for new discoveries which will offer significantly better pricing on crude and gas Qadirpur pricing issue – lingering on: The gas sales agreement of Qadirpur gas field entailed a step discount mechanism which was specified only up to HSFO price of $200/ton , but failed to specify pricing terms when the HSFO price went above US$200/mt. Since July 2005, monthly average HSFO prices have crossed $200/ton and to date have not fallen below that level. The DGPC allowed the gas prices to increase in 2HCY05 and 1HCY06 with only 45% discount. However, starting in 2H CY06 the DGPC decided that a high set of discounts should be applied above US$200/mt and released provisional discount schedule applying a maximum 64.5% discount. From 2HCY07, the provisional discount table was made ineffective and prices were frozen at PKR161.02, which remains applicable to date.

32

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Recently, the petroleum ministry and stake holders of Qadirpur gas field have agreed upon a price, which in our opinion can range between $3.11/mmbtu to $3.19/mmbtu, based on our discussion in the industry

Fig 45 FSL expectation of Qadirpur pricing schedule HSFO- Floor

HSFO-cap

0

80

Average price

Discount

Max gas price (based on average)

Max gas price (based on cap)

70

0.0%

1.72

1.96

80

100

90

15.0%

1.87

2.08

100.01

120

110

20.0%

2.16

2.35

120.01

140

130

28.0%

2.29

2.47

140.01

160

150

34.0%

2.43

2.59

160.01

180

170

40.0%

2.50

2.65

180.01

200

190

45.0%

2.56

2.70

200.01

220

210

49.8%

2.59

2.71

220.01

240

230

54.0%

2.59

2.71

240.01

260

250

57.5%

2.60

2.71

260.01

280

270

60.5%

2.61

2.71

280.01

300

290

62.5%

2.66

2.76

300.01

320

310

64.5%

2.70

2.78

320.01

340

330

65.5%

2.79

2.87

340.01

360

350

66.5%

2.87

2.96

360.01

380

370

67.0%

2.99

3.07

380.01

400

390

67.5%

3.11

3.19

Source: FSL estimates based on discussion in the industry, Sep09

For now we have incorporated price of PKR213/mmbtu for FY10 (incorporating only exchange gain) and increased it with PKR depreciation going forward. If the gas price is revised to $3.09/mmbtu, our earnings forecast for OGDC will increase by PKR0.8/share to PKR12.8/share. However, if there is no change in gas Qadirpur gas price from current level, we will revise down our earnings forecast to PKR11.1/share for FY10

33

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Valuation: Target PKR108.3 We value OGDC at PKR108.3/share based on Reserve Based DCF valuation model. Though we have used six other valuation techniques such as market based PER, justified leading PE, target EV/EBITDA, dividend discount model, free cash flow to equity, and Economic Value added (EVA™) to value OGDC, we prefer Reserve Based DCF as it eliminates several weaknesses in other valuation techniques and properly assigns value according to company’s reserve life and future production profile. The technique involves forecasting of company’s complete production profile till the exhaustion of reserves, and translating the production in cash flows. Net debt and deferred tax liabilities (assuming that deferred tax benefit is temporary) are adjusted separately. We have not incorporated any exploration upside in order to reduce subjectivity and favor conservatism. Market Based PER target PKR108.1/share: Based on Market Based PER, value of OGDC comes to PKR108.1/share. We have valued the company on both FY10 earnings and 3-year average earnings, and taken average of the two to determine company’s Market Based PER value. Market PE and sector PE are taken as same (no premium has been assigned to E&P sector) at 8x, which is the approx. current PE of KSE-100. Since the method ignores importance of an E&P companies’ reserves, cash generation capacity, and assigns value only to short-term earnings potential of the firm, we do not prefer this technique. Justified leading PE target PKR90.8/share: Based on Justified leading PE, value of OGDC comes to PKR90.8/share. We have assigned a 5% premium to company’s sustainable ROE, as higher payout and lower retention will allow company to sustain higher equity return compared to is peers. OGDC’s average ROE for next three years will be 37%. Since the method ignores importance of an E&P companies’ reserves, cash generation capacity, and has certain degree of subjectivity involved in assumption of sustainable ROE, we do not prefer this technique. However, we have reduced subjectivity by keeping the sustainable ROE figure 5% below the average projected ROE in coming three years. EV/EBITDA multiple target PKR96.4/share: Based on EV/EBITDA multiple, value of OGDC comes to PKR96.4/share. Considering that OGDC has the most balanced production profile (owing to nearly equal share of oil and gas in revenues), we have taken the company’s EBITDA/boe as the benchmark for assigning premium or discount to other companies. Again, we have used both FY10 EBITDA and 3-year average EBITDA, and taken the average of two to determine company’s EV/EBITDA based value. Since the method ignores importance of E&P companies reserves, and has certain degree of subjectivity involved in assumption of target EBITDA multiple, we do not prefer this technique. Other valuation techniques: We have used three other valuation techniques, namely Dividend Discount Model, Free Cash Flow to Equity, and EVA™ for valuation of OGDC. Dividend Discount Model values OGDC at PKR83.3/share, Free Cash Flow values OGDC at PKR94.5/share, where as EVA™ values OGDC at PKR91.5/share. However, all these models suffer a similar set of weakness, they fail to incorporate the value of reserves of the firms, and have certain degree of subjectivity involved owing to assumption of terminal growth rate. In case of OGDC, we have assumed a terminal growth rate of 6%, 100-150bps below its peers owing to company’s massive size and low retention rate which reduces consistent growth potential. We have also provided a grand average value for the company, which is simply the average value, derived from all valuation techniques. Though with no theoretical backing, this simply provides the investor a single figure for all the techniques used. Fig 46 Summary of valuation techniques for OGDC Valuation technique

Valuation technique

PKR/share

Market Based PER

108.1

Dividend discount

83.3

EV/EBITDA multiple

96.40

Equity free cash flow

94.5

EVA ™

91.5

Justified leading PE Reserve Based DCF Grand Average (all valuation techniques) Source: FSL Research, Sep09

34

PKR/share

Foundation Securities (Pvt) Limited

90.8 108.34 96.1

Pakistan Oil and Gas - Report

September 07, 2009

Valuation: Target PKR108.3 Major Assumptions Risk-free rate Equity risk premium (sector) Equity risk premium (company) Total risk premium cost of equity Debt as % of assets Effective tax rate range Long-term oil price Long-term PKR depcn

12% 7% 0% 7% 19% 0% 45-50% $75 3%

Market Based PER KSE-100 PE E&P sector premium/disocunt E&P sector multiple FY10 earnings FY10-FY12 avg earnings Shares outstanding FY10 EPS FY10-FY12 avg EPS FY10 EPS based target price FY10-FY12 avg EPS based target price

8.5 0% 8.5 51,600 57,747 4,300.9 12.00 13.43 102.0 114.1

Target price (avg of the two target prices)

108.1

EV/EBITDA multiple Target EBITDA multiple OGDC premium/discount OGDC target EBITDA multiple FY10 EBITDA Net Debt FY10 EBITDA based EV FY10 EBITDA based market cap Shares Outstanding FY10 EBITDA based target price FY10-FY12 avg EBITDA FY10-FY12 avg EBITDA based market cap FY10-FY12 avg EBITDA based target price

4.5 0% 4.5 83,469 (11,965) 375,611 387,575 4,300.9 90.11 95,480 441,624 102.68

Target price (avg of the two target prices) Other valuation techniques Dividend discount Equity free cash flow

96.40

EVA ™

83.3 94.5 91.5

Grand Average (all valuation techniques)

96.1

Source: FSL Research, company reports, Sep09

35

Foundation Securities (Pvt) Limited

Justified leading PE Payout ratio Retention rate Sustainable ROE Growth (Retention x Sust. ROE) Required return Justified PE FY10 Earnings Shares outstanding FY10 EPS

Target price Reserve Based DCF FY09 end oil reserves (mn barrels) FY09 end gas reserves (bcf) Total Reserves (mmboe) Production to reserve

Present Value of reserves Exploration upside Deferred Liabilites Debt Cash Reserve based value Shares Outstanding Target Price

0.7 0.3 32.5% 9.8% 19% 7.57 51,600 4,300.9 12.00

90.8

178 10,649 2,030 4%

473,731 19,719 11,965 465,977 4,301 108.34

Comments Payout ratio assumed at 85%, terminal growth rate at 6.5%

Pakistan Oil and Gas - Report

September 07, 2009

Fig 47 Key graphs- OGDC $ 35

90%

$ 30

80% 70%

$ 25 60% $ 20

50%

$ 15

40% 30%

$ 10

20% $5

10%

$-

EBITDA/boe

Remaining reserves

12

EBITDA margins

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

Operating margins

Net realized price/boe Tcf

MMboe 180

FY98

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

0%

Net margins

PKR bn 120

160 10

100

8

80

140 120 100 6

60

80 60

4

40 2

40 20

20

oil MMboe 90

Operating costs Exploration expenses

gas

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28

FY97

-

FY98

0 0

Royalty and taxes Financial/other

60% Production contribution

80 50% 70

60

40%

50 30%

40 30

20%

20 10%

10

FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

-

oil

gas

lpg

Source: Company accounts, FSL Research, Sep09

36

Foundation Securities (Pvt) Limited

0% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 ROE

EVA spread

Pakistan Oil and Gas - Report

September 07, 2009

About The Company Oil and Gas Development Company (OGDCL), the largest Exploration and Production Company of Pakistan, was established in 1961 to prospect, refine and sell oil and gas in Pakistan. The company is listed on all three stock exchanges of Pakistan, as well as on London Stock Exchange. Government of Pakistan (GoP) divested 4.98% of its shareholding in the company in October 2003 through an Initial Public Offering. GoP further divested 9.5% of its shareholding through Secondary Offering in the form of Global Depository Shares to international and local institutional investors in December 2006 and 0.5% to general public in February 2007. GoP now own 85.02% of shares of the company. In a recent development, GoP has launched Benazir Stock Option Scheme whereby employees of government held organizations will be given 12% share free of cost from the GoP shareholding. These shares will be held in a trust and will not be available for sale in market. OGDCL’s share in country’s total oil and gas production stands at 59% and 23% respectively. The company holds largest exploration acreage in Pakistan, covering 28% of the total acreage awarded. It has the largest portfolio of net hydrocarbon reserves in Pakistan i.e. 45% of country’s oil and 35% of country’s gas reserves. The company has stake in 71 fields, 41 of these being 100% Owned & Operated by OGDC. As of June 30, 2009 OGDCL operated in 35 Exploration Blocks (22 blocks with 100% share and 13 blocks as operated JVs) including 4 Offshore Blocks, covering an area of 68,310.92 Sq. Kms. Fig 48 OGDC key assets Field

Operator

OGDC Stake

Discovery Year

Gas reserves (bcf)* Original Remaining

Qadirpur

OGDCL

75.0%

1990

5,057

3,093

Uch

OGDCL

100.0%

1955

5,099

4,362

19%

Bhit

ENI

20.0%

1997

1,605

868

8%

Makori

MOL

27.8%

2005

700

673

30.0

27.9

1%

1.3%

Manzalai

MOL

27.8%

2002

1,884

1,821

29.0

28.3

1%

0.3%

Dakhni

OGDCL

100.0%

1983

352

189

11.9

6.1

5%

3.9%

Miano

OMV

52.0%

1993

542

167

Kunar**

OGDCL

100.0%

1988

68

52

25.1

-

0%

17.2%

Bobi

OGDCL

100.0%

1988

71

48

11.6

6.1

1%

7.3%

Chanda

OGDCL

72.0%

1999

49

31

15.6

7.6

1%

8.9%

Mela

OGDCL

56.5%

2006

81

71

23.9

19.7

1%

8.2%

Pasakhi

OGDCL

100.0%

1989

9

3

32.5

4.6

0%

9.7%

Sono

OGDCL

100.0%

1988

5

2

19.2

3.4

0%

7.7%

Adhi

PPL

50.0%

1978

509

356

55.1

32.4

2%

5.7%

Pindori POL 50.0% 1991 172 105 55.0 *As of July 2009 **Oil Reserves have been revised upward but not communicated by the company Source: PPIS, FSL Research, Sep09

32.7

0%

1.0%

See Appendix F for OGDCL held interest map

37

Foundation Securities (Pvt) Limited

Oil reserves (mn bbls)* Original Remaining 10.1

Production contribution* Gas Oil

7.2

41%

1.8%

4%

Pakistan Oil and Gas - Report

September 07, 2009

Oil and Gas Dev. Co (OGDC PA, Neutral, Target price PKR108.3) Balance Sheet

2008A

2009E

2010E

2011E

Profit & Loss

2008A

2009E

2010E

2011E

Cash

m

18,514

9,062

8,064

2,677

Revenue

m

125,848

130,794

134,478

153,514

Receivables

m

46,458

62,135

50,331

50,409

Gross Profit

m

87,502

91,478

90,181

100,750

Inventories

m

16,767

17,573

22,117

28,441

Cost of Goods Sold

m

38,346

39,316

44,297

52,764

Investments

m

2,860

2,903

2,903

2,903

Other Pre-Tax Income

m

(1,425)

3,428

2,254

1,886

Intangibles

m

34,572

48,178

60,746

73,885

Other Charges (WPPF/WWF)m

4,387

4,259

3,805

4,252

Operating Assets

m

33,139

38,141

49,838

68,318

EBITDA

m

86,817

91,249

83,469

95,814

Depreciation

m

9,291

13,708

11,408

15,340

Total Assets

m

152,309

177,992

193,999

226,633

Amortisation of Goodwill

m

0

0

0

Payables

m

17,216

18,747

20,172

23,027

Other Amortisation

m

0

0

0

Short-Term Debt

m

-

-

-

-

EBIT

m

Long-Term Debt

m

-

-

-

6,000.0

Exceptionals

m

5016

Provisions

m

11,018

13,355

10,815

10,815

Financial Charges

m

537

926

1,009

1,740

Other Liabilities

m

13,660

19,719

25,498

31,298

Pre-Tax Profit

m

76,882

84,356

73,541

80,926

Total Liabilities

m

41,894

51,821

56,485

71,140

Tax Expense

m

33,969

25,388

19,686

21,324

Shareholders' Funds

m

110,415

126,171

137,515

155,493

Net Profit

m

44,338

55,540

51,600

57,716

Minority Interests

m

0

0

0

0

Minority Interests

m

Other

m

0

0

0

0

Total S/H Equity

m

110,415

126,171

137,515

155,493

Reported Earnings

m

44,338

55,540

51,600

57,716

Total Liab & S/H Funds

m

152,309

177,992

193,999

226,633

Adjusted Earnings

m

44,338

55,540

51,600

57,716

EPS (rep)

10.31

12.91

12.00

13.42

EPS (adj)

10.31

12.91

12.00

13.42

0

86,113 0

0

76,101 0

0

0 85,032 0

0

EPS Growth (adj)

%

10.3

12.9

12.0

13.4

PE (rep)

x

11.16

8.91

9.59

8.57

PE (adj)

x

11.16

8.91

9.59

8.57 9.00

Total DPS

Profit and Loss Ratios

83,232

0

9.50

8.25

9.00

Total Div Yield

%

8.3

7.2

7.8

7.8

Period End Shares

m

4,300.9

4,300.9

4,300.9

4,300.9

Cashflow Analysis

Revenue Growth

%

25.6

3.9

2.8

14.2

EBITDA

m

86,817

91,249

83,469

95,814

EBITDA Growth

%

27.6

5.1

(8.5)

14.8

Tax Paid

m

(33,969)

(25,388)

(19,686)

(21,324)

EBIT Growth

%

28.6

3.5

(11.6)

11.7

Chgs in Working Cap

m

(4,901)

(14,451)

8,887.4

(3,323)

Gross Profit Margin

%

69.5

69.9

67.1

65.6

Net Interest Paid

m

(6,349)

1,757

2,560

EBITDA Margin

%

69.0

69.8

62.1

62.4

Other

m

18,213

5,614

(6,166)

EBIT Margin

%

66.1

65.8

56.6

55.4

Operating Cashflow

m

59,810

58,780

69,065

Net Profit Margin

%

35.2

42.5

38.4

37.6

Acquisitions

m

0

0

0

0

Payout Ratio

%

92.2

63.9

75.0

67.1

Capex

m

(18,642)

(28,298)

(35,672)

(46,959)

EV/EBITDA

x

5.5

5.3

5.8

5.2

Asset Sales

m

-115

-161

-50

-51

EV/EBIT

x

5.7

5.5

6.3

5.6

Other

m

45

10

19

Investing Cashflow

m

(18,711)

(28,449)

(35,703)

(46,991) (39,738)

Balance Sheet Ratios

4,106 69 75,342

19

Dividend (Ordinary)

m

(40,859)

(39,784)

(34,359)

ROE

%

40.2

44.0

37.5

37.1

Equity Raised

m

0

0

0

0

ROA

%

40.2

44.0

37.5

37.1

Debt Movements

m

0

0

0

6000

Net Debt/Equity

%

Other

m

0

0

0

0

Interest Cover

x

Financing Cashflow

m

(40,859)

(39,784)

(34,359)

(33,738)

Price/Book

x

Net Chg in Cash/Debt

m

240

(9,452)

(998)

(5,387)

Free Cashflow

m

41,099

Book Value per Share

(0.2) 155.1

(0.1)

(0.1)

0.0

93.0

75.4

48.9

4.5

3.9

3.6

3.2

25.7

29.3

32.0

36.2

All figures in PKR unless noted Source: Company data, FSL Research, Sep09

38

Foundation Securities (Pvt) Limited

30,331

33,362

28,351

Pakistan Oil and Gas - Report

September 07, 2009

Pakistan Petroleum

PAKISTAN

07 September 2009 PPL PA

Outperform

Stock price as of 04 Sep June 10 target Upside/downside Valuation

Rs Rs % Rs

213.2 274.0 28.5 274.0

Rs bn US$m US$m m

177 9.9 2,211 829.8

- Reserve based DCF

Oil and gas exploration Market cap 30-day avg turnover Market cap Number shares on issue

Investment fundamentals Year end 30 Jun

2008A

2009E

2010E

2011E

Total revenue

m

45,717

60,972

59,029

71,086

EBIT

m

30,513

42,548

35,272

44,291

EBIT Growth

%

25.0

39.4

Recurring profit

m

19,707

27,778

23,995

29,603

Reported profit

m

19,707

27,778

23,995

29,603

Rs

23.75

33.47

28.91

35.67

EPS rep growth %

17.5

41.0

(13.4)

23.4

x

9.0

6.4

7.4

6.0

EPS rep

(16.0)

25.6

Best bet in Pakistan E&P sector Event  We have revised our forecasts for PPL incorporating revised oil price assumptions, additional production of 40mmcfd from Kandhkot field and 3,500bpd from the recent Nashpa discovery. Owing to highest certainty in earnings and successful project execution, we rate PPL as our top pick.

Impact  PPL is the only scrip trading at discount to its existing asset base: We value PPL’s existing asset base, including cash and investments at PKR227.9/share. The scrip offers 6.5% upside to its existing assets value, whereas future development projects are likely to add PKR46.1/share to company’s value. PPL is the only scrip in our universe trading at a discount to its existing asset base

 Production and price increase to boost earnings from 2HFY10: Despite continuous decline in production from Sui and Miano fields, PPL will register growth in production in FY10 owing to production additions from Tal (Manzalai and Mamikhel), Mela, Latif, Qadirpur, and Kandhkot. Apart from growth in production, PPL’s 2HFY10 gas prices will also increase as long as average Arab Light prices do not fall below $46.6/barrel (for Jun-Nov 09) and Rupee does not appreciate against US dollar. The increase in production and gas prices will lead to attractive earnings growth for PPL from 2HFY10.

 Highest earnings certainty and lowest project execution risk: PPL’s PE rep

Total DPS

Rs

14.10

16.00

14.50

17.80

Total div yiel

%

6.6

7.5

6.8

8.4

ROA

%

32.3

33.1

25.2

26.2

ROE

%

45.14

42.45

31.86

32.25

x

4.8

3.5

4.0

3.2

EV/EBITDA Net debt/equity Price/book

%

-50.36

x

4.1

-28.01

-43.82

2.7

2.3

-49.09 1.9

PPL PK rel KSE100 performance 125

KSE-100

PPL

earnings can be forecasted with highest certainty owing to knowledge of key revenue determinant, the gas prices, which are decided six months in advance. Moreover, unlike OGDC, most of PPL’s projects have low execution risk and are most likely to be completed in the provided time frame.

Earnings Revision  We are reducing our FY10 earnings estimates by 1%, which reflects change in our assumption regarding production decline from Sui field. We have now incorporated a decline of 5% p.a. from Sui vs. previous assumption of 4% and historical decline rate of 3.3%. The decline in FY11 earnings is offset by increased production from Nashpa.

Price catalyst  Jun-10 price target: Rs274.0 based on Reserve Based DCF methodology.  Catalyst: Completion of Kandhkot, Manzalai Compression, Nashpa

100

development projects and increase in gas prices from 2HFY10.

75 50

Action and recommendation

25

 Revising our target price from Rs274.2 to Rs274.0: Decrease in our June-10 target price reflects sharper production decline assumption from Sui, which will be offset by increased production from Nashpa.

Source: Bloomberg, Foundation Research, Sep 2009 (all figures in PKR unless noted)

Analyst Asim wahab Khan 92 21 5612290-94 Ext 335

39

 PPL’s stock price can underperform in the short term owing to expected cut of 25% in Sui and Kandhkot wellhead prices. Investors should treat 1HFY10 as a buying opportunity as we expect significant earnings growth from 2HFY10. After a decline of 12.9% in FY10 earnings, PPL’s earnings are set to grow at 3-year CAGR of 12.2% (FY10-FY13)

[email protected]

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Best bet in Pakistan E&P sector We rank PPL as our top pick in Pakistan E&P sector. Our investment case for PPL is based upon company’s strong operational performance, highest exploration exposure to the most prospective Kohat plateau, highly discounted valuations, highest earnings certainty in the sector, and highest project execution certainty. PPL is currently trading at FY11 PE, EV/DACF, and EV/EBITDA multiples 6.0x, 3.83x and 3.3x respectively, which translates to a discount of 20-25% over the sector. At current levels, even the value of company’s developed assets is not fully incorporated in the stock price. Several developing assets (such as Tal, Kandhkot, Adam, Tajjal, Latif, Nashpa) offer incremental upside to the stock price. Moreover, most of the developing assets are at verge of completion (Tal, Kandhkot, Adam, Latif, Tajjal) whereas the remaining developing asset (Naspha) has very high execution certainty and significant value potential. Though we have not incorporated any exploration value in our valuation for PPL, it is a common practice to include exploration upside as E&P companies are expected to make continued expenditures in order to maintain their reserves. Several factors need to be considered in determining exploration value of a company such as its exploration acreage, potential of the exploration acreage, drilling and seismic targets, historical success rate, exposure to high potential areas, and expected composition of hydrocarbons in case of discovery. However, owing to significant subjectivity involved in the process, we have not included exploration value in our target price for PPL, or any other Pakistani E&P firm. Fig 49 Break up of PPL’s value 300

PKR

15.2 289.2 46.1

250

274.0

227.9 200

150

100

50

Developed assets Developing assets

Target price

Exploration upside Target price with exploration upside

Source: FSL Research, Sep09

Sui decline, low reserve life not a concern The primary factors that investors consider to be a drag on value of PPL is the decline in company’s largest gas field, Sui, and company’s lowest reserve life in Pakistan E&P sector. The same argument is used to justify cheaper valuation multiples for the company. We religiously believe that these arguments hold little justification for a number of reasons such as, 1) decline in production from Sui will be replaced by production additions from a host of fields such as Manzalai, Makori, Mamikhel, Maramzai, Tajjal, Latif, Mela, Nashpa, Adam X-1, and Kandhkot, 2) the revenue impact of these fields will be even better as they are priced approx 75% higher than Sui, 3) reserves of several discoveries such as Nashpa, Tajjal, Latif, Adam, Mamikhel, Maramzai are yet to be included in company’s total reserves which can potentially add 2-3 years to company’s current 2p reserve life of 16.5years, 4) our valuation technique, Reserve Based DCF, by its very nature incorporates the lower reserve life of the company. To sum it all up, investors should not be concerned about production, costs, taxes, revenues etc for any company. What investors should focus on is how all of these factors (and host of other factors) interact together to determine company’s cash flow generation capacity, and whether the current stock price is justified given a company’s future cash generation capacity. A company with fantastic production growth will have a justified price, and a company with negative

40

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

production growth will also have a justified price. PPL’s current price is not justified by its lower production growth and lower realized prices, and we expect a significant rerating in company’s valuation multiples We assume a decline of 5%p.a from Sui vs historical decline of 3.3%: The annual production from Sui field peaked in FY99 at around 305bcf. From then onwards, the production from the field has declined at 10-year CAGR of 3.3%. Going forward, we have assumed a much faster decline in production from Sui, at 5%p.a, which adequately incorporates any risk of sharper decline in production from Sui. We do not expect Sui to decline as sharply as we have assumed, as development activities have once again started at the field’s limestone formation after a period of 19 years. Sui 88-was completed as a gas producer, whereas another development well, Sui-92 is planned by the company in the current month. The pickup in development activities should support production from the field. Fig 50 A sharper decline in Sui production assumed Mcft 310,000

Sui production has declined at 3.3%p.a from its peak

290,000 270,000 250,000 Sharper decline of 5%p.a assumed

230,000

210,000 190,000 170,000

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

150,000

Source: PPL accounts, FSL Research, Sep09

Revenue decline from Sui to be offset by numerous other fields: As we mentioned before, the production decline from Sui is not that worrisome as several production additions will come on-stream by next 1-2 years. These include Manzalai (200mmcfd gas, 4,000bpd oil), Mamikhel (20mmcfd gas, 1,400bpd oi), Adam X-1 (15mmcfd gas), Tajjal and Latif (20mmcfd gas), and Nashpa (3500bpd oil, gas production of 10mmcfd expected but not incorporated). Sui contributed more than 60% to company’s total revenue of PKR6.4bn in FY02. The revenue contribution by FY08 had fallen to 47%. By FY13, we expect PPL to report net revenues of PKR82.8bn out of which Sui will contribute only 34%.

41

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 51 Revenue decline from Sui to be offset by other fields PKR bn 90,000

70%

80,000

60%

70,000 50% 60,000 50,000

40%

40,000

30%

30,000 20% 20,000 10%

10,000 -

0% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Total revenue

Sui revenue

Sui revenue contribution

Source: PPL accounts, FSL Research, Sep09

High project execution certainty Several development and expansion projects are in the pipeline for PPL. A few are PPL operated projects whereas the majority are partner operated projects. Unlike OGDC, almost all of the development projects of PPL entail high execution certainty, as most of the projects are near completion and none of the project is under litigation, with the exception of Qadirpur Compression project (discussed in detail in our write up on OGDC). Self operated projects: PPL is currently involved in three development projects; two pertain to Kandhkot gas field whereas one pertains to Hala block. A gas compression project is underway at Kandhkot which upon completion will add 40mmcfd gas to company’s production. The project is expected to be completed before the end of this year. Second project at Kandhkot is a Standby Dehydration Unit which will ensure consistent gas supply from the field. The third project is setting up of Extended Well Testing (EWT) facility at Adam X-1 well in Hala Block. The first gas is expected by end of this year. The project is expected to add 15mmcfd gas, 1500bpd condensate, and 25mtpd LPG. We have only incorporated gas production from Hala. Partner operated projects: Several partner operated projects are under way. These include Qadirpur Compression project with purpose to maintain production plateau at 650mmcfd gas. Wellhead compressors at Miano and compression facility at Sawan are near completion with purpose of maintaining contractual gas supply. EWT at Latif-1 and Tajjal-1 is in progress and Latif-2 is expected to add 20mmcfd gas from next month. The most significant work is being carried out at Tal block where a 300mmcfd capacity Central Processing Facility is being setup at Manzalai. The field is expected to add 250mmcfd gas and 4,000bpd condensate upon completion which is expected in October, 2009. Mamikhel in the same block will also be tied up to the same facility with production of 20mmcfd gas and 1,400bpd oil. Finally, preparations are being made to move a spare Dehydration Plant from Qadirpur field to Nashpa-01 in order to process 10mmcfd gas from the field. The field is also expected to add 3,500bpd oil by September 2010.

42

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 52 PPL’s key development and expansion projects Field/Block

Operator

Stake

Project

Purpose

Production addition

Comments

Kandhkot

PPL

100%

Gas compression Project

Maximize reserve recovery

Gas: 40mmcfd

EPPC work 98% complete, project completion before year end, cost around PKR10bn

Kandhkot

PPL

100%

Standby Dehydration Unit

Increase reliability of field production

none

EPCC work 70% complete, cost around PKR600mn

Hala

PPL

65%

EWT facilities

Initiate EWT of Adam X-1

Gas: 15mmcfd, Cond:1500bpd, LPG: 25mtpd

First gas flow expected before year end, only gas production incorporated in our model

Qadirpur

OGDC

7%

Compression facility

Maximize reserve recovery

To maintain plateau of gas production to 650mmcfd

Wellhead compressors expected by May-09, Compression facility by 2013

Miano

OMV

15%

Wellhead compressors

Maintain gas supply

none

Phase-1 completed whereas Phase-2 in progress

Sawan

OMV

26%

Compression Facility

Latif

OMV

33%

Tie-in of Latif-02

Production enhancement

Gas: 20mmcfd

Completion expected by October-09

Manzalai

MOL

28%

Central Processing Plant

Production enhancement

Gas: 200mmcfd, Cond: 4,000bpd

Inauguration in October, full production from year end

Mamikhel

MOL

28%

Tie-in to Manzalai CPF

Production enhancement

Gas: 20mmcfd, Cond: 1,400bpd

Expected by year end, incorporated from April-10 in our models

Maintain gas supply

none

Expected completion by Feb10

Source: PPL, MPNR, FSL Research, Sep09

Improving exploration outlook PPL’s exploration philosophy is very conservative, and company’s recent exploration history, to be bluntly put is poor. The company spends miserly in drilling activities which is evident by the fact that in last 11 years, the company has spudded only 9 exploration wells in its operated areas. OGDC usually spuds this many wells in less than a year. PPL believes in venturing into areas with established potential, and thus conducts significant seismic before selecting a well for drilling. Owing to this, company’s success ratio has been at 56%. However, low risk entails low returns, thus the company has not been able to make a significant discovery in last 32 years (last significant discovery being that of Adhi in 1977). It seems PPL has come to believe that it has limited capabilities of exploration and has thus relied primarily on globally experienced and better equipped joint venture partners to deliver the exploration success for them. This strategy has provided great success to PPL as the company in last 11 years has tripled its balance recoverable oil reserves and increased its gas reserves by 32%. Adequate exposure to offshore potential: PPL has stake in three offshore blocks, Offshore Indus-C, Offshore Indus-M, and Offshore Indus-N. The operator of all the three blocks is Eni, which is consistent with PPL’s strategy to bank on the technical strengths of its JV partners. Eni in FY09 carried out significant seismic activity in the three blocks and locations of two offshore wells, Kuna-1 and Shark-1 have been finalized. Shark-1 is expected to be spudded by Jan 2010 whereas Kuna-1 is likely to be spudded before the end of FY10. PPL holds 30% stake in Shark-1 (Offshore Indus-M) and 40% stake in Kuna-1 (Offshore Indus-C). Going global: PPL is actively pursuing exploration activities in five countries, namely Yemen, Iraq, Iran, Algeria, and Senegal. In Yemen, Block-29 was awarded to OMV in March 2009, where PPL has 50% non-operating stake. OMV will be conducting 2-D seismic this fiscal. In Iraq, PPL has prequalified to participate in 2nd bidding round for field development. PPL has also prequalified in Iran to participate in exploration activities and evaluation in two block is underway. Technical evaluation of a block in Senegal has been completed and company will soon be deciding to go for or reject the prospect.

43

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 53 FY09 exploration activity - PPL relying on JV partners 100% 90% 80% 70% 60%

50% 40% 30% 20% 10% 0% 2-D Seismic

3-D seismic

Exploratory well

PPL

development wells

JV partners

Source: PPIS, FSL Research, Sep09

Exploration value: As mentioned in the beginning of our discussion on PPL, we have not incorporated any exploration upside in our valuation for Pakistan E&Ps. However, all companies are expected to make significant investments in exploratory drilling in coming years, so we now mention our estimates for the exploration value of PPL. Fig 54 Exploration value for PPL comes to PKR15.2/share

PV of exploratory capex/share Total PV of exploratory capex/share

FY10

FY11

FY12

FY13

(6.0)

(4.1)

(3.4)

(2.9)

(16.3)

Exploratory wells Success rate Discoveries Average discovery size (mmboe) Reserve addition (mmboe) EV/boe (USD) - new discoveries Exchange rate Value of discoveries (PKR bn) Discount rate Time line PV of Discoveries Total PV of discoveries

5

4

4

4

30%

25%

25%

25%

1

1

1

1

16.0

15.2

14.4

13.7

16

15

14

14

3

3

3

3

84

89

92

96

4,054

4,043

3,994

3,946

19%

19%

19%

19%

-

1

2

3

4,054

3,397

2,821

2,342

12,614

Exploration value

15.2

NPV of exploration program

(1.1)

Developed and developing value

274.0

TP with exploration upside

289.2

Source: FSL Research, Sep09

We estimate PPL’s exploration upside to be PKR15.2/share. The present value of capex for exploration comes to PKR16.3/share. Thus the actual NPV of exploration is negative which is intentional on our part as we want to remain conservative on the exploration option value. We have assumed USD3/boe for valuation of reserves, which is very conservative for new discoveries which will offer significantly better pricing on crude and gas

44

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

PPL provides leveraged exposure to Kohat plateau Kohat plateau: Since the discovery of Chanda in 1999 by OGDC, Kohat plateau has become a discovery galore. The region boasts an astonishing 70% success rate post the discovery of Chanda. Success rate in NWFP province, prior to Chanda was 0%. 10 wells have thus far been drilled out of which 7 wells have been hydrocarbon producers. 4 discoveries have been made in Tal block, 2 in Nashpa, and 1 in Chanda. The recent discovery by OGDC at Nashpa confirms the potential of the region. PPL has stake in six of the seven discoveries in the Kohat Plateau. Owing to smaller capital and reserve base, PPL provides a leveraged exposure to the Kohat plateau. At present, all the development and exploration activity in the 7 successes is planned in those six where PPL has stake. No exploration or development is expected in near future in Chanda where PPL has no stake. As per PPL estimates, the total reserve potential for the Kohat plateau stands at 2 billion barrels oil and 5 trillion cubic feet gas. Fig 55 PPL’s exposure to Kohat plateau Discovery

Year

Operator

PPL stake

Gas reserves Original

Oil Reserves

Remaining

Original

Remaining

Chanda

1999

OGDC

0%

49

31

16

8

Manzalai

2002

MOL

28%

1,884

1,821

29

28

Makori

2005

MOL

28%

700

673

30

28

Mela

2006

OGDC

26%

81

71

24

20

Mamikhel*

2008

MOL

28%

200

200

20

20

Maramzai

2009

MOL

28%

NA

NA

NA

NA

Nashpa

2009

OGDC

26%

NA

NA

NA

NA

766

28

26

PPL's hare of reserves

794

PPL's total reserves

5,272

35

15%

75%

% PPL reserves in Kohat plateau *Operator initial estimates Source: PPIS, FSL Research

Nashpa potential: OGDC recently made the Nashpa discovery in Kohat plateau. Two formations, Lower Lockehart and Middle Lockehart were tested by the company. The Lower Lockehart tested for 3,000bpd oil and 9.7mmcfd gas whereas Middle Lockehart tested for 145bpd oil and 0.4mmcfd gas. The primary test objective of the drilling, Upper Lockehart remains to be tested. It is possible that this zone may produce additional 3,000bpd oil. As per our discussion with various industry experts, the potential of Nashpa discovery is huge and it could easily turn out as big as Mela. Mela currently produces 6,000bpd oil which is expected to go up to 8,500bpd once Mela-03 is completed. The oil reserves of Naspha are expected to be in excess of 20mn barrels, similar to Mela. OGDC plans to drill an appraisal well in Naspha during FY10, whereas another exploratory well is also planned. The company expects the production from Nashpa to start in a year, and we have incorporated the same in our model. Fig 56 Earnings impact of Nashpa – PPL stands to gain more than OGDC Oil production assumption (bpd) 3,145*

3,500*

Stake

4,500*

6,000*

8,500*

EPS impact

OGDC

56%

0.39

0.43

0.54

0.70

0.98

PPL

26%

0.94

1.03

1.29

1.68

2.34

Share price

Price/EPS impact (P/E of discovery)

OGDC

115

293

267

213

163

118

PPL

213

227

207

165

126

91

*3,145 = tested; 3,500 = incorporated in models; 4,500 = Mela-01size; *6,000 = current prod from Mela; 8,500 = expected prod from Mela upon completion of Mela-03 Source: OGDC, FSL Research, Sep09

45

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Potential of tight gas reserves Owing to the recent news flow regarding tight gas reserves development by OMV in Sawan and Miano fields, we have provided a detailed discussion on the potential of tight gas reservoirs in Pakistan in Appendix C. As per the media reports, OMV officials have confirmed that studies showed presence of 6-8 trillion cubic feet (tcf) of GIIP (Gas Initially In Place) in Sawan and Miano fields alone. Horizontal drilling is being introduced in the country for the first time by OMV to develop these tight gas reserves. OMV officials have said that 2.3tcf gas is recoverable from the two fields and OMV will spend $1.2bn to develop the tight gas reserves. To recover these reserves, the company would drill 1,200 meters horizontal section at 14 wells in Sawan. The petroleum ministry indicates more than 200 mmcfd gas would be developed from the field in two years, while the same technique would be applied for 57 wells in Miano in next 4-6 years to produce up to another 200mmcfd of gas. While we did not get any confirmation from OMV regarding the above mentioned plan, OGDC has confirmed that OMV will be drilling a well in 2010 to validate tight gas reserve potential of Miano field. We refrain from coming out with any earnings impact for PPL, as development of tight reserves is a complex process and the project can actually produce negative NPV for companies unless 2-3 times higher gas prices (compared to gas price of conventional reserves) are not offered to the company.

Earnings dampeners: Sui/Kandhkot gas price cut and possible failure in offshore wells We would like warn investors about two negative events for PPL. The first negative event, gas price cut in Sui and Kandhkot fields, is certain and incorporated in our FY10 earnings forecast. The second negative event, possible failure in offshore exploration is not incorporated in our forecast. Sui Kandhkot gas price cut: Oil and Gas Regulatory Authority will be announcing wellhead gas prices for 1HFY10 this month. Gas prices of Sui/Kandhkot fields are likely to be cut by 25-30% owing to 52.9% reduction in oil prices during the relevant period, which will depress PPL’s 1HFY10 earnings. Owing to cut in gas prices, PPL’s earnings will remain muted at around PKR6-6.5/share for each of the first two quarters of FY10 (EPS of PKR12-13/share for 1HFY10). This would mean a 25-30% cut in quarterly earnings compared to current (previous two quarters) quarterly earnings level of PKR8-9/share. The cut in gas prices and the resultant decline in earnings may lead to slight underperformance of the scrip in coming temporarily. However, PPL’s 2HFY10 gas prices will increase as long as average Arab Light prices do not fall below $46.6/barrel (for Jun-Nov 09) and Rupee does not appreciate against US dollar. The increase in production and gas prices will lead to attractive earnings growth for PPL from 2HFY10. Investors should treat 1HFY10 as a buying opportunity as we expect significant earnings growth from 2HFY10. After a decline of 13.4% in FY10 earnings, PPL’s earnings are set to grow at 3-year CAGR of 12.6% (FY10-FY13). Possible failure in offshore attempts: As mentioned earlier, Eni in FY09 carried out significant seismic activity in the three blocks and locations of two offshore wells, Kuna-1 and Shark-1 have been finalized. Shark-1 is expected to be spudded by Jan 2010 whereas Kuna-1 is likely to be spudded before the end of FY10. PPL holds 30% stake in Shark-1 (Offshore Indus-M) and 40% stake in Kuna-1 (Offshore Indus-C). Upon failure, Shark-1 can shave off as much as PKR1.38/share from PPL’s FY10 earnings, whereas Kuna-1 can reduce PPL’s FY11 earnings (because the well drilling will likely be completed in FY11) by PKR1.92/share, assuming drilling cost of $70mn

Bonus shares likely in future PPL in its FY09 results announced bonus issue of 20%, which will increase company’s outstanding shares to approx 1bn. The company has also announced to increase its authorize share capital to 1.5bn shares of PKR10/share par value. This will provide PPL with a cushion to issue more bonus shares going forward. Though the bonus issue adds no value to the shareholder, it does increase liquidity in the stock which can have a positive impact on share price.

.

46

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Valuation: Target PKR274.0 We value PPL at PKR274/share based on Reserve Based DCF valuation model. Though we have used six other valuation techniques such as market based PER, justified leading PE, target EV/EBITDA, dividend discount model, free cash flow to equity, and Economic Value added (EVA™) to value PPL, we prefer Reserve Based DCF as it eliminates several weaknesses in other valuation techniques and properly assigns value according to company’s reserve life and future production profile. The technique involves forecasting of company’s complete production profile till the exhaustion of reserves, and translating the production in cash flows. Net debt and deferred tax liabilities (assuming that deferred tax benefit is temporary) are adjusted separately. We have not incorporated any exploration upside in order to reduce subjectivity and favor conservatism. Market Based PER target PKR254.8/share: Based on Market Based PER, value of PPL comes to PKR254.8/share. We have valued the company on both FY10 earnings and 3-year average earnings, and taken average of the two to determine company’s Market Based PER value. Market PE and sector PE are taken as same (no premium has been assigned to E&P sector) at 8x, which is the approx. current PE of KSE-100. Since the method ignores importance of an E&P companies’ reserves, cash generation capacity, and assigns value only to short-term earnings potential of the firm, we do not prefer this technique. Justified leading PE target PKR262.9/share: Based on Justified leading PE, value of PPL comes to PKR262.9/share. We have assigned a sustainable ROE of 27% to the company, which is at 5% discount to OGDC, as lower payout and higher retention will eventually lead to reduced sustainable ROE. PPL’s average ROE for next three years will be 32%. Since the method ignores importance of an E&P companies’ reserves, cash generation capacity, and has certain degree of subjectivity involved in assumption of sustainable ROE, we do not prefer this technique. However, we have reduced subjectivity by keeping the sustainable ROE figure 5% below the average projected ROE in coming three years. EV/EBITDA multiple target PKR232.4/share: Based on EV/EBITDA multiple, value of PPL comes to PKR232.4/share. Considering that OGDC has the most balanced production profile (owing to nearly equal share of oil and gas in revenues), we have taken the company’s EBITDA/boe as the benchmark for assigning premium or discount to other companies. Owing to lower EBITDA/boe, we have assigned 10% discount for PPL’s target EBITDA multiple. Again, we have used both FY10 EBITDA and 3-year average EBITDA, and taken the average of two to determine company’s EV/EBITDA based value. Since the method ignores importance of an E&P companies reserve, and has certain degree of subjectivity involved in assumption of target EBITDA multiple, we do not prefer this technique. Other valuation techniques: We have used three other valuation techniques, namely Dividend Discount Model, Free Cash Flow to Equity, and EVA™ for valuation of PPL. Dividend Discount Model values PPL at PKR164.8/share, Free Cash Flow values PPL at PKR303.9/share, where as EVA™ values PPL at PKR275.2/share. However, all these models suffer a similar set of weakness, they fail to incorporate the value of reserves of the firms, and have certain degree of subjectivity involved owing to assumption of terminal growth rate. In case of PPL, we have assumed a terminal growth rate of 7%, 100bps above OGDC owing to company’s relatively smaller size and higher retention rate which strengthens consistent growth potential. We have also provided a grand average value for the company, which is simply the average value, derived from all valuation techniques. Though with no theoretical backing, this simply provides the investor a single figure for all the techniques used. Fig 57 Summary of valuation techniques for PPL Valuation technique

Valuation technique

PKR/share

Market Based PER

254.8

Dividend discount

164.8

EV/EBITDA multiple

232.4

Equity free cash flow

303.9

Justified leading PE

262.9

EVA ™

275.2

Reserve Based DCF

274.0

Grand Average (all valuation techniques)

252.6

Source: FSL Research, Sep09

47

PKR/share

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Valuation: Target PKR274.0 Major Assumptions Risk-free rate Equity risk premium (sector) Equity risk premium (company) Total risk premium cost of equity Debt as % of assets Effective tax rate range Long-term oil price Long-term PKR depcn

12% 7% 0% 7% 19% 0% 45-50% $75 3%

Market Based PER KSE-100 PE E&P sector premium/disocunt E&P sector multiple FY10 earnings FY10-FY12 avg earnings Shares outstanding FY10 EPS FY10-FY12 avg EPS FY10 EPS based target price FY10-FY12 avg EPS based target price

8.0 0% 8.0 23,995 28,872 829.8 28.91 34.79 231.3 278.3

Target price (avg of the two target prices)

254.8

EV/EBITDA multiple Target EBITDA multiple OGDC premium/disocunt OGDC target EBITDA multiple FY10 EBITDA Net Debt FY10 EBITDA based EV FY10 EBITDA based market cap Shares Outstanding FY10 EBITDA based target price FY10-FY12 avg EBITDA FY10-FY12 avg EBITDA based market cap FY10-FY12 avg EBITDA based target price

4.5 -10% 4.05 38,613 (19,694) 156,383 176,077 829.8 212.18 46,894 209,615 252.59

Target price (avg of the two target prices)

232.4

Other valuation techniques Dividend discount Equity free cash flow

164.8 303.9

EVA ™

275.2 252.6

Grand Average (all valuation techniques) Source: FSL Research, company reports, Sep09

48

Foundation Securities (Pvt) Limited

Justified leading PE Payout ratio Retention rate Sustainable ROE Growth (Retention x Sust. ROE) Required return Justified PE FY10 Earnings Shares outstanding FY10 EPS

0.5 0.5 27.0% 13.5% 19% 9.09 23,995 829.8 28.91

Target price

262.9

Reserve Based DCF FY09 end oil reserves (mn barrels) FY09 end gas reserves (bcf) Total Reserves (mmboe) Production to reserve

39 5,272 956 6.9%

Present Value of reserves Exploration upside Deferred Liabilites Debt Cash and investments Reserve based value Shares Outstanding Target Price Comments Payout ratio assumed at 50%, terminal growth rate at 7%

211,381 3,673 19,694 227,402 829.8 274.0

Pakistan Oil and Gas - Report

September 07, 2009

Fig 58 Key graphs- PPL $ 16

80%

$ 14

70%

$ 12

60%

$ 10

50%

$8

40%

$6

30% 20%

$4

10%

$2

MMboe 6,000

40

35

5,000

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

Operating Margin Net profit margin

Net Revenue ($/boe)

Remaining reserves

FY99

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

EBITDA ($/boe)

FY98

0%

$-

EBITDA Margin

MMboe 60,000

50,000

30 40,000

4,000

25

3,000

20 15

2,000

30,000 20,000

10 10,000

1,000

5

70.0

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

Operating costs Exploration expense

Gas

Production Contribution

FY00

FY98

FY25

FY24

FY23

FY22

FY21

FY20

FY19

FY18

FY17

FY16

FY15

FY14

FY13

FY12

FY11

oil

MMboe

FY99

-

0

FY10

-

Royalty and taxes Financial/other

50% 45%

65.0

40% 35%

60.0

30% 55.0

25% 20%

50.0

15%

10%

45.0

5%

oil production

Source: Company accounts, FSL Research, Sep09

49

Foundation Securities (Pvt) Limited

ROE

EVA spread

FY13E

FY12E

FY11E

FY10E

FY09

FY08

FY07

FY05 gas production

FY06

0%

40.0

Pakistan Oil and Gas - Report

September 07, 2009

About The Company Pakistan Petroleum Ltd is the oldest exploration and production company in the country. It was incorporated on 5th June, 1950 subsequent to the promulgation of the Pakistan Petroleum Production Rules, 1949 with the main objective of conducting exploration, development and production of Pakistan's oil and natural gas resources. PPL inherited all the assets and liabilities of the Burmah Oil Company (Pakistan Concessions) Limited and commenced business on 1st July 1952. The Government of Pakistan (GoP) in September 1997 purchased the entire equity interest of Burmah Castrol PLC, formerly Burmah Oil Company, representing 63.91 percent of the Share Capital thereby increasing its holding in the Company to 93.35 percent. Subsequent to June 2004, the GoP has disinvested a portion of its equity in the company equivalent to 15% of the paid up share capital through an Initial Public Offering (IPO). The GoP has made a policy decision to privatize PPL and IPO is a significant step towards this direction. Currently, GoP hold 78.35% of the shares, International Finance Corporation (6.09%) and institutional and individual investors (15.56%). In a recent development, GoP has launched Benazir Stock Option Scheme whereby employees of government held organizations will be given 12% share free of cost from the GoP shareholding. These shares will be held in a trust and will not be available for sale in market. Starting out concurrently with the first major gas discovery at Sui in 1952, PPL now operates four producing fields at Sui, Kandhkot, Adhi and Mazarani and holds working interest in seven partner-operated producing fields. PPL’s exploration portfolio comprises 24 exploration blocks, including four that are offshore. On June 30, 2008, the company’s hydrocarbon reserves stood at approximately 3.71 trillion cubic feet of natural gas, 23.3 million barrels of oil/NGL and 321,000 tonnes of LPG. The company also operates a Baryte mine in Balochistan province. It produces oil well drilling grade Baryte powder from the mine, which has proven reserves of 1.25 million tones Fig 59 Global oil supply by region Field

Operator

PPL

Discovery

Stake

Year

Gas reserves (bcf)*

Gas

Oil

32.39

2%

44%

700

673

30.00

27.89

1%

12%

1,884

1,821

29.00

28.34

1%

3%

81

71

23.86

19.72

0%

36%

12,625

3,049

62%

1,680

908

17%

1990

5,057

3,093

1993

542

167

1%

1998

1,500

649

10%

39.0%

1978

Makori-Tal

MOL

27.8%

2005

Manzalai-Tal

MOL

27.8%

2002

Mela-Nashpa

OGDCL

26.1%

2006

Sui

PPL

100.0%

1952

Kandhkot

PPL

100.0%

1959

Qadirpur

OGDCL

7.0%

Miano

OMV

15.2%

Sawan

OMV

26.2%

509

*As of Jun 2009 Source: PPIS, FSL Research, Sep09

See Appendix G for PPL Held interest map

50

Foundation Securities (Pvt) Limited

Original

10.11

Remaining

Production contribution*

55.10

PPL

Remaining

Oil reserves (mn bbls)*

356

Adhi

Original

7.25

4%

2%

Pakistan Oil and Gas - Report

erform

September 07, 2009

Pakistan Petroleum (PPL PA, Outperform, Target price PKR274.0) Balance Sheet

2008A

2009E

2010E

2011E

Profit & Loss

2008A

2009E

2010E

2011E

Cash

m

22,063

18,358

33,078

45,142

Revenue

m

45,717

61,580

59,029

71,086

Receivables

m

14,206

34,609

24,887

26,244

Gross Profit

m

33,386

46,077

42,197

52,018

Inventories

m

1,604

1,925

2,099

2,245

Cost of Goods Sold

m

12,331

15,503

16,832

19,068

Investments

m

1,781

1,781

1,781

1,781

Other Pre-Tax Income

m

3,092

4,150

2,019

2,977

Intangibles

m

9,887

13,209

17,236

20,043

Other Charges (WPPF/WWF) m

2,085

3,103

2,245

2,820

Operating Assets

m

11,481

13,925

16,270

17,668

EBITDA

m

32,052

44,732

38,613

48,119

Depreciation

m

1,539

2,730

3,341

3,828

Total Assets

m

61,023

83,808

95,351

113,124

Amortisation of Goodwill

m

0

0

0

Payables

m

12,242

14,690

16,012

17,133

Other Amortisation

m

0

0

0

Short-Term Debt

m

44.8

EBIT

m

Long-Term Debt

m

77.6

77.6

77.6

77.6

Exceptionals

m

Provisions

m

2,813

2,878

3,045

3,213

Financial Charges

m

67

94

103

113

Other Liabilities

m

2,191

899

899

899

Pre-Tax Profit

m

30,447

41,908

35,169

44,178

Total Liabilities

m

17,369

18,545

20,034

21,323

Tax Expense

m

10,739

14,206

11,175

14,575

Shareholders' Funds

m

43,654

65,263

75,317

91,800

Net Profit

m

19,707

27,703

23,995

29,603

Minority Interests

m

0

0

0

0

Minority Interests

m

Other

m

0

0

0

0

Total S/H Equity

m

43,654

65,263

75,317

91,800

Reported Earnings

m

19,707

27,703

23,995

29,603

Total Liab & S/H Funds

m

61,023

83,808

95,351

113,124

Adjusted Earnings

m

19,707

27,703

23,995

29,603

EPS (rep)

23.75

33.38

28.91

35.67

EPS (adj)

23.75

33.38

28.91

35.67

0

0

0

40,956

0

35,498

0

0

0 44,134

0

0

0

0

0

EPS Growth (adj)

%

17.5

41.0

(13.4)

23.4

PE (rep)

x

8.98

6.37

7.37

5.98

PE (adj)

x

8.98

6.37

7.37

5.98 17.80

Total DPS

Profit and Loss Ratios

29,506

0

14.10

16.00

14.50

Total Div Yield

%

6.6

7.5

6.8

8.4

Period End Shares

m

754.4

829.8

829.8

829.8

Cashflow Analysis

Revenue Growth

%

19.1

34.7

(4.1)

20.4

EBITDA

m

32,052

44,732

38,613

48,119

EBITDA Growth

%

23.1

39.6

(13.7)

24.6

Tax Paid

m

(10,739)

(14,206)

(11,175)

(14,575)

EBIT Growth

%

25.0

37.7

(16.0)

25.6

Chgs in Working Cap

m

398

(18,275)

10,871

(383)

Gross Profit Margin

%

73.0

74.8

71.5

73.2

Net Interest Paid

m

940

(953)

328

(44)

EBITDA Margin

%

70.1

72.6

65.4

67.7

Other

m

906

(535)

(431)

EBIT Margin

%

64.5

66.5

60.1

62.1

Operating Cashflow

m

23,557

Net Profit Margin

%

43.1

45.0

40.6

41.6

Acquisitions

m

-

-

-

-

Payout Ratio

%

59.4

47.9

50.1

49.9

Capex

m

(6,544)

(8,328)

(9,546)

(7,864)

EV/EBITDA

x

4.8

3.5

4.0

3.2

Asset Sales

m

-

-

-

-

EV/EBIT

x

5.3

3.8

4.4

3.5

Other

m

(1,104)

-

-

-

Investing Cashflow

m

(7,649)

(8,328)

(9,546)

(7,864)

Balance Sheet Ratios

10,763

38,206

(69) 33,047

Dividend (Ordinary)

m

(16,151)

(6,095)

(13,941)

(13,119)

ROE

%

45.1

42.4

31.9

32.2

Equity Raised

m

-

-

-

-

ROA

%

45.1

42.4

31.9

32.2

Debt Movements

m

(45)

-

-

Net Debt/Equity

%

(50.4)

(28.0)

(43.8)

(49.1)

Other

m

-

-

-

-

Interest Cover

x

442.9

437.4

344.7

389.6

Financing Cashflow

m

(16,149)

(6,139)

(13,941)

(13,119)

Price/Book

x

Net Chg in Cash/Debt

m

(240)

(3,705)

14,720

12,064

Free Cashflow

m

2,435

28,660

25,183

Book Value per Share

4.1

2.7

2.3

1.9

52.6

78.6

90.8

110.6

All figures in PKR unless noted Source: Company data, FSL Research, Sep09

51

Foundation Securities (Pvt) Limited

3

15,908

Pakistan Oil and Gas - Report

September 07, 2009

Pakistan Oilfields

PAKISTAN

07 September 2009 POL PA

Outperform

Stock price as of 03 Nov 08 June 09 target Upside/downside Valuation

Rs Rs % Rs

201.1 260.0 29.3 260.0

Rs bn US$m US$m m

47.6 580.1 236.5

- Reserve based DCF

Oil and gas exploration Market cap 30-day avg turnover Market cap Number shares on issue

Investment fundamentals Year end 30 Jun

2008A

2009E

2010E

2011E

Total revenue

m

16,739

14,270

17,644

21,128

EBIT

m

11,810

7,823

8,963

11,525

EBIT Growth

%

39.8

(33.8)

14.6

28.6

Recurring profit

m

7,059

5,766

6,435

8,070

Reported profit

m

8,616

5,766

6,435

8,070

Rs

36.43

24.37

27.21

34.12

EPS rep growth %

36.5

(33.1)

11.6

25.4

Rs

29.84

24.37

27.21

34.12

EPS rec growth %

11.8

(18.3)

11.6

25.4

EPS rep EPS rec

PE rep

x

5.5

8.3

7.4

5.9

PE rec

x

6.7

8.3

7.4

5.9

Total DPS

Rs

13.33

12.80

14.80

19.70

Total div yield

%

6.6

6.4

7.4

9.8

ROA

%

26.2

16.4

16.7

18.8

ROE

%

33.96

21.78

21.71

24.00

Well worth the risk Event  We have revised our forecasts for POL incorporating revised oil price assumptions and slight delay in enhanced production from Manzalai field. Though POL offers highest upside in our E&P universe, we rate it second to PPL owing to relatively lower earnings certainty, potential overstatement of reserves, and high dependence on a single non-operated block, Tal.

Impact  It’s all about time and Tal: We expect POL’s earnings to register 3-year CAGR of 17.1% from FY09-FY12, highest in our E&P universe. The growth will primarily come from increased oil and gas production (3-year oil production CAGR of 7% and gas production CAGR of 31%) driven by higher production from Manzalai and Makori fields (in Tal Block). The stock price has to date failed to fully incorporate the impact of production growth and resultant earnings growth, owing to uncertainty regarding the timing of enhanced production flows from Tal. The project is already delayed by more than three years and any additional delays will result in persistent underperformance of the scrip. However, considering the on-ground project progress, we are confident that additional production should kick in before calendar year end. Though we do feel uncomfortable with the fact that the core value driving asset for the company is a non-operated asset.

 Balancing shift in revenues: Post the enhanced production from Tal, POL’s production portfolio will become more balanced with gas contributing around 38% to revenues and oil contributing 45%, as against historical weightage of 25% gas and 55% oil. This, to some extent, will insulate POL from oil price movements and add to company’s earnings certainty.

Earnings Revision  We have increased our FY10 and FY11 earnings forecast by 2% and 10%,

EV/EBITDA

x

Net debt/equity Price/book

2.6

%

-67.90

x

1.9

4.1

3.8

-69.53

-52.94

1.8

2.9 -50.02

1.6

1.4

KSE-100

Price catalyst  Jun-10 price target: Rs260.0 based on Reserve Based DCF methodology.

POL PA rel KSE100 performance 120

respectively, which reflects the increase in our oil price assumptions. We had already communicated the earnings impact of increase in our oil price assumption for other E&P companies (OGDC and PPL) in our daily reports

 Catalyst: Commencement of production from Manzalai CPP facility by

POL

100

October 2009

80

Action and recommendation

60

 Revising our target price from Rs240.5 to Rs260.0: Increase in our June-10

40

target price reflects increase in oil price assumption. Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

20

Source: Bloomberg, Foundation Research, Sep 2009 (all figures in PKR unless noted)

 POL currently offers 29.3% return to our June-10 price target of PKR260.0. The stock trades at FY11 PE, EV/DACF, and EV/EBITDA multiples of 5.9x, 3.8x, and 2.9x, respectively. We believe that risk factors such as impairment loss on Pindori and delay in Manzalai expansion have already been incorporated in stock price. We maintain our ‘Outperform’ rating for the stock.

Analyst Asim wahab Khan 92 21 5612290-94 Ext 335

52

[email protected]

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Well worth the risk We rank POL as the next favorite investment option after PPL. Our investment case for POL is based upon company’s strong earnings growth, leveraged exploration exposure to the high potential Tal block, discounted valuations, and high project execution certainty. POL is currently trading at FY11 PE, EV/DACF, and EV/EBITDA multiples of 5.9x, 3.8x and 2.9x respectively. At current levels, though company’s developed assets value is fully incorporated in its valuations, the value of high potential developing asset, Tal block, is yet to be fully incorporated in company’s stock price. Tal block has been facing major delays (around 24-36 months) but now the 2nd phase of field development plan is near completion, which adds to high project execution certainty for POL. As per our discussion with MOL (Tal block operator), the Manzalai Central Processing Plant (CPP) facility is scheduled for inauguration in October, but the full production from the field will come on stream by the end of this calendar year. Successful inauguration of plant in October and subsequent production addition by end of this year will most likely drive a rally in POL’s stock price. However, we rank POL as second investment choice despite it offering highest upside potential owing to several reason such as, 1) relatively lower project execution certainty (compared to PPL) as there is still possibility of small delay in production addition from Tal, 2) relatively lower earnings certainty and high stock price volatility, 3) high dependence on a single non operated block Tal and, 4) potential overstatement of reserves of Pindori field. We have partially incorporated the high risk of the company by assigning it a 1% higher risk premium compared to PPL and OGDC. Though we have not incorporated any exploration value in our valuation for POL, it is a common practice to include exploration upside as E&P companies are expected to make continued expenditures in order to maintain their reserves. Several factors need to be considered in determining exploration value of a company such as its exploration acreage, potential of the exploration acreage, drilling and seismic targets, historical success rate, exposure to high potential areas, and expected composition of hydrocarbons in case of discovery. However, owing to significant subjectivity involved in the process, we have not included exploration value in our target price for POL, or any other Pakistani E&P firm. Fig 60 Break up of POL’s value 300

PKR 14.2

274.2

250

97.3

260.0

200

150

162.7

100

50

Developed assets Developing assets

Target price

Exploration upside Target price with exploration upside

Source: FSL Research, Sep09

Tal block – value driver for POL MOL operated Tal Block, located about 90 km south of Peshawar and 200 km southwest of Islamabad, is amongst the most promising area in Pakistan in terms of hydrocarbon potential. Tal block covers 4643.48 sq. km of the Kohat Plateau in Northwestern Pakistan. Total sedimentary thickness of the basin is up to 12,000 meters, holding potential for both oil and gas. Kohat emerged as an oil and gas prone region after the discovery of Chanda in 1999. PPL’s basin studies suggest that UpperIndus Basin (which is further divided in Kohat basin and Potowar Basin) has prognosticated remaining potential of 2 BBbl oil and 5 Tcf gas.

53

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 61 Tal block located in the prospective Kohat plateau

Source: MOL, Sep09

Tal history: The Government of Pakistan granted Tal Petroleum Concession & Exploration License to MOL in Tal Block (3370-3) with the Oil & Gas Development Corporation Ltd (OGDCL), Pakistan Petroleum Ltd (PPL) and Government Holdings (Pvt.) Ltd (GHPL) as joint venture partners on February 1999. In a decision that proved to be worth multi-hundred million dollars for the company, POL joined the TAL consortium in 2001, with post discovery stake of 21.05%. A discovery galore at Tal!: So far four discoveries namely Manzalai, Makori, Mamikhel, and Maramzai have been made in the block. Manzalai: The first and largest discovery of the Block, Manzalai, was struck in 2002. Manzalai is the largest discovery of this decade with original recoverable gas reserves of 1.9tcf gas and 29mnbbls oil. After successful completion of the extended well test (EWT) of the discovery well Manzalai-1, commerciality of the field was declared in November 2006 and full fledge development of Manzalai discovery is in progress. The field is currently producing around 37mmcfd gas and 450bpd oil Makori: The second discovery at Tal, Makori, was struck in 2005. Makori is mainly an oil find. Initial estimates were that MOL would start producing 5,000bpd of oil and 15mmcfd of gas from this field by February 2006. However, the well is currently producing about 20 mmcfd of gas and 1,500bpd of condensate. The reserves for the field are estimated at 0.68tcf gas and 30mmbbls of oil. Mamikhel: An ultra deep exploration well, Mamikhel, turned into another successful discovery at Tal. The well encountered flows of 45.9mmcfd gas and 2,881bpd condensate. Actual predicted recoverable reserves of the structure based on 2D seismic are about 20mmbl oil and 200bcf gas. Maramzai: The fourth discovery at Tal, Maramzai, was made last month. In the Lockhart Formation, upper 75 meters of the drilled section produced around 12 MMscfd gas and 430 bbls per day condensate was tested The discovery is made in the uppermost reservoir section of the well and drilling is continued to penetrate and test the lower potentially prospective zones.The full extent of discovery from the well will be known once the well reaches the planned Total Depth during next 60 days. Massive exploration and development plan underway at Tal: MOL and its JV partners to date have invested more than USD643mn for development and exploration in Tal block. The cumulative investment till FY07 stood at USD303mn. Another USD150mn was invested during 2008, and around USD190mn has been invested in 1HCY09. So far seven wells (1 exploratory, 1 appraisal and 5 devolvement) have been drilled at Manzalai field. Work for the installation of 300mmcfd capacity Central Processing Facility (CPF) and wells’ flow lines & gathering system is in progress with first gas expected by October 2008 upon inauguration of the facility. Production from Manzalai field will increase from current 37mmcfd of

54

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

gas to about 250mmcfd after the CPF is commissioned. The oil production will be 4,000bpd. As per PPL, the production will further increase to 350mmcfd in the next phase (expected in 2013) when more wells will be available. However, we have not incorporated the increase to 350mmcfd in our models. MOL Pakistan as operator of Tal Block signed a contract for the Manzalai Field Development Surface Facilities, worth 119 million USD with a consortium, Presson Descon International (PDIL). The contract is to construct a central processing facility comprising of two 150mmcfd capacity gas processing trains, supporting utilities, residential facilities for operators and four (4) remote gathering stations, seven (7) wellheads on turnkey (EPCC) basis. The discovery of Mamikhel will also be tied-in to Manzalai CPF facility with production of 20mmcfd gas and 1,400bpd condensate by end of this calendar year. After failure of Makori -2, a field development study for the discovery is being initiated, for which contract is being awarded to independent consultant, Fugro Robertson Limited. Though MOL has planned continued appraisal of the field, it has stated in its latest annual report that the upside from Makori discovery may be limited. Fig 62 Snapshot of development activities in Tal block

Source: MOL, Sep09

The first discovery, Manzalai field, was made in December 2002 and it is currently under trial or extended well testing (EWT) phase with oil and gas production of 400bpd of oil and 45mmcfd of gas. Looking at the initial reservoir estimates (0.6-2.8tcf as MOL official estimates) it is largest gas find in the country during current decade. MOL has indicated an expected production of 250300mmcfd from this field by end-2007. Production addition from Tal is the heart of our investment case for POL: Though POL’s stake in Tal is at 21.05% compared to PPL and OGDC stake of 27.76% each, lower equity base for POL and low reserve and production base grants the shareholder of POL a leveraged exposure to Tal. We expect POL to register earnings growth at three year CAGR of 17.1%, which is highest in our E&P universe on back of gas production CAGR of 31% and oil production CAGR of 7%. All of this growth will be driven by Tal, as we expect the production from block to contribute 70% to POL’s production and 60% to its oil and gas revenues by 2013, as against current contribution of 5% in production and 19% in revenues

55

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 63 Foreign E&P firms’ oil and gas production mmboe 8

80%

7

70%

PKR bn 20

60%

18 50%

16 6

60%

5

50%

4

40%

3

30%

8

2

20%

6

1

10%

4

14

Total POL production

Tal

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

0%

FY05

-

40%

12 10

30%

20%

10%

2 0

Tal contribution

0% FY09 FY10 Tal revenue

FY11 FY12 Total Revenue

FY13 Tal share

Source: POL accounts, FSL Research, Sep09

The value of Tal for POL comes to PKR140/share: The total value of Tal for POL comes to PKR140/share based on our Reserve Based DCF methodology. As mentioned earlier, the value of POL’s developing assets is PKR97.3/share, and all of this value is basically driven by production enhancement at Tal. Given no production enhancement, the current value of Tal for POL is 42.7/share. This comes to around 60% of POL’s producing assets value (company value less the value of cash and portfolio holdings). If we were to value POL’s reserves on EV/boe basis, the contribution for Tal would be around 75% to company’s producing assets value, as this is the block’s contribution to company’s total reserves on boe basis. EV/boe valuation would overstate the value of Tal for POL as it misses two key aspects, 1) Pindori and Pariwali fields generate better revenue per boe as they entail no crude cap on prices, 2) Tal’s contribution to company’s oil reserves is much less at 50% Fig 64 Tal’s contribution to POL’s reserves Discovery

Year

Operator

POL stake

Gas reserves Original

Oil Reserves

Remaining

Original

Remaining

Manzalai

2002

MOL

21%

1,884

1,821

29

28

Makori

2005

MOL

21%

700

673

30

28

Mamikhel*

2008

MOL

21%

200

200

20

20

Maramzai

2009

MOL

21%

NA

NA

NA

NA

586

567

17

16

POL's hare of reserves POL's total resrves % of POL reserves in Tal block *Operator initial estimates

654

32

87%

50%

Source: PPIS, FSL Research, Sep09

Tal’s earnings contribution to the company would range between 50-60% of total earnings. As per our estimates, the earnings contribution of Tal for FY10 would be 45% of company’s bottom line. This contribution would grow along with the growth in revenues and production from the field, to 55% by FY13.

56

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 65 Tal’s contribution to POL’s revenues and earnings

Tal prod assumption-Oil (barrels)

FY10

FY11

FY12

FY13

439,661

659,286

740,750

740,750

Tal prod assumption-Gas (mmcft)

18,020

23,776

24,534

24,534

Tal's contribution to POL oil production

28%

39%

43%

44%

Tal's contribution to POL gas production

67%

74%

76%

77%

13,898

17,366

19,759

20,052

6,495

9,638

11,315

11,768

47%

55%

57%

59%

POL's Total earnings

6,435

8,070

9,260

9,337

Tal's earnings

2,903

4,244

4,980

5,139

45%

53%

54%

55%

POL's oil and gas revenues Tal's revenue Tal's revenue contribution

Tal's earnings contribution Source: FSL Research, Sep09

Delays cannot be ruled out: Production enhancement from Tal has a long history of delays on back of various reasons like supply issues, security concerns, local issues (villagers demands regarding gas and royalty etc). The current target date for first gas from Manzalai CPF is October 2009. However, considering the history of delays, it wont be a surprise if another delay is announced. This might create short-term selling pressure in the scrip. However, we strongly believe that Tal production will come online before end of this year, and small hiccups in expansion program should be overlooked by the investor in favor of long term earnings potential.

Pindori – resurfacing its head Historically, Pindori field (POL 35% stake) has been the major earnings and revenue contributor for POL. The field’s peak production was around 10,000bpd oil and 30mmcfd gas. The production peaked in May 2006 and the decline began from June 2006. In June 2009, Pindori’s oil output stood at 10,000barrels, as against 300,000barrels in May 2006. Lately, the production from Pindori field has gradually recovered to 1,800bpd oil. However, this recovery is not new as POL has been making efforts to improve production from Pindori via Enhanced Oil Recovery (EOR) techniques (such as water injection well, specialized chemicals). At least 5 times the production from Pindori has recovered, only to fall down more sharply again. Fig 66 Pindori’s production trend barrels 350,000

mmcft 1,200

300,000

1,000

Failure to sustain recovery

250,000 800 200,000 600 150,000 400 100,000 200

50,000

oil Source: PPIS, FSL Research, Sep09

57

Foundation Securities (Pvt) Limited

gas

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

Feb-08

Dec-07

Oct-07

Aug-07

Apr-07

Jun-07

Feb-07

Dec-06

Oct-06

Jun-06

Aug-06

Apr-06

Feb-06

-

Pakistan Oil and Gas - Report

September 07, 2009

We have incorporated production of 500bpd oil from Pindori going forward as we would like to see production sustain current levels of 1,500bpd-2,000bpd oil for next three months before we incorporate higher production level. Nonetheless, we have provided an earnings sensitivity for different production levels from Pindori. Fig 67 POL’s earnings and target price sensitivity to Pindori production FY10

FY11

FY12

FY13

Target Price

300bpd

26.9

33.7

38.7

39.0

257.7

500bpd

27.2

34.1

39.1

39.5

260.0

1,000bpd

28.1

35.1

40.3

40.7

265.8

1,500bpd

29.0

36.1

41.5

42.0

271.6

2,000bpd

29.9

37.1

42.7

43.3

277.3

Source: FSL Research,

Sep09

Exploration – near term news flow likely Four exploratory wells near completion: Historically, POL has not been a very aggressive explorer, just like PPL. The company has also been relying on its JV partners to deliver exploration success. Recently, however, POL has become relatively active in exploration. Four exploratory wells at the moment are near completion. These include Bela-01 in Meyal (90% complete, 100% POL stake), Domail-01 in Ikhlkas (94.2% complete, 100% POL stake), Khwaja01 in Gurgalot (89% complete, 20% POL stake, operator OGDC), and Maramzai-01 in Tal (64.4% complete, 21% POL stake, operator MOL). Out of these wells, Maramzai has already been tested for oil and gas flows and further drilling is being made to test the potential of the field. Gurgalot is located in the prospective Kohat plateau, near Nashpa and Tal so it is a highly prospective are. Bela-01 in Meyal also has prospects as hydrocarbons have already been discovered in the area. Exploration value: As mentioned in the beginning of our discussion on POL, we have not incorporated any exploration upside in our valuation for Pakistan E&Ps. However, all companies are expected to make significant investments in exploratory drilling in coming years, so we now mention our estimates for the exploration value of POL. We estimate PPL’s exploration upside to be PKR14.2/share. The present value of capex for exploration comes to PKR21.4/share. Thus the actual NPV of exploration is negative which is intentional on our part as we want to remain conservative on the exploration option value. We have assumed USD3/boe for valuation of reserves, which is very conservative for new discoveries which will offer significantly better pricing on crude and gas Fig 68 POL’s exploration value comes to PKR14.2/share PV of exploratory capex/share Total PV of exploratory capex/share Success rate Discoveries Average discovery size (mmboe) Reserve addition (mmboe) EV/boe (USD) - new discoveries Exchange rate Value of discoveries (PKR bn) Discount rate Time line PV of Discoveries Total PV of discoveries

58

FY12

FY13

(6.3)

(5.7)

(5.0)

(4.4)

3

3

3

3

35%

35%

35%

35%

1

1

1

1

15.0

14.3

13.5

12.9

15

14

14

13

3

3

3

3

84

89

92

96

3,801

3,790

3,745

3,700

19%

19%

19%

19%

-

1

2

3

3,801

3,185

2,644

2,195

11,826

Exploration value

14.2

NPV of exploration program

(7.2)

Developed and developing value

260.0

TP with exploration upside

274.2

Foundation Securities (Pvt) Limited

FY11

(21.4)

Exploratory wells

Source: FSL Research, Sep09

FY10

Pakistan Oil and Gas - Report

September 07, 2009

Valuation: Target PKR260.0 We value POL at PKR260.0/share based on Reserve Based DCF valuation model. Though we have used six other valuation techniques such as market based PER, justified leading PE, target EV/EBITDA, dividend discount model, free cash flow to equity, and Economic Value added (EVA™) to value POL, we prefer Reserve Based DCF as it eliminates several weaknesses in other valuation techniques and properly assigns value according to company’s reserve life and future production profile. The technique involves forecasting of company’s complete production profile till the exhaustion of reserves, and translating the production in cash flows. Net debt and deferred tax liabilities (assuming that deferred tax benefit is temporary) are adjusted separately. We have not incorporated any exploration upside in order to reduce subjectivity and favor conservatism. For POL, we have assigned an additional 1% company equity risk premium owing to company’s heavy dependence on a single block, Tal, and high earnings and stock price volatility. Market Based PER target PKR242.8/share: Based on Market Based PER, value of POL comes to PKR242.8/share. We have valued the company on both FY10 earnings and 3-year average earnings, and taken average of the two to determine company’s Market Based PER value. Market PE and sector PE are taken as same (no premium has been assigned to E&P sector) at 8x, which is the approx. current PE of KSE-100. Since the method ignores importance of an E&P companies’ reserves, cash generation capacity, and assigns value only to short-term earnings potential of the firm, we do not prefer this technique. Justified leading PE target PKR209.3/share: Based on Justified leading PE, value of POL comes to PKR209.3/share. We have assigned a sustainable ROE of 27% to the company, which is at 5% discount to OGDC, as lower payout and higher retention will eventually lead to reduced sustainable ROE. POL’s average ROE for next three years will be 23%. Since the method ignores importance of an E&P companies’ reserves, cash generation capacity, and has certain degree of subjectivity involved in assumption of sustainable ROE, we do not prefer this technique. EV/EBITDA multiple target PKR303.2/share: Based on EV/EBITDA multiple, value of POL comes to PKR303.2/share. Considering that OGDC has the most balanced production profile (owing to nearly equal share of oil and gas in revenues), we have taken the company’s EBITDA/boe as the benchmark for assigning premium or discount to other companies. Owing to higher EBITDA/boe, we have assigned 10% premium for POL’s target EBITDA multiple. Again, we have used both FY10 EBITDA and 3-year average EBITDA, and taken the average of two to determine company’s EV/EBITDA based value. Since the method ignores importance of an E&P companies reserve, and has certain degree of subjectivity involved in assumption of target EBITDA multiple, we do not prefer this technique. Other valuation techniques: We have used three other valuation techniques, namely Dividend Discount Model, Free Cash Flow to Equity, and EVA™ for valuation of POL. Dividend Discount Model values POL at PKR184.4/share, Free Cash Flow values POL at PKR295.6/share, where as EVA™ values POL at PKR208.8/share. However, all these models suffer a similar set of weakness, they fail to incorporate the value of reserves of the firms, and have certain degree of subjectivity involved owing to assumption of terminal growth rate. In case of POL, we have assumed a terminal growth rate of 7.5%, 150bps above OGDC and 100bps above PPL owing to company’s relatively smaller size and higher retention rate which strengthens consistent growth potential. We have also provided a grand average value for the company, which is simply the average value, derived from all valuation techniques. Though with no theoretical backing, this simply provides the investor a single figure for all the techniques used. Fig 69 Summary of valuation techniques for POL Valuation technique

Valuation technique

PKR/share

Market Based PER

242.8

Dividend discount

184.4

EV/EBITDA multiple

303.2

Equity free cash flow

295.6

Justified leading PE

209.3

EVA ™

208.8

Reserve Based DCF

260.0

Grand Average (all valuation techniques)

243.4

Source: FSL Research, Sep09

59

PKR/share

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Valuation: Target PKR260.0 Major Assumptions Risk-free rate Equity risk premium (sector) Equity risk premium (company) Total risk premium Cost of equity Debt as % of assets Effective tax rate range Long-term oil price Long-term PKR depcn

12% 7% 1% 8% 20% 0% 45-50% $75 4%

Market Based PER KSE-100 PE E&P sector premium/disocunt E&P sector multiple FY10 earnings FY10-FY12 avg earnings Shares outstanding FY10 EPS FY10-FY12 avg EPS FY10 EPS based target price FY10-FY12 avg EPS based target price

8.0 0% 8.0 6,435 7,922 236.5 27.21 33.49 217.7 267.9

Target price (avg of the two target prices)

242.8

EV/EBITDA multiple Target EBITDA multiple POL premium/discount POL target EBITDA multiple FY10 EBITDA Net Debt FY10 EBITDA based EV FY10 EBITDA based market cap Shares Outstanding FY10 EBITDA based target price FY10-FY12 avg EBITDA FY10-FY12 avg EBITDA based market cap FY10-FY12 avg EBITDA based target price

4.5 10% 4.95 11,432 (8,833) 56,586 65,419 236.5 276.59 13,976 78,013 329.84

Target price (avg of the two target prices) Other valuation techniques Dividend discount Equity free cash flow

303.2

EVA ™

184.4 295.6 208.8

Grand Average (all valuation techniques)

243.4

Source: FSL Research, company reports, Sep09

60

Foundation Securities (Pvt) Limited

Justified leading PE Payout ratio Retention rate Sustainable ROE Growth (Retention x Sust. ROE) Required return Justified PE FY10 Earnings Shares outstanding FY10 EPS

0.5 0.5 27.0% 13.5% 20% 7.69 6,435 236.5 27.21

Target price

209.3

Reserve Based DCF FY09 end oil reserves (mn barrels) FY09 end gas reserves (bcf) Total Reserves (mmboe) Production to reserve

32 654 146 4.3%

Present Value of reserves Exploration upside Deferred Liabilites Debt Cash and investments Reserve based value Shares Outstanding Target Price

57,568 4,909 8,833 61,492 236.5 260.0

Comments Payout ratio assumed at 50%, terminal growth rate at 7.5%

Pakistan Oil and Gas - Report

September 07, 2009

Fig 70 Key graphs- POL 90%

$ 60

80% $ 50

70% 60%

$ 40

50% $ 30

40% 30%

$ 20

20% $ 10 10%

Operating margin

Net realized price/boe

MMboe 700

35

PKR bn 18,000

600

30

16,000

500

25

Remaining reserves

EBITDA margin

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY98 EBITDA/boe

FY99

0%

$-

Net margin

14,000 12,000 400

20

10,000

300

15

8,000

200

10

6,000 4,000

MMboe 9,000

Operating costs Exploration expenses

Gas

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Oil

FY02

-

FY01

-

FY00

0

2,000

FY99

5

FY98

100

Royalty and taxes Financial/other

45% Production contribution

40%

8,000 7,000

35%

6,000

30%

5,000

25%

4,000

20%

3,000

15%

2,000

10%

1,000

5%

oil

gas

lpg

Source: Company accounts, FSL Research, Sep09

61

Foundation Securities (Pvt) Limited

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

FY98

FY97

-

0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 ROE

EVA spread

Pakistan Oil and Gas - Report

September 07, 2009

About The Company Pakistan Oilfields Limited (POL), a subsidiary of The Attock Oil Company Limited (AOC), was incorporated on November 25, 1950. AOC was founded in 1913 and made its first oil discovery in 1915 at Khaur, District Attock. In 1978, POL took over the exploration and production business of AOC. Since then, POL has been investing independently and in joint venture with other exploration and production companies for the search of oil and gas both within the country and outside Pakistan. In addition to exploration and production of oil and gas, POL plants also manufacture LPG, solvent oil and sulphur. POL markets LPG under its own brand name of POLGAS as well as through its subsidiary CAPGAS (Private) Limited. POL has a 25% shareholding in National Refinery Limited, which is Pakistan’s only local refinery producing lube base oils and is the single largest producer of high quality asphalts. POL also operates a network of pipelines for transportation of its own as well as other companies’ crude oil to Attock Refinery Limited. Fig 71 POL key assets Field

Operator

OGDC

Discovery

Stake

Year

Gas reserves (bcf)*

Pindori

POL

50.0%

1991

172

Dhulian

POL

100.0%

1937

Meyal & Uchri

POL

100.0%

1968

Balakssar

POL

100.0%

1946

Pariwali**

POL

82.5%

Adhi

PPL

Makori-Tal

MOL

Manzalai-Tal

MOL

Original

Remaining

Remaining

Gas

Oil

55.0

32.7

0%

217

5

42.6

0.7

19%

297

23

41.7

0.7

8%

35.2

-

1%

1.3%

1994

101

40

7.2

0.8

1%

0.3%

39.0%

1978

509

356

55.1

32.4

2%

44%

27.8%

2005

700

673

30.0

27.9

1%

12%

27.8%

2002

1,884

1,821

29.0

28.3

1%

3%

Sep 09

See Appendix H for POL Held interest map

62

Original

Production contribution*

105

*As of July 2009 **To be updated by the company as the field is still producing oil Source: PPIS, FSL Research,

Oil reserves (mn bbls)*

Foundation Securities (Pvt) Limited

1.0%

Pakistan Oil and Gas - Report

September 07, 2009

Pakistan Oilfields (POL PA, 201, Target price PKR260.0) Balance Sheet

2008A

2009E

2010E

2011E

Profit & Loss

2008A

2009E

2010E

2011E

Cash

m

7,425

3,796

4,611

6,419

Revenue

m

16,739

14,270

17,644

21,128

Receivables

m

2,513

3,013

3,478

3,899

Gross Profit

m

10,583

8,551

10,104

12,599

Inventories

m

2,356

2,827

3,082

3,298

Cost of Goods Sold

m

6,156

5,718

7,540

8,529

Investments

m

10,215

10,215

10,215

10,215

Other Pre-Tax Income

m

1,392

2,020

1,407

1,556

Intangibles

m

7,717

11,086

12,059

12,853

Other Charges (WPPF/WWF)

m

647

537

637

826

Operating Assets

m

2,642

4,292

5,197

6,153

EBITDA

m

13,548

9,357

11,432

14,248

Depreciation

m

316

496

586

676

Total Assets

m

32,868

35,230

38,641

42,837

Amortisation of Goodwill

m

0

0

0

Payables

m

2,227

2,672

2,913

3,116

Other Amortisation

m

0

0

0

Short-Term Debt

m

-

-

-

-

EBIT

m

11,810

Long-Term Debt

m

-

-

-

-

Exceptionals

m

1,558

Provisions

m

2,624

3,008

3,008

3,008

Financial Charges

m

389

555

500

550

Other Liabilities

m

2,648

3,082

3,082

3,082

Pre-Tax Profit

m

11,421

8,751

9,233

11,705

Total Liabilities

m

7,498

8,762

9,002

9,206

Tax Expense

m

2,804

1,503

2,027

2,904

Shareholders' Funds

m

25,370

26,468

29,639

33,631

Net Profit

m

8,616

5,766

6,435

8,070

Minority Interests

m

-

-

-

-

Minority Interests

m

Other

m

-

-

-

-

Total S/H Equity

m

25,370

26,468

29,639

33,631

Reported Earnings

m

8,616

5,766

6,435

8,070

Total Liab & S/H Funds

m

32,868

35,230

38,641

42,837

Adjusted Earnings

m

7,059

5,766

6,435

8,070

EPS (rep)

36.43

24.37

27.21

34.12

EPS (adj)

29.84

24.37

27.21

34.12

8,963

0

0

0 11,525

0

0

0

0

0

EPS Growth (adj)

%

11.8

(18.3)

11.6

25.4

PE (rep)

x

5.52

8.25

7.39

5.89

PE (adj)

x

6.74

8.25

7.39

5.89 19.70

Total DPS

Profit and Loss Ratios

7,823

0

13.33

12.80

14.80

Total Div Yield

%

6.6

6.4

7.4

9.8

Period End Shares

m

197.1

236.5

236.5

236.5

Cashflow Analysis

Revenue Growth

%

17.6

(14.8)

23.6

19.7

EBITDA

m

13,548

9,357

11,432

14,248

EBITDA Growth

%

36.8

(30.9)

22.2

24.6

Tax Paid

m

(2,804)

(1,503)

(2,027)

(2,904)

EBIT Growth

%

39.8

(33.8)

14.6

28.6

Chgs in Working Cap

m

1,112

(526)

(479)

(433)

Gross Profit Margin

%

63.2

59.9

57.3

59.6

Net Interest Paid

m

356

(929)

(270)

(180)

EBITDA Margin

%

80.9

65.6

64.8

67.4

Other

m

693

1,205

EBIT Margin

%

70.6

54.8

50.8

54.5

Operating Cashflow

m

12,904

7,605

Net Profit Margin

%

51.5

40.4

36.5

38.2

Acquisitions

m

-

-

-

-

Payout Ratio

%

36.6

52.5

54.4

57.7

Capex

m

(4,218)

(6,566)

(3,900)

(3,947)

EV/EBITDA

x

2.6

4.1

3.8

2.9

Asset Sales

m

(1,478)

-

-

-

EV/EBIT

x

3.0

4.9

4.1

3.0

Other

m

-

-

-

-

Investing Cashflow

m

(5,696)

(6,566)

(3,900)

(3,947)

Balance Sheet Ratios

(676) 7,979

(897) 9,834

Dividend (Ordinary)

m

(2,957)

(4,667)

(3,265)

(4,079)

ROE

%

34.0

21.8

21.7

24.0

Equity Raised

m

-

-

-

-

ROA

%

26.2

16.4

16.7

18.8

Debt Movements

m

-

-

-

-

Net Debt/Equity

%

(67.9)

(69.5)

(52.9)

(50.0)

Other

m

-

-

-

-

Interest Cover

x

30.4

14.1

17.9

21.0

Financing Cashflow

m

(2,957)

(4,667)

(3,265)

(4,079)

Price/Book

x

Net Chg in Cash/Debt

m

4,251

(3,629)

Free Cashflow

m

7,208

1,039

Book Value per Share

1.9

1.8

1.6

1.4

107.3

111.9

125.3

142.2

All figures in PKR unless noted Source: Company data, FSL Research, Sep09

63

Foundation Securities (Pvt) Limited

814

1,808

4,079

5,887

Pakistan Oil and Gas - Report

To reference point

September 07, 2009

Appendix A: Economy on the mend Pakistan’s economy performed remarkably well during FY04-07, registering an average growth of 7.3% per annum while maintaining a reasonable degree of macroeconomic stability. However, country’s erstwhile robust macroeconomic performance was seriously disrupted in FY08 when the economy received unprecedented exogenous and endogenous shocks. On the external front, global commodity prices went through the roof, more than doubling on average in a short span of 12 months. With the country overly depend on commodity imports, notably petroleum and edible oil, the above led to sharp increase in imports. Excess domestic demand, an aftermath of lopsided growth strategy and inadequate policy response to emerging economic situation, along with domestic supply disruptions further exacerbated trade imbalance. Driven by substantial increase in goods and services deficit, country’s current account deficit widened to US$14.0bn or 8.4% of GDP in FY08. A concomitant decline in financial account surplus, reflective of rising risk profile of the country and dwindling external liquidity, resulted in significant pressur e on overall balance of payments position and exchange rate. Delays in passing higher global commodity prices to domestic consumers led to increase in fiscal deficit to US$12.3bn i.e. 7.4% of GDP. The monetization of fiscal deficit fuelled inflation which increased to 12.0% in FY08 vs. 7.8% in FY07. Against the above-said backdrop, GDP growth decelerated to 4.1%. The macroeconomic stresses further worsened in the initial months of FY09. With global commodity prices peaking in August, current account deficit ballooned to US$4.0 (2.4% of GDP) in 1QFY09. Due to pass on of global commodity prices to domestic consumers, consumer price inflation increased to 25.0%. Lastly, balance of payments position became extremely precarious as SBP reserves declined to US$3.4bn i.e. 4 weeks of imports and a sovereign default looked quite probable. However, following global commodity prices meltdown in August 2008, along with corrective monetary, fiscal and commercial policy actions undertaken by the government, macroeconomic situation has significantly stabilized since January 2009. For instance, CPI inflation has eased to 13.1%YoY in June from a peak of 25.0% hit in October CY08. The pressure on external account has also abated with monthly current account deficit averaging at US$193mn during January-June CY09 vs. US$1,270mn in CY08. Consequently, country’s foreign exchange reserves have increased to US$12.2bn from a low mark of US$6.7bn in October CY08. With the removal of subsidies, government’s fiscal operations have also come in order. A fall out of the stabilization program is further decline in GDP growth to 2.0% in FY09. The restoration of macroeconomic stability has provided some room to pursue counter-cyclical policies. SBP has already cut its discount rate by 200bps to 13.0%. The government also plans to run a higher fiscal deficit this year (4.9% of GDP vs. 4.3% targeted last fiscal year) depending upon materialization of FODP pledges. Provided that macroeconomic environment remains conducive, we expect economic growth to gradually pick up from FY10. However, unlike the last bout of rapid economic growth which was overwhelmingly consumption-based and services focused (eventually putting immense pressure on trade balance), the country needs to adopt a more balanced (and sustainable) growth model with larger share of productive investments (in the commodity producing sectors) and value-added exports in GDP. Though current account deficit is likely to shrink further in FY10, the country will need significant aid and loans from FODP and multilateral institutions to fund the above as private inflows are expected to further dwindle in the medium-term.

64

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 72 Improving macroeconomic outlook -1 40%

CPI

WPI

19.0

84

Total Reserves (US$bn)

PKR/US$ (LHS)

35%

17.0 79

30%

15.0

25%

74

13.0

20% 11.0 69 15% 9.0 10%

64 7.0

5%

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-09

Jul-08

Apr-09

May-08

Jan-09

Mar-08

Oct-08

Jan-08

Jul-08

Sep-07

Apr-08

Nov-07

Jan-08

5.0 Jul-07

59 0%

Source: FBS, SBP, FSL Research, Sep09

Fig 73 Improving macroeconomic outlook -2

3.00

Current Account Deficit

Fiscal deficit as %age of GDP 4,000

2.50

3,500 3,000

2.00

2,500

1.50

2,000 1,500

1.00

1,000

0.50 500

-

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Source: FBS, SBP, FSL Research, Sep09

65

Foundation Securities (Pvt) Limited

USDmn

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Pakistan Oil and Gas - Report

To reference point

September 07, 2009

Appendix B: Improving security situation With the army having taken a decisive stand against militancy following widespread support from the parliament, international community & most importantly the general public, things have finally moved in the positive direction. Following successful Rah-e-Rast (right path) operation in Malakand Division, the army has cleared most of the Taliban-afflicted NWFP districts of militants. Internally displaced persons (IDP) from the Swat, Malakand and Buner districts have gradually started returning to their homes where reconstruction efforts are gaining momentum. The army has also decided to take the Tailban head on in the restive tribal areas like Waziristan & Khyber Agency which are considered Taliban strongholds. In another major development, Baitullah Mehsud, the leader of TTP and mastermind of various bomb blasts in different Pakistani cities, was recently killed in a drone attack. Death of Baitullah Mehsud is a big blow to the Taliban forces in Pakistan.

Source: Dawn - Herald

66

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

To reference point

September 07, 2009

Appendix C: Potential of tight gas reservoirs in Pakistan Tight gas 101 Tight gas refers to natural gas produced from reservoirs that have very low porosities (i.e. lower volume of void spaces that contain hydrocarbon content) and low permeability (i.e. lower ability of rocks to transfer hydrocarbon content). These reservoirs are usually sandstone, although carbonate rocks can also be tight-gas producers. The standard industry definition for a tight-gas reservoir is a rock with matrix porosity of 10% or less and permeability of 0.1 millidarcy or less. Fig 74 Tight gas resource pyramid

Small Volumes

High 1000 md Quality

Porosity value

100 md Medium Quality

1 md 0.1 md

Tight Gas

0.001 md

Large Volumes Gas Shales

Low Quality

Coalbed Methane

0.0001 md

Source: Ryder Scott Company, FSL Research, Sep09

Tight gas entails considerable extraction complexities: In a conventional natural gas deposit, once drilled, the gas can usually be extracted quite readily, and easily. . Tight gas reservoirs, however, are a different story. The tight reservoir rocks tend to be much older – many were originally deposited during the Palaeozoic era more than 248 million years ago. Any porosity – spaces between the rock grains – and permeability they once had, has often been greatly reduced as a result of compaction, cementation, recrystallisation and chemical changes during their long and complex burial histories. In conventional reservoirs permeabilities typically range from 0.01 to 0.5 darcy – the darcy is the unit used to measure permeability – but in tight reservoirs permeabilities can be as low as fractions of a millidarcy, or even in the microdarcy range. As a result many more wells are needed to drain a tight gas field because each well produces a relatively small amount of gas. In addition, the wells need to connect with as much reservoir as possible, so they often have very complex geometries. They may, for example, be drilled on a deviated path to bypass obstacles; or they can be horizontal; or multilateral, where several horizontal wells are drilled in different directions originating from a single vertical well. Hydraulic fracturing is the key technology in tight-gas development. Most tight reservoirs have to be fractured before they will flow gas at commercial rates. In the 1980s, thick, cross-linked polymer fluids that carried tremendous volumes of sand were popular for tight-sand reservoirs, but the high cost of these treatments rendered many plays uneconomic. In the 1990s, slick-water fracturing techniques were developed that used high volumes of water and low concentrations of proppant. Multi-stage fracturing was another advance, allowing several stages to be treated in quick succession. At present, operators use a variety of techniques, the choice depending on the particular characteristics of a reservoir. However, these techniques are also very costly. Like all unconventional natural gas, the economic incentive must be there to incite companies to extract this costly gas instead of more easily obtainable, conventional natural gas.

67

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 75 Permeability vs. Porosity of gas reservoirs

Source: Total, Sep09

Global development of tight gas – U.S. the main player Tight gas to date remains underexploited outside the United States. Outside North America, only the few companies proficient in the complex techniques required to produce this gas have manifested an active interest in tight reservoirs, whose potential is quite considerable in comparison to the 180 Tcm of conventional gas reserves. In the case of the United States, not until conventional resources began to decline did operators – spurred on by fiscal incentives – turn to the potential of tight gas. Currently the only country to have implemented large-scale production of tight gas reservoirs, the United States produces 37% of its gas from unconventional fields, of which 30% comes from tight reservoirs. Elsewhere, the volumes of gas in place, coupled with improvements in production techniques, have now made it economically feasible to produce other tight gas reservoirs, thus helping to ensure future supply and driving the rapid growth of the gas market. By 2020, over half of North American gas production is likely to come from tight gas plays. Fig 76 Tight gas reservoirs will become primary source of gas in U.S.

Source: CRA International, Sep09

68

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Due to rising demand for gas, there has been international interest in its development. During the last decade development of tight gas reservoirs has occurred outside US in Canada, Australia, Mexico, Venezuela, Argentina, Indonesia, China, Russia, Egypt, and Saudi Arabia. Although the volumes of tight gas in place are distributed all over the world, the largest accumulations occur in two major regions, North America and Russia/China. Best estimates of total technically recoverable tight gas volume worldwide are between 3,000 and 10,000 TCF, enough to keep the world supplied for decades. Fig 77 World unconventional gas reserves Figures in Tcf

Coalbed Methane

Shale Gas

Tight Gas

Total

North America

3,017

3,840

1,371

8,228

Latin America

39

2,116

1,293

3,448

Western europe

157

509

353

1,019

Central and Eastern Europe

118

39

78

235

3,957

627

901

5,485

-

2,547

823

3,370

39

274

784

1,097

1,215

3,526

353

5,094

470

2,312

705

3,487

-

313

549

862

39

-

196

235

9,051

16,103

7,406

32,560

Former Soviet Union Middle East and North Africa Sub Saharan Africa Centrally planned Asia and China Pacific OECD Other Asia pacific South Asia World Source: SPE Paper-Kwata and Fujita, 2001,

Tight gas economics – when is it feasible to produce tight gas The economics of tight gas stems from the production behavior of tight gas reservoirs, which differs significantly from conventional gas reservoirs. Tight gas reservoirs have production characteristics such as more rapid decline from initial rate, long production tail at low rates, low recovery per well, more wells required to develop a field, and lower overall recovery factor. This is in sharp contrast to conventional gas formations which have higher and sustained production rates, shorter production life, high recovery per well, lesser number of wells required and high recovery factor. Fig 78 Production profile – Conventional vs. tight reserves 6

Production trend of conventional gas reservoir

5

35

1.6

30

1.4

25

Production trend of tight gas reservoir

9 8 7

1.2

6

4

1 Annual production (LHS) Cumulative production (RHS)

3

20

Annual production (LHS) Cumulative production (RHS)

0.8

5 4

15 0.6

3

2 10 1

0 0

2

4

6

8 10 12 14 16 18 20 22 24 26 28 30 Years

Source: Arc Energy, FSL Research, Sep09

69

Foundation Securities (Pvt) Limited

0.4

5

0.2

0

0

2 1 0 0

2

4

6

8 10 12 14 16 18 20 22 24 26 28 30 Years

Pakistan Oil and Gas - Report

September 07, 2009

Tight margins on tight gas owing to high development costs, costly equipment, low gas production rates over long periods, and low gas prices have prevented development of tight gas resources. As per a study, tight-gas development projects yield only marginal returns at a price of US$7/mmbtu and are very sensitive to gas price fluctuations. Financial returns depend largely on the volume of gas an average well delivers relative to the costs of drilling and stimulation, and even a 10-15% decline in gas prices can make the project completely unviable. Another study conducted by Advanced Resources International lends support to the previous study. The study evaluated 94 unconventional gas resources and yielded following results: ► 27 were economical only at a long term gas price of more than 6.30 USD/MSCF ► 21 being marginally economic ► 46 need higher gas prices to be profitable These economics are for US where infrastructure is well established and the cost of drilling & production services is much lower, thus higher breakeven price can be expected in other regions. Arc Energy Limited has presented a comparison of value derived from a tight gas field as against a similar conventional gas field. Owing to higher number of wells required (could be as many as 10 times than that of a similar conventional gas field) and complex drilling techniques (such as Hydraulic Fracturing), the capex requirements of a tight gas field can be many times more than a conventional gas field. Owing to this, conventional gas fields can offer more attractive NPVs even at half the gas price of a tight gas field. Fig 79 Cumulative before-tax cash flows – Conventional vs. Tight gas projects USD mn 275 $7/GJ-Conventional 225 175 $5/GJ-Conventional 125 $7/GJ-Tight gas

75

$5/GJ-Tight gas

25 -25

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Years

-75

-125 Source: Arc Energy, FSL Research, Sep09

Tight gas – the case for Pakistan As per OMV estimates, Pakistan holds 30-40tcf of tight gas reserves which nearly similar to country’s remaining conventional gas reserves of 30tcf. Eni Pakistan estimates that the Pakistan may have more than 33 TCF (5,700mmboe) Gas Initial In Place (GIIP) distributed in different areas across the country, while large area still unknown and may have more potential tight gas reserves Fig 80 Tight gas potential in Pakistan Basin

No of prospects

Reservoirs

GIIP

% tight gas potential

Middle Indus Basin

11

7

7,400

22.0%

Sulaiman basin

14

3

19,000

56.4%

8

2

7,300

21.7%

33

12

33,700

100.0%

Kirthar Basin Total

Source: Eni Pakistan Limited, FSL research, Sep09

70

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 81 Known tight gas reservoirs in Pakistan

Source: Eni Pakistan Limited, Sep09

Three basins, namely Middle Indus Basin, Sulaiman Basin, and Kirthar Basin contain tight gas reservois of around 33.7tcf. Whereas other potential basins such as Potwar Basin, Lower Indus Basin, and Indus Offshore are additional potential areas Tight gas extraction in Pakistan is feasible with adequate incentives: Eni Pakistan presented a case study on possibilities of development of tight reservoirs in the country, and projected NPV and IRR of such projects. The study was based on a simulated tight gas reservoir with following set of assumptions: Initial production rate is 2 MMscf/d and cum production is ~ 6 BCF / Well No of wells Estimated to produce around 300 bcf (50 Wells with hydraulic fracture) 10 Wells will be drilled every year. 1st gas after 1 year Duration of the field production is 20 years Wells will be tied into an existing facility. 50 wells with hydraulic fracture stimulation are required to produce ~ 300 Bcf in 20 years. Well Drilling, completion and fracturing estimated cost is 13 M$/Well Tie-in cost is 3 M$/Well and abandonment cost is 1 M$/Well Cost will be escalated 5% every year. OPEX is estimated at 3.5$/BOE

71

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

September 07, 2009

Fig 82 Eni tight gas project simulation – project comparison under 2009 policy vs. proposed policy Tight gas project – 2009 policy Project assumptions Type of Contract: Petroleum Concessions Agreement Location: On-shore fields. Taxation: Tax on income will be payable at the rate of 40%

Tight gas project - Proposed policy Project assumptions Type of Contract: Petroleum Concessions Agreement Location: On-shore fields. Taxation: Sliding Scale taxation system based on Annual R-Factors R-Factor* Tax rate 1.5 or below 0% Between 1.5 and 2.0 15% Between 2.0 to 2.5 30% Above 2.5 40% *where R-Factor = cumulative earnings/cumulative costs Royalty: 12.5% Production bonuses: No Zonal Index used : 75% Pricing Mechanism: As provided below Ruling Price ($ /BBL) Applicable Price ( $ /BBL)

Royalty: 12.5% Production bonuses: Yes Zonal Index used : 67.5% Pricing Mechanism: As provided below Ruling Price ($ /BBL) Applicable Price ( $ /BBL)

$ 60 or below 100% with floor of $56 Between $ 60 to $ 75 $60 plus 50% of incremental price Between $ 75 to $ 100 $67.5 plus 25% of the incremental price Between $ 100 to $ 150 $73.75 plus 15% of incremental price Above $ 150 $81.25 DR = Discount Rate: 13% Project financials (USD mn unless noted) Total CAPEX 884 Total OPEX 183 No. of Wells (no.s) 50 Total Cost per well 17.7 Project NPV 46 PV Government Take 141 Project IRR 15.00% Reserves (BCF) 300 Total Cost $/boe @ 13% DR 13.45 CAPEX $/boe @ 13% DR 12.18 OPEX $/boe @ 13% DR 1.26 Source: Eni Pakistan Limited, MPNR, FSLResearch, Sep09

$ 20 or below 100% with floor of $10 Between $ 20 to $ 30 $20 plus 50% of incremental price Between $ 30 to $ 40 $25 plus 30% of incremental price Between $ 40 to $ 70 $28 plus 20% of incremental price From $70 to $100 $ 34 plus 10% upto $100 / BBL Discount Rate: 12.5% Project financials (USD mn unless noted) Total CAPEX 884 Total OPEX 183 No. of Wells (no.s) 50 Total Cost per well 17.7 Project NPV -410 PV Government Take 62 Project IRR -6.33% Reserves (BCF) 300 Total Cost $/boe @ 12.5% DR 14.21 CAPEX $/boe @ 12.5 % DR 12.71 OPEX $/boe @ 12.5 % DR 1.5

80

350,000

70

300,000

Daily sales (mmcfd)

60

250,000

50 200,000 40 150,000 30 100,000

20

50,000

10 0

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 Y20 avg daily sales

Source: Eni Pakistan Limited, FSL Research, Sep09

72

Foundation Securities (Pvt) Limited

Cum sales

Cumulative sales (mmcf)

Fig 83 Production profile – Eni tight gas simulated project

Pakistan Oil and Gas - Report

September 07, 2009

Tight gas case for Pakistan conclusion – GoP should go for it!: It has to be recognized that quite similar to deep water exploration and development, tight gas reservoir development entails significant risk. The process requires complex drilling technology such as horizontal wells, Multilateral wells, involves complex completion system and excessive stimulation technology, multifracs etc. Also, the production behavior of tight gas reservoirs, as discussed earlier, results in small declines in realized prices dramatically affecting project NPV. Thus we feel that the demands of lower zonal discount, fiscal incentives, and pricing incentives is justified by the higher risks associated with development of tight gas reservoirs. Most importantly, however, the gas obtained from tight reservoirs will be cheaper than imported gas at any crude oil price of over $52.5/barrel Fig 84 Tight gas likely to be cheaper than imported gas 25.0

Gas price USD/mmbtu

20.0

15.0

IP pipeline price Tight gas price for 15% project IRR

10.0 $52.5/bbl = equivalency point

5.0

150

145

140

135

130

125

120

115

110

105

95

100

90

85

80

75

70

65

60

55

50

45

40

35

30

25

20

15

10

Reference crude price USD/bbl Source: Eni Pakistan Limited, FSL Research, Sep09

Considering the cost of imported gas could go as high 4-5 times that of local gas (and 3-4 times the cost of gas under 2009 policy), we feel that development of unconventional hydrocarbon resources such as tight gas could offer significantly better economic terms to the country, not only in terms of lower gas prices compared to imported gas but on multitude of macroeconomic factors such as lower inflation, increased employment, lower pressure on balance of payments etc.

73

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

To reference point

Appendix D: Oil and gas discovery map

Source: PPL

74

September 07, 2009

Foundation Securities (Pvt) Limited

Pakistan Oil and Gas - Report

To reference point

Appendix E: Pakistan basin map

Source: PPL

75

Foundation Securities (Pvt) Limited

September 07, 2009

Pakistan Oil and Gas - Report

To reference point

Appendix F: OGDCL held interest map

Source: OGDCL

76

Foundation Securities (Pvt) Limited

September 07, 2009

Pakistan Oil and Gas - Report

To reference point

Appendix G: PPL held interest map

Source: PPL

77

Foundation Securities (Pvt) Limited

September 07, 2009

Pakistan Oil and Gas - Report

To reference point

Appendix H: POL held interest map

Source: POL

78

Foundation Securities (Pvt) Limited

September 07, 2009

Pakistan Oil and Gas - Report

September 07, 2009

Foundation Securities (Pvt) Limited URL: www.fs.com.pk Email: [email protected]

Offices Karachi

Islamabad

Lahore

Ground Floor, Bahria Complex II

2nd Floor, Block 11

1st Floor, 86 Y, Commercial Area

MT Khan Road

School Road, F-6 Markaz

Phase 3, DHA

Karachi

Islamabad

Lahore

UAN: 111 000 375

UAN: 111 000 375

PABX: +9221 35612290-94

PABX: +9251 2879460-66

PABX: +9242 35692781-90

Facsimile: +9221 35612262

Facsimile: +9251 2879469

Facsimile: +9242 35781575

Foundation Research Analyst

Sectors

PABX

Email

Syed Suleman Akhtar CFA

Economy, Banking

+92 21 3561 2290-94 x 338

[email protected]

Asim Wahab Khan

E&P, Refineries

+92 21 3561 2290-94 x 335

[email protected]

Taha Javaid Khan

Chemicals, Cement, Power

+92 21 3561 2290-94 x 313

[email protected]

Ali Reimoo

Fertilizers, OMCs, Textiles

+92 21 3561 2290-94 x 345

[email protected]

Naukhaiz Saleem

Telecom, FMCGs, Gas Marketing, Auto

+92 21 3561 2290-94 x 339

[email protected]

Shahzad Usman

Database

+92 21 3561 2290-94 x 312

[email protected]

PABX

Email

Atif Muhammad Khan

+92 21 3561 2253

[email protected]

Siraj Ebrabim Kazi

+92 21 3561 2256

[email protected]

Syed Rehan Ali

+92 21 3561 2259

[email protected]

Zubair Ghulam Hussain

+92 21 3563 5166

[email protected]

Imran Abdul Aziz

+92 21 3563 5013

[email protected]

Murtaza Jafar

+92 21 3561 0625

[email protected]

Faisal Khan

+92 21 3561 2258

[email protected]

Adnan Ahmed Usmani

+92 21 3561 0887

[email protected]

Islamabad Ehmer Iqbal Syed Salman Mansur

+92 51 287 9467 +92 51 287 9461

[email protected] [email protected]

Lahore Mehmood Afzal Butt Ata-ur-Rehman

+92 42 3569 2781 +92 42 3569 2782

[email protected] [email protected]

Foundation Sales Trader

Karachi

79

Foundation Securities (Pvt) Limited