Oil & gas sector's profit boom stalls in Q1 2024 amid lower income

May 10, 2024 (MLN): Pakistan’s oil and gas exploration sector has failed to sustain its tale of financial success as industry players witnessed a major drop in earnings due to a negative shift in exchange income during the first quarter of 2024.

The unconsolidated earnings for the quarter clocked in at Rs101.93 billion, significantly down by 21.71% YoY, equivalent to Rs28.26bn compared to the profit of Rs130.19bn incurred in the same quarter last year.

The industry leader, Oil & Gas Development Company Limited (OGDC) experienced the highest profit drop with net earnings reducing by Rs16.82bn to Rs47.81bn versus Rs64.63bn in Q1 2023.

The declining trend was followed by all the remaining members, which include Mari Petroleum Company Limited (MARI), Pakistan Petroleum Limited (PPL) and Pakistan Oilfields Limited (POL).

Resultantly, POL and MARI did not announce any dividends for the quarter, while OGDC and PPL declared their consistent dividend of Rs2 and Rs1 per share respectively.

The sector has been at the forefront in the nation for quite a prolonged period, earlier due to the escalating concerns over the circular debt, and more recently during this quarter due to the positivity surrounding Saudia Arabia’s interest in investment.

It is important to highlight that despite the ups and downs on the circular debt front, the sector recorded a stellar financial performance during the first half of the ongoing fiscal year 2024.

Analysis of the profit and loss accounts made available by companies reveals that the primary reason for the contraction in the bottom line is the massive reduction in Finance and other income.

The sector’s topline improved 6.81% YoY and reached Rs252.22bn in Q1 2024 against the revenue of Rs236.14bn posted in Q1 2023.

PPL associated this rise with a positive price variance that was partially offset by a negative volume variance.

Positive price variance stems from a significant devaluation of the Pakistan Rupee against the US dollar, with the average exchange rate for Q1 2024 rising to 279.51 compared to 261.08 during the corresponding period, reflecting a 6.59% YoY depreciation.

However, the gains arising from the Rupee devaluation were somewhat capped due to a slight drop in international crude oil prices. Brent Crude, the key benchmark fell to an average rate of $81.7 in Q1 2024 compared to $82.17 in Q1 2023.

Despite the rising geopolitical tensions and extended supply cuts by the OPEC+ group, crude oil prices remained lower in comparison to the corresponding period last year.

Furthermore, royalties and operating expenses associated with the sector’s cost of sales inched higher to a total of Rs86.19bn during the review quarter.

As the sales revenue grew by a greater proportion, the gross profit ticked up slightly and was recorded at Rs166.04bn in Q1 2024, up by just 2.88% YoY.

However, this marginal rise in gross profit was not significant enough to cover the escalating operational costs.

The sector correspondents remained robust in drilling and operational activities, which resulted in the exploration and prospecting expenditure spiking by 76.77% YoY to a total of Rs22.72bn.

Likewise, the general and administrative expenses were recorded higher at Rs3.17bn during the quarter under review.

Considering the limited growth in gross profit and the increase in expenses, the companies managed to reduce their other charges, which include workers welfare, participation fund and various other payments, by 3.36% YoY to Rs11.41bn.

The section that draws the most attention in the joint profit and loss statement is the finance and other income segment, which reflects a massive drop of 58.14% YoY equivalent to Rs27.06bn in Q1 2024, leading it to be the main reason for the reduced quarterly earnings.

Upon digging into the notes of the financials of individual companies, it was revealed that all components under this segment remained strong apart from the Net Exchange Income, which underwent a major transition from a substantial inflow to a considerable loss.

Even though the sector’s finance costs were reduced by more than half, the impact of the decline in finance and other income couldn't be offset by any other factor, consequently, the bottom line dropped in Q1 2024.

The tax expenditure this quarter was reduced significantly by 16% YoY to Rs52.73bn on account of the reversal of prior years’ tax provision under a favorable decision of the Honorable Supreme Court of Pakistan (SCP) in respect of the calculation of depletion allowance on well-head value.

In the judgment, the SCP decided that royalty paid by a taxpayer is a separate component and not to be deducted while calculating the well-head value for depletion allowance, said PPL.

Recent Developments with Potential Outlook

At the beginning of the quarter, the government executed Petroleum Concession Agreements and Exploration Licenses for 8 blocks with these 4 companies, stipulating a minimum investment of over $33.3 million to be carried out.

To further incentivize the oil and gas industry to invest in the exploration of unconventional/tight gas resources, the government unveiled the long-awaited Tight Gas (Exploration & Production) Policy 2024 to the public on February 01, 2024.

The policy will incentivize the oil and gas industry to invest in the exploration of unconventional/tight gas resources that have not been produced due to non-commercial viability.

Another positive wave came to the sector when Saudi Arabia showed its interest in acquiring shares of Pakistan's leading energy giants, OGDC and PPL to bolster the nation's energy sector and strengthen economic ties.

However, the circular debt and its resolution plan remain a question mark with no progress currently being observed.

In February 2024, it was unveiled that the long-awaited negotiations between the government and the International Monetary Fund (IMF) regarding the settlement of the energy sector's circular debt had started. However, since then, no further developments have been observed.

On the investment front, the Special Investment Facilitation Council (SIFC) will continue to play its role in attracting foreign investment in Pakistan. The oil and gas exploration sector being one of the major attractions to foreign investors is poised to witness a substantial boost.

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