Pakistan Oilfields Ltd – FY10 EPS lags estimates; our liking remains intact

FY10 EPS trailed expectations; DPS surprises: POL posted profit after tax of PKR7.4bn (EPS: PKR31.44), up 32% YoY, and announced final DPS of PKR17.5, taking full year payout to PKR25.5/share. 4QFY10 EPS at PKR7.78, down 19% QoQ trailed estimates by 17.5%.

Gross profit in line; higher exploration cost behind lower earnings: 4QFY10 exploration cost at PKR736mn was almost three times of what we expected, taking full year exploration cost to PKR1.6bn, down 22% YoY, but 43% higher than estimates.

Higher payout ratio continues for the second consecutive year: FY10 DPS at PKR25.5 translates into a payout ratio of 81%, against FY05-08 average payout ratio of 45%. Maturing exploration efforts and completion of major development projects are the likely reasons behind increase in payouts and may continue going forward.

Poised for another year of strong growth: Full year impact of Manzalai expansion, coupled with additions from Mamikhel and Maramzai, shall lead to 12% YoY and 46% YoY growth in oil and gas volumes respectively in FY11. Maintain estimates, reiterate BUY: POL trades at FY11E PER of 5.7x, FY11E dividend yield of 10.7% and offers 36% upside to our June-2011 PT of PKR320/share. BUY!

Gross profit in line; higher exploration cost behind lower earnings

With top-line and operating costs largely in line with expectations, higher exploration cost during 4QFY10 was the major reason behind lower than expected earnings. 4QFY10 exploration cost at PKR736mn was almost three times of what we expected, taking full year exploration cost to PKR1.6bn, down 22% YoY, but 43% higher than estimates. POL acquired 54 sq. km (stake adjusted) of 3D seismic during 4QFY10 as against 37 sq. km (stake adjusted) during 3QFY10.

Higher payout ratio continues for the second consecutive year

With the announcement of PKR17.5/share final dividend, aggregate FY10 DPS reached PKR25.5 translating into a payout ratio of 81%, against FY05-08 average payout ratio of 45%. Maturing exploration efforts and completion of major development projects are the likely reasons behind increase in payouts and we do not rule out possibility of higher payouts continuing into FY11. Assuming 80% payout ratio, FY11 DPS would rise to PKR33 (base case: PKR25), implying an attractive FY11E dividend yield of 13.9% (base case: 10.5%). We, however, maintain our base case DPS estimates for now.

Poised for another year of strong growth

POL is poised for another year of strong growth in FY11 as full year impact of Manzalai expansion, coupled with additions from Mamikhel and Maramzai, shall lead to 12% YoY and 46% YoY growth in FY11 oil and gas volumes respectively. This shall translate into an overall volume growth of 34% during the next year, marginally lower than 37% YoY volume growth achieved during FY10. FY11E EPS is expected to jump 31% YoY.

Maintain estimates, reiterate BUY

While we slightly tweak our FY11 ‘other income’ estimates due to lower cash balances resulting from higher FY10 payouts, we maintain our FY11E DPS forecast at PKR25.0. POL trades at FY11E PER of 5.7x, FY11E dividend yield of 10.7% and offers 35% upside to our June-2011 PT of PKR320/share. BUY!

Economic & Political News

Govt studying future plan without IMF

The government is considering to wind up the Standby Arrangement (SBA) with the International Monetary Fund (IMF) on a “positive note” after meeting all conditionalities and receiving the next USD1.7bn tranche in November-December this year. Informed sources said the authorities hoped to meet the remaining major conditions of the IMF programme, including introduction of a broad-based reformed general sales tax (RGST) and energy sector reforms during the current quarter (October-December) and complete the fifth review in October-November. A government official said that the authorities had discussed the option in internal meetings and a final decision about the termination of the SBA would be made by November this year keeping in view the economic situation at that time.

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