Pakistan Oilfields Ltd - Credit Suisse

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17 April 2012 Asia Pacific/Pakistan

Equity Research Oil & Gas Exploration & Production

Pakistan Oilfields Ltd (PKOL.KA / POL PA)

INITIATION

One of our strongest bottom-up picks in Pakistan ■ We initiate coverage on Pakistan Oilfields with an OUTPERFORM rating

and a target price of PRs515 per share. In addition, it offers a dividend yield of 14%, providing a total return of 50%. POL is one of the four listed oil and gas exploration and production (E&P) companies in Pakistan.

■ In our view, POL is one of the strongest bottom-up investments in Pakistan today. As a uniquely positioned E&P company, it is relatively shielded from macro, political and currency risks, including insulation from the sectoral issue of circular debt (see page 15). Among Pakistani E&Ps, POL provides the best hedge to high oil prices and PRs depreciation, due to its favourable oil-gas mix. Its private ownership is also an advantage, particularly its ability and willingness to maintain high dividend payouts.

■ POL has the most leveraged exposure to the potential of Pakistan’s biggest oil and gas find of the past decade (the TAL block). TAL is Pakistan’s biggest hydro-carbon asset by revenue, value and acreage, accounting for 39% of the country’s oil reserves. It has had six successful discoveries (a success ratio of 55%) and produces 7% of Pakistan’s gas and 12% of its oil, with CS expecting oil contribution to rise to 20% in FY13E.

■ Trading at a FY13E P/E of 5.2x, an EV/EBITDAX of 2.6x and offering a best-in-class dividend yield of 14%, POL offers one of the most compelling valuations among CS’ E&P universe. We are significantly ahead of consensus forecasts, mainly due to our higher oil price assumptions. We expect consensus upgrades as higher oil prices look likely to sustain. The key risk to our thesis is high dependence on TAL block, dependence on group refining, and a sharp decline in oil prices.

Share price performance

200250300350400

Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11

80100120140160

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the KARACHI SE 100 INDEX which closed at 13825.72 on 16/04/12 On 16/04/12 the spot exchange rate was PRs90.7/US$1

Performance Over 1M 3M 12M Absolute (%) 3.3 4.3 15.1 Relative (%) -0.7 -15.4 -3.3

Financial and valuation metrics

Year 6/11A 6/12E 6/13E 6/14E Revenue (PRs mn) 24,950.7 31,457.2 38,948.6 44,076.9 EBITDAX (PRs mn) 17,245.7 21,915.5 27,540.5 31,052.5 EBIT (PRs mn) 14,469.6 17,487.5 23,233.9 26,590.6 Net profit (PRs mn) 10,815.0 12,737.8 16,913.4 19,279.5 EPS (CS adj.) (PRs) 45.72 53.85 71.50 81.50 Change from previous EPS (%) n.a. Consensus EPS (PRs) n.a. 52.8 61.3 65.5 EPS growth (%) 45.4 17.8 32.8 14.0 P/E (x) 8.1 6.9 5.2 4.6 Dividend yield (%) 9.4 10.8 13.5 15.4 EV/EBITDAX (x) 4.7 3.4 2.6 2.1 P/B (x) 3.2 2.9 2.4 2.1 ROE (%) 41.2 43.7 50.8 49.7 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (16 Apr 12, PRs) 371.26 Target price (PRs) 515.00¹ Chg to TP (%) 38.7 Market cap. (PRs mn) 87,820 Enterprise value (PRs mn) 74,981 Number of shares (mn) 236.55 Free float (%) 46.0 52-week price range 390.6 - 319.0 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.

Research Analysts

Farrukh Khan, CFA 65 6212 3035

[email protected]

17 April 2012

Pakistan Oilfields Ltd

(PKOL.KA / POL PA) 2

Focus charts Figure 1: POL enjoys a favourable oil-gas mix which is

very beneficial in a high crude price environment

Figure 2: Earnings and dividend yield continue to rise

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Figure 3: POL’s trade debts as a % of sales much lower

than peers’, as it is less impacted by circular debt …

Figure 4: … and it provides the most leveraged exposure

to Pakistan’s most valuable hydrocarbon asset (TAL)

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Figure 5: Attractive valuations vs. Asia-Pacific E&Ps … Figure 6: … while offering a best-in-class dividend yield

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Source: IBES, Credit Suisse estimates Source: IBES, Credit Suisse estimates

17 April 2012



One of our strongest bottom-up picks in Pakistan Strong defensive qualities, good growth prospects We initiate coverage on Pakistan Oilfields (PKOL.KA) with an OUTPERFORM rating and a target price of PRs515, based on a 2P reserves based DCF valuation. Within Pakistan’s E&P sector, POL is one of the four listed companies. Others are: (1) Oil and Gas Development Company (OGDC); (2) Pakistan Petroleum (PPL); and (3) Mari Gas (MARI). Pakistan’s E&P sector provides strong defensive qualities, with demand and pricing not linked to domestic macros. ROEs and EBITDA margins are among the highest in the CS APAC universe, and recent gas price improvements provide the basis for strong long-term economics. Besides strong fundamentals, POL is one of KSE’s most liquid stocks—avg daily trading value of US$2.9 mn.

Good place to be with crude at US$120 Against this backdrop of weak macros and high oil prices, one of the best sectors to be overweight is E&Ps, which offers investors relative macro immunity and benefits from rising oil prices. Within the sector, POL stands out as a favourable oil-gas mix gives it greater benefit than domestic peers from higher oil prices and PRs depreciation. The combined impact of a 5% oil price rise and 5% PRs depreciation increases its EPS by 8%.

Earnings growth from multiple drivers We believe POL’s earnings and dividend growth will remain strong over FY12–15E, driven by oil-heavy production growth, high oil prices and PRs depreciation. Our earnings estimates and target price are significantly above consensus, primarily due to our higher oil price assumption. We believe consensus upgrades will come in as high oil prices are expected to sustain. With its 21% stake, POL provides the most leveraged exposure to the potential of Pakistan’s largest oil and gas find of the last decade (TAL block). TAL is Pakistan’s biggest hydro-carbon asset by revenue, value and acreage, accounting for 39% of the country’s oil reserves. It has had six successful discoveries (a success ratio of 55%) and produces 7% of Pakistan’s gas and 12% of its oil, with oil contribution expected to rise to 20% by FY13E.

No quick resolution to circular debt, POL insulated POL’s unique group-level vertical integration shields it from the sectoral issue of circular debt (see page 16). The issue of circular debt has been an overhang for Pakistan’s E&P sector, and is adversely impacting cash flows, dividends and valuations. Circular debt arises when the government delays payment of electricity subsidies to power distribution companies, which creates a cash crunch throughout the energy supply chain. Being net cash companies, E&Ps remain fairly liquid, but OGDC in particular has seen a sharp increase in trade receivables due to circular debt. POL, however, escapes the worst of the impact of circular debt through vertical integration of the Attock Group. This allows POL to receive relatively prompt payment from its only oil customer, Attock Refinery (ATRL), which, like POL, is majority owned by the Attock Group. Thus, POL’s cash cycle and payouts are much healthier than E&P peers.

Compelling valuations on standalone/relative basis Our target price of PRs515, along with a 14% dividend yield offers a total return of 50%. Our valuation is based on a 2P reserves-based discounted cash flow. Trading at a FY13E P/E of 5.2x, an EV/EBITDAX of 2.6x and offering a best-in-class dividend yield of 14%, POL’s valuations stand out in the CS APAC E&P universe. Given its bottom-up strength and insulation from most Pakistan-specific risks, we believe discounts to international peers are excessive. The key risks to our thesis are high dependence on TAL block, dependence on group refining, and a sharp decline in oil prices.

Pakistan E&P ROEs and EBITDA margins are among the highest in CS APAC E&P universe

POL stands out for its favourable oil-gas mix, leveraged exposure to Pakistan’s most valuable hydrocarbon asset, and unique group-level vertical integration which shields it from circular debt

Strong EPS and dividend growth in FY12–15E based on a combination of production growth, high oil prices, and PRs depreciation

POL offers the highest dividend yield in the CS oil and gas universe and very attractive on P/E and EV/EBITDAX

17 April 2012



E&P sector comparison Figure 7: E&P universe TP Mkt Dividend

Company Ticker Rec. Mkt price Target upside cap P/E (x) yld (%) EV/EBITDAX (x)

13-Apr 12 price (%) (US$ mn) 12E 13E 12E 13E 12E 13E

ASIA-PACIFIC

Pakistan Oilfields PKOL.KA O 370.6 515.4 39.1 963 6.9 5.2 10.8 13.5 3.7 2.6

Pakistan Petroleum PPL.KA NR 192.0 n.a n.a 2,760 5.8 5.3 7.0 8.1 3.0 2.8

Oil and Gas Development Co OGDC.KA NR 164.0 n.a n.a 7,730 8.5 7.7 4.0 5.0 4.6 3.9

CNOOC 0883.HK 0 15.4 18.3 18.8 88,581 6.6 6.4 4.0 4.1 4.1 3.9

Cairn India CAIL.BO N 340.0 390.0 14.7 12,594 5.2 4.2 4.3 5.3 3.8 3.2

Green Dragon Gas GDG.L O 8.8 15.1 71.6 1,195 - 18.1 0.0 0.0 37.7 12.8

INPEX 1605 O 521,000 840,000 61.2 25,693 10.2 10.0 1.1 1.1 9.8 7.6

ONGC ONGC.BO N 261.1 315.0 20.6 43,456 8.8 8.6 3.8 3.9 4.3 3.9

Aurora Oil & Gas AUT.AX N 3.7 4.2 13.5 1,606 11.7 5.9 0.0 0.0 8.8 4.3

AWE Limited AWE.AX N 1.8 2.1 16.7 986 20.9 13.5 0.0 0.0 5.6 4.8

Molopo Australia MPO.AX O 0.6 1.0 48.4 164 - 18.8 0.0 0.0 - 7.4

Oil Search Ltd. OSH.AX O 7.0 8.4 20.1 9,585 39.9 36.4 0.6 0.6 28.0 26.1

Karoon Gas KAR.AX O 5.9 7.7 29.2 1,363 - - 0.0 0.0 - -

Santos Ltd. STO.AX N 14.0 14.8 5.4 13,843 20.4 18.2 2.1 2.1 8.4 7.8

Tap Oil Ltd TAP.AX N 0.9 1.0 8.7 227 25.9 30.8 0.0 0.0 10.5 7.4

Woodside Ltd. WPL.AX O 34.2 40.5 18.2 29,484 13.0 9.6 3.9 4.2 8.8 7.3

Average 27.6 14.2 13.3 2.7 3.1 10.9 8.4

Europe

Afren Plc AFRE.L O 133.8 170.0 27.1 2,290 8.6 9.3 0.0 0.0 3.6 4.5

Cairn Energy CNE.L N 326.9 392.0 19.9 2,891 41.4 - 0.0 0.0 46.0 43.8

EnQuest ENQ.L N 124.5 127.0 2.0 1,593 14.6 7.9 0.0 0.0 3.1 2.5

Det norske DETNOR.OL

O 83.8 120.0 43.3 1,853 - - 0.0 0.0 15.6 11.4

DNO Petroleum DNO.OL N 9.5 10.2 7.9 1,672 7.4 4.7 0.0 0.0 3.9 2.7

Dragon Oil DGO.L O 614.5 818.0 33.1 5,008 7.1 5.5 2.2 2.9 3.7 3.0

Faroe Petroleum FPM.L O 171.0 231.0 35.1 579 16.7 4.8 0.0 0.0 2.7 1.6

Genel Energy plc GENL.L O 699.0 1,142.0 63.4 2,379 19.7 8.0 0.0 0.0 2.2 1.0

KazMunaiGas E&P KMGq.L N 20.4 23.9 17.2 8,436 5.7 5.8 4.1 4.2 5.2 5.5

Lundin Petroleum LUPE.ST N 134.1 161.0 20.1 6,311 29.7 26.7 0.0 0.0 14.1 12.9

Ophir Energy plc OPHR.L O 521.0 680.0 30.5 3,302 - - 0.0 0.0 - -

Premier Oil PMO.L O 393.3 490.0 24.6 3,317 21.9 9.0 0.0 0.0 5.5 3.6

Rockhopper Exploration Plc RKH.L O 327.3 408.0 24.7 1,483 - - 0.0 0.0 -24.7 -54.3

RusPetro Plc RPO.L O 194.5 332.0 70.7 1,034 - 25.0 0.0 0.0 40.9 11.8

SOCO International SIA.L N 294.1 313.0 6.4 1,586 12.2 10.3 0.0 0.0 7.9 6.5

Tullow Oil TLW.L O 1,475.0 1,800.0 22.0 21,303 40.0 27.7 0.0 0.0 29.8 21.2

Average 28.0 18.7 12.1 0.4 0.4 10.6 5.2

For OGDC and PPL, we have used IBES estimates as they are not under CS coverage. Source: Company data, Thomson Reuters Datastream,

Credit Suisse estimates

17 April 2012



Strong defensive qualities, good growth prospects Pakistan E&P Sector highlights Oil and gas exploration companies form the mainstay of Pakistan’s equity market, with a 32% weightage in the KSE-100. In total, there are 27 E&P companies operating in Pakistan, including 11 local and 16 international players. Government-owned OGDC and PPL dominate the landscape in terms of production and reserves. Apart from OGDC and PPL, the other listed E&Ps are POL and MARI.

Pakistani E&Ps have historically enjoyed a very high success rate of 30% in exploration. One of the reasons for this high run rate is the concentration of exploration activity in mature basins. This results in low operating costs as well.

Figure 8: Pakistan E&P sector highlights No. As of 31 March 2012

Exploration wells to date 799

Appraisal/development wells to date 1,089

Total 1,888

Total discoveries 248

Success rate (%) 31

Oil (no of discoveries) 58

Oil & Gas/Gas/Condensate (no of discoveries) 190

Sedimentary area (sq km) 827,268

Area under exploration (sq km) 277,491

Drilling density (wells/1,000 sq km) 2.17

Exploration licences held 133

No of operators 27

Source: PPIS

Pakistan is mainly a gas producing country, with gas production (4.3 bcf/d) more than 10x higher than oil production of a mere 72,000 bbl/d. Pakistan ranks as the sixth-highest natural gas producer in the APAC region, but faces a domestic deficit in both oil and gas. Demand has been rising, but production has stagnated in the past few years. However, oil production has increased in FY12 and is expected to rise to 80,000 bbl/d by FY13E, once production from Makori-East and other fields comes online. And because oil pricing is much more favourable than that for gas (see page 9), the impact on sector profitability of higher oil production is very significant.

Figure 9: Production has been stagnant through the years but oil now on the rise FY05 FY06 FY07 FY08 FY09 FY10 FY11 Mar-12

Oil production (bbl/d) 66,079 65,577 67,438 69,954 65,845 64,948 65,824 72,150

OGDC 38,377 39,383 41,884 43,866 41,600 38,062 37,530

PPL 1,546 1,732 2,740 3,908 4,071 4,949 7,519

POL 5,540 7,077 5,927 5,058 3,706 4,035 4,535

Gas production (mmcfd) 3,685 3,836 3,873 3,973 4,002 4,063 4,200 4,277

OGDC 1,009 997 998 1,028 1,052 1,016 1,034

PPL 852 908 893 898 873 874 883

POL 31 48 47 44 38 62 86

Source: PPIS

Pakistan’s E&P enjoys a success ratio of 30% in exploration and low operating costs

Mainly a gas focused country but oil production rising in FY12 and FY13E

17 April 2012



Pakistani E&Ps offer strong defensive qualities …

Pakistan’s E&P sector has defensive qualities that make it a strong investment in today’s weak economic environment. E&Ps enjoy relative macro immunity in the following ways:

(1) Hedge against currency risk, as oil prices are internationally determined in USD, and PRs depreciation leads to higher earnings. However, because gas prices are capped or discounted, the hedge is not perfect. Among E&P companies, POL offers the best hedge against currency risk, given its higher proportion of revenues.

(2) Demand risk is low, as Pakistan faces both an oil and gas shortage. Oil production is 72,000 bbl/d against a demand of 400,000 bbl/d; with the differential imported. Gas production is 4.3 bcf/d, against demand of 6.0 bcf/d, which has led to gas rationalisation.

(3) Pricing is not macro-dependent, as both oil and gas pricing is linked to oil prices and not dependent on domestic macros.

(4) Unleveraged, with all the three major listed E&P companies (OGDC, PPL and POL) being net cash companies with little or no leverage.

… with high ROEs and growth prospects to boot Pakistan’s E&P sector offers more than just defensive qualities. It enjoys the highest ROEs amongst CS’ Asia-Pacific E&P universe and its EBITDA margins are among the highest in the region. The high success ratio of 30% in exploration has been a major contributory factor, along with the low operating costs in the country. Such strong profitability is even more impressive once Pakistan’s gas pricing discounts/caps are considered.

Figure 10: Pakistan E&P ROEs are highest in the region … Figure 11: …and so are EBITDA margins

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Source: Company data, IBES estimates, Credit Suisse estimates Source: Company data, IBES estimates, Credit Suisse estimates

Both demand and pricing is not macros linked for Pak E&P’s, providing strong defensive quality

17 April 2012



Figure 12: Although realised prices are low in Pakistan … Figure 13: … so are costs

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Source: Company data, IBES estimates, Credit Suisse estimates Source: Company data, IBES estimates, Credit Suisse estimates

Given the demand gap in both oil and gas, the government is understandably keen to promote exploration activity in the country. This has resulted in much improved pricing recently in the case of gas, and the award of a large number of licences and acreage (the last award was in 2009). Given the structural deficits that Pakistan faces in both oil and gas, and the favourable pricing afforded to E&P companies now, we foresee a higher intensity of exploration and development activity in the next five to ten years, compared to the past. Earnings growth would be driven by both higher production and improved pricing.

Historically low gas pricing has now improved Over time, the demand-supply dynamics have dictated oil and gas pricing. Since Pakistan has been a large oil importer historically, but self sufficient in gas until 2010, oil pricing for exploration companies has been much more favourable than gas pricing. Oil pricing has been linked to international oil prices since the 1994 petroleum policy. Although there are no explicit discounts, a windfall levy of 50% is applicable to a crude price of more than US$30 per barrel, in the 2001 and 2009 policies. However, E&P companies are still able to capture much of the benefit from rising oil prices.

On the other hand, gas pricing, while also linked to international oil prices, has been subject to significant caps and/or discounts historically. Under the 2001 petroleum policy, for example, the gas price is capped at US$2.82/mmbtu (US$16 per boe). As a result, average realised prices for gas production in Pakistan are less than 20% of realised oil prices. In terms of profits, the difference is even starker; once finding and lifting costs are accounted for, oil can be 8-10x more profitable to produce than gas.

However, Pakistan now faces a significant gas shortage, with demand exceeding local supply. In response to this deficit, gas pricing for exploration companies has improved markedly in the recent petroleum policies. For example, in the 2012 petroleum policy, the gas price is US$6 per mmtbu (based on a crude price of US$110), compared to the US$2.82 per mmbtu afforded in the 2001 petroleum policy. Although most existing fields will remain under the old pricing regimes, the new pricing should provide upside when success under new exploration licences is achieved. The pay-off from new pricing may be a few years out, but it does assure very favourable long-term economics for Pakistan’s E&P sector. These pricing changes assume even greater importance because Pakistan is primarily a gas-based country, with gas production ten times higher than for oil. It also means that E&P companies will not have to depend solely on production growth for higher profitability; profits can surge due to pricing upside as well.

..however, gas pricing has improved markedly; under the 2012 petroleum policy,

Realised gas prices in Pakistan are less than 20% of realised oil prices due to caps and discounts

17 April 2012



To convey how significant the impact of the gas pricing change can be, we show hypothetical ROEs if gas pricing for all current production was done at the 2012 petroleum policy level of US$6 per mmbtu. Earnings and ROEs increase dramatically for all the three E&P companies. The improvement is most marked for PPL, as the proportion of gas in its production mix is the highest.

Our valuation for POL does not include the potential benefit from this improved gas pricing, as we have used a 2P reserve-based DCF value. The potential upside from production at the new pricing would be captured on a 3P reserve valuation, which accounts for possible reserves priced under the new pricing policies. At this stage, we have only highlighted the potential impact from gas pricing change so that investors are fully aware of the strong long-term economics of Pakistani E&Ps.

Figure 14: Gas pricing has improved significantly in

recent petroleum policies

Figure 15: Hypothetical impact on ROEs from gas pricing

change is high

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POL company profile POL is a subsidiary of The Attock Oil Company Limited (AOC) which was incorporated on 25 November 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 ventures with other exploration and production companies to explore oil and gas in Pakistan.

In addition to the exploration and production of oil and gas, POL also manufactures LPG, solvent oil and sulphur. POL markets LPG under its brand name of POLGAS, as well as through its 51%-held 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.

The Attock Group has majority shareholding (directly or indirectly) in POL in exploration, Attock Refinery (ATRL) and National Refinery (NRL) in refining, and Attock Petroleum (APL) in oil marketing. The group harnesses synergies from this integrated model, with POL’s oil production sold almost to ATRL.

POL, due to its smaller size, has historically been a niche player in exploration. It focuses on a few fields, through a combination of own-operated and joint venture (JV) operated programmes. Geographically, POL concentrates its exploration activities in northern Pakistan. Favourable oil-gas mix, strong production growth from TAL, high oil prices and relatively low operating costs have helped POL enjoy strong profitability.

The Attock Group is vertically integrated across the energy value chain, in exploration, refining and marketing

17 April 2012



Good place to be with crude at US$120 POL benefits more from high oil prices and currency depreciation Pakistan faces macro headwinds in the form of fiscal, external, growth and inflationary challenges. Rising oil prices and their impact on the country’s import bill make macro-economic stability even more elusive in the short term. The political landscape is also uncertain, with elections slated for next year, and a difficult and deteriorating relationship with the US. This macro and political uncertainty feeds into low equity market valuations.

Against this backdrop of weak macros and high oil prices, one of the best sectors to be overweight is E&Ps, which offers investors relative macro immunity and benefits from rising oil prices. Within the E&P sector, POL stands out for having very limited exposure to circular debt and benefiting the most from higher oil prices and PRs depreciation.

Figure 16: POL’s oil gas mix is most favourable … Figure 17: … which is important given low gas pricing

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Among listed Pakistani E&P companies, POL provides the best exposure to rising oil prices and PRs depreciation, both of which are important in the current context. In Pakistan’s case, high oil prices usually also lead to PRs depreciation, given the high dependence on imported oil. The combined impact of high oil prices and PRs depreciation on POL’s earnings is substantial, and we expect them to be a major contributor to earnings growth in FY12-15E.

Therefore, as a US$120 crude price creates unease about Pakistan’s overall macroeconomic stability, POL on a company basis looks set to gain handsomely. A 5% increase in oil prices leads to a 3.2% increase in earnings. OGDC and PPL also benefit from rising oil prices, but POL’s earnings accretion is the highest, because its proportion of oil revenues is higher, at more than 60%. As gas pricing for most existing fields is subject to caps and/or discounts, the full impact of higher oil prices does not filter through into gas revenues.

CS forecasts oil prices to remain at a high level until 2015E, with the long-term forecast at US$90 (in real terms) thereafter. Our bullish stance on oil price is driven by our expectation of a continued tight demand supply gap, as the global economy improves, and the presence of political risks, such as the Iran issue. We believe that the current level of oil prices do not pose a threat to global growth and an economic recovery; however, an oil price above US$150 a barrel can be a major macro risk to the global economy. .

POL benefits most among local peers from higher oil prices and PRs depreciation

Combined earnings impact of a 5% increase in oil price and a 5% PRs depreciation increases POL’s earnings by 8%

17 April 2012



We do wish to highlight that our higher oil price assumption is the main reason for our above-consensus earnings and target price estimates. In POL’s case, consensus oil price ranges from US$90-100 a barrel. While our oil price assumption is significantly higher in the medium term, the long run assumption converges to consensus .

Figure 18: Credit Suisse Oil Forecast (July-June year) (US$/bbl) FY11A FY12E FY13E FY14E FY15E LT

Brent 96 116 134 133 132 100

Dubai crude 92 115 128 127 126 95

Discount (%) 4 1 5 5 5 5

Source: Bloomberg, Credit Suisse estimates

As oil prices are seen to be volatile, we provide a sensitivity analysis to show the impact of changes in oil price assumptions on POL’s EPS and target price. A US$30 decline from current CS oil price assumptions still provides a total return of 35% in POL. In that sense, buying at current levels incorporates a large margin of safety.

Figure 19: Oil price sensitivity analysis for POL (PRs) FY12E EPS FY13E EPS FY14E EPS Target price Total return (%)

-US$30 54 58 69 470 35

-US$20 54 63 72 480 40

-US$10 54 67 77 495 45

Base case 54 72 82 515 50

+US$10 54 76 86 530 55

+US$20 54 80 91 550 62

+US$30 54 85 96 565 67

Source: Credit Suisse estimates

Due to its favourable oil-gas production mix, POL also provides a better hedge against PRs depreciation as compared to domestic peers. A 5% percent depreciation in the PRs increases POL’s earnings by 4.4%. For foreign investors, this currency hedge can be a very important dimension for a Pakistan-based investment . In our forecasts, we have assumed a 5% annual depreciation in the PRs. The combined earnings impact of a 5% increase in oil price and a 5% PRs depreciation increases POL’s earnings by 8%.

Figure 20: POL’s EPS sensitivity to oil and PRs

depreciation is high …

Figure 21: … both should propel EPS over FY12-14E

0%

3%

5%

8%

10%

5% rise in oil price 5% fall of PRs Combined impact

85

90

95

100

105

FY11A FY12E FY13E FY14E

90

100

110

120

130

PRs/USD (LHS) Dubai crude US$/bbl

Source: Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

We are ahead of consensus estimates mainly due to our higher oil price assumption

Oil price sensitivity highlights a large margin of safety at current prices

17 April 2012



Earnings growth from multiple drivers Strong earnings and payout momentum to continue POL’s strong earnings momentum is expected to continue in FY12-15E, but the earnings drivers are changing. In FY10 and FY11, earnings growth was propelled by TAL’s production growth. This is evident from Figure 22 below, which shows that while EPS almost doubled from FY09-11, profitability per barrel was fairly flat, indicating production growth was the driver of higher profitability In FY12-14E, while we expect continued strong growth in EPS, production growth should normalise. But higher crude prices and PRs depreciation would augment earnings growth in that period. We estimate EPS of PRs54, PRs72 and PRs82 in FY12E, FY13E and FY14E, respectively. High payouts are also expected to continue; we estimate a DPS of PRs40, PRs50 and PRs57 in FY12E, FY13E and FY14E, respectively.

Figure 22: POL’s P&L on a per-barrel basis (US$) FY09 FY10 FY11 FY12E FY13E FY14E

Revenue 31 27 30 34 37 38

Operating costs 9 6 6 7 6 6

Exploration costs 6 3 2 3 2 2

Royalty & other charges 7 5 6 7 7 7

Other income 11 6 6 7 6 6

PBT 20 18 22 24 27 28

Tax 4 4 6 7 8 8

PAT per barrel (US$/BOE) 16 14 16 17 20 20

Exchange rate (PRs/USD) 79 84 86 89 95 100

PAT per barrel (PRs/BOE) 1,255 1,202 1,359 1,534 1,860 2,014

Production (mmboe) 4.5 6.2 8.0 8.3 9.1 9.6

EPS 24 31 46 54 72 82

Source: Company data, Credit Suisse estimates

Figure 23: Earnings momentum to remain strong … Figure 24: … and high payouts to sustain

46

54

7282

0

20

40

60

80


EPS (PRs)

3540

50

57

0

15

30

45

60


DPS (PRs)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Production growth normalising but earnings growth augmented by high oil prices and PRs depreciation

17 April 2012



Figure 25: Production growth normalises, but oil heavy … Figure 26: … as revenue and earnings grow strongly

0%

3%

6%

9%

12%

15%

FY12E FY13E FY14E

Production growth Oil prod growth

0%

10%

20%

30%

40%

FY12E FY13E FY14E

EPS Growth Revenue growth


POL’s exploration strategy: Niche and concentrated POL has historically been a niche player in exploration owing to its smaller size. It is selective in its exploration and development programmes, and has concentrated its efforts in the northern Pakistan (north Punjab and Kyber-Pakhtunkha). This strategy has paid rich dividends to the company, as despite its relatively small size, POL has been a major player in most of Pakistan’s large oil discoveries, enjoying a shareholding in eight of Pakistan’s top ten oil fields, and being operator in four of them.

Figure 27: POL has a stake in 8 of Pakistan’s 10 biggest oil fields mmboe Field POL Discovery Original Cumulative Balance

shareholding (%) year recoverable production recoverable

MOL MakoriEast 21 2010 80 - 80

PPL Adhi 11 1978 55 26 29

OPII Dhurnal 5 1984 50 50 0

POL Dhulian 100 1937 42 42 0

POL Pindori 35 1991 42 23 19

POL Meyal 100 1968 42 41 0

POL Balkassar 100 1946 35 35 0

OGDC Pasakhi 0 1989 32 31 1

OGDC Thora 0 1987 31 19 12

MOL Manzalai 21 2002 29 3 26

Pakistan-total 1,024 680 344

Contribution of top 10 43% 40% 49%


Currently, through its nine active exploration licences, POL operates in a number of high-potential areas through own-operated and JV partners. The current acreage under exploration is 7,275 sq km. In addition, the company also has 18 development, production and mining licences. Of these, development activities are taking place in own-operated ventures at Dhulian, Pindori and Pariwali, and through JV partners in TAL, Adhi and Ratana. Also, with rising earnings and cash balances, POL is now very well placed to increase exploration and development activity, something which it has already been doing. Exploratory and development assets have more than doubled since FY07. Taking into account the improved gas pricing offered in the 2012 Petroleum Policy and its rising cash balances, we believe POL will continue to expand its exploration and development plans selectively.

POL has shareholding in 8 of Pakistan’s top 10 oil fields

Improved gas pricing and higher cash reserves should encourage POL to expand its exploration and development plans

17 April 2012



Figure 28: POL’s exploration and development activities

increasing …

Figure 29: … and can remain high as cash increases

0

4

8

12

16

FY07 FY08 FY09 FY10 FY11

Exploration & dev assets (PRs bn)

-

5

10

15

20

25

FY09 FY10 FY11 FY12E FY13E FY14E

Cash and equivalents (PRs bn)

Source: Company data Source: Company data, Credit Suisse estimates

TAL is a game changer and still driving growth POL’s investment case is built on the current and future potential of the TAL block. At the moment, TAL constitutes 64% of production and 56% of revenues for POL. TAL’s production growth has been the main driver of POL earnings in the past three years. Although OGDC and PPL have a greater outright shareholding (28%) in TAL, POL’s 21% stake has a much greater relative impact on the bottom line, given its smaller equity size.

Figure 30: POL benefits the most from TAL Figure 31: … and TAL’s production continues to rise

0% 15% 30% 45% 60%

OGDC

PPL

POL

TAL's revenue contribution (FY11)

50,000 60,000 70,000 80,000 90,000 100,000

FY11

FY12E

FY13E

FY14E

TAL production (boe/d)

Source: Company data, Credit Suisse estimates Source: PPIS, Credit Suisse estimates

17 April 2012



Figure 32: POL’s production increasingly reliant on TAL Figure 33: … and the same trend can be seen in revenues

0%

20%

40%

60%

80%

FY10 FY11 FY12E FY13E FY14E

TAL prod contribution to POL

0%

20%

40%

60%

80%

FY10 FY11 FY12E FY13E FY14E

TAL revenue contribution to POL


TAL is Pakistan’s biggest hydro-carbon asset in terms of revenue, value and acreage. It currently produces 7% of the country’s gas and 12% of its oil. Once Makori East’s initial oil production levels of 5,000 bbl/d are accounted for, TAL’s share in Pakistan’s oil production would rise to 20%. In terms of recoverable reserves, TAL contribution is even more imposing, accounting for 39% of Pakistan’s oil reserves and 8% of the country’s gas reserves. This oil-heavy production growth expected from TAL is all the more important because of favourable oil pricing in Pakistan.

The TAL block represents the most promising area for exploration and development in Pakistan, with its success ratio of 55% well above the country average of 30%. In terms of its massive acreage of 3,690 sq km, it also represents Pakistan’s largest exploration block (and is the size of Karachi city). POL represents the best means for investors to have exposure in TAL’s potential.

Figure 34: TAL is Pakistan’s most valuable hydro-carbon asset Field Gross revenue 2012E (US$ mn) Reserve life (years)

TAL 950 13.1

Bhit 347 4.5

Sawan 247 5.5

Zamzama 552 6.6

Qadirpur 700 11.2

Sui 332 13.1

Source: Woodmacenzie, Credit Suisse estimates

Crucially, the development and exploration potential from TAL seems high, particularly in terms of oil production. Apart from Manzalai, where nine wells have been spud, other fields in the TAL block are in the initial stages of development. We believe strong development upside is likely in the coming years from existing fields such as Makori East, Mamikhel and Maramzai, where TAL’s operator MOL already has development plans in place

The operator of the TAL block is the Hungarian E&P company MOL. MOL offers a strong combination of proven international exploration capabilities in difficult regions (currently active in seven countries including Syria, Iraq and Kazakhstan) and significant expertise in the Tal block (where it has been operating for the past 12 years). Having an experienced and committed international operator at the helm is positive from the perspective of a POL shareholder.

TAL is Pakistan’s biggest hydro-carbon asset by revenue, value, and acreage

Development and exploration potential of TAL seems high

17 April 2012



No quick resolution to circular debt, POL remains insulated Short-term resolution to circular debt unlikely A major overhang for the E&P sector in Pakistan is the issue of rising trade receivables owing to circular debt. At its core, circular debt arises when the government delays payment of electricity subsidies to power distribution companies, the impact of which is then carried through the energy value chain as downstream companies delay payments to the upstream sector. As a result of the circular debt issue, which has cropped up since 2008, exploration companies have seen an increase in their trade debts.

There are three main sources of the electricity subsidy, which in turn leads to circular debt creation.

Basic electricity subsidy

Electricity tariffs in Pakistan remain below cost recovery levels, despite a large increase in tariffs in the past three years. We estimate that the current per KWh basic subsidy is PRs2.25. The tariff gap primarily is due to Pakistan’s unbalanced generation mix, with a rising dependence on expensive oil-based generation, Regionally, most low- to mid-income countries depend largely on coal for base load generation, but Pakistan has minimal coal usage in its electricity generation. Cost pressures were magnified by the sharp depreciation of the PRs in 2008-09. We estimate the basic electricity subsidy is about PRs170 bn annually.

High transmission and distribution (T&D) losses

Some degree of T&D losses is allowed by the National Electric Power Regulatory Authority (Nepra) and built into the tariff. However, actual T&D losses on a country-wide basis are significantly higher than those permitted levels (country-wide losses averaged 20% in FY11). Because distribution companies (apart from KESC) are government owned, this is also a gap that the government needs to plug. We estimate that excessive T&D losses add PRs100 bn annually to the subsidy burden.

Non-recoveries

With higher tariffs, incidences of non-recoveries have increased, particularly from government and quasi-government entities. We estimate that non-recoveries put an additional PRs50 bn of subsidy burden on the government.

The combination of the basic subsidy, excessively high T&D losses and the rising incidences of non-recoveries amounts to a total subsidy burden of approximately PRs320 bn (US$3.5 bn) annually, amounting to 1.6% of Pakistan’s GDP. This is a significant outlay for Pakistan’s cash-strapped and fiscally stressed government, which manages its cash flows by delaying the subsidy payment to distribution companies. It is this delay in payments which causes a cash crunch through the energy value chain. Given the prevalent tight fiscal conditions, we do not foresee any near-term change in the pattern of the government’s delayed payments, unless some structural changes in generation mix, distribution efficiency, and defaulter protection are made.

Cost recovery tariffs difficult to implement The government and the IMF’s main focus over the last few years has been to raise tariffs to cost recovery levels. This policy has been painful and is unlikely to resolve the issue entirely. Since 2008, it has been a story of tariffs unsuccessfully trying to catch up with costs. The cost of electricity generation initially spiked in 2007 due to the oil price shock, an issue which was exacerbated by Pakistan’s increasing reliance on expensive oil-based power generation and sharp PRs depreciation. In response, the government has raised tariffs multiple times to eliminate the subsidy, but the gap persists as costs also continued rising. We believe higher oil prices, an unfavourable generation mix and PRs depreciation have been the key drivers of the cost increase.

The three sources of circular debt are: basic electricity subsidy, excessive T&D losses and non-recoveries

17 April 2012



Figure 35: Tariffs have been raised, but costs have been rising too

0

3

6

9

12

Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12

Tariff (PRs/KwH) Cost (PRs/KwH)

Source: NEPRA, Credit Suisse estimates

Figure 36: Residential electricity tariffs (US$/kWh) Figure 37: Industrial electricity tariffs (US$/KWh)

0

4

8

12

16

Bang

lade

sh

Nep

al

Thai

land

Mal

aysia

Indi

a

Paki

stan

Kore

a

Hong

Kon

g

Sing

apor

e

Japa

n

Pak

cost

0

4

8

12

16

Indo

nesia

Kore

a

Mal

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a

Chin

a

Hong

Kon

g

Viet

nam

Pakis

tan

Thai

land

Japa

n

Sing

apor

e

Pak

cost

Source: NEPRA, Credit Suisse estimates Source: NEPRA, Credit Suisse estimates

Figure 38: Pakistan’s electricity tariff is very high on a GDP per capita basis

0.0%

0.3%

0.6%

0.9%

1.2%

Sing

apor

e

Kore

a

Hong

Kon

g

Japa

n

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ysia

Chi

na

Indo

nesia

Thai

land

Viet

nam

Pakis

tan

Indus trial tarif f as % of daily per c apita GD P (PPP adjus ted) Average

Source: IMF, NEPRA

17 April 2012



To get a broader perspective on the issue, we compare electricity tariffs in Pakistan to other Asian oil importing countries. Data in Figures 36-38 indicate that current tariff levels in Pakistan are quite high and cost recovery levels look truly daunting, particularly in the context of Pakistan’s low per-capita GDP. Implementing cost recovery level tariffs would impose a very heavy burden on both industry and residential consumers.

We believe tariff raising alone will not solve the subsidy and circular debt problem for two reasons. Firstly, we have seen that when tariffs are increased there is the rise in non-recoveries, which makes the hike self-defeating. Secondly, seen within the context of regional tariffs, it is evident that due to a high reliance on oil-based generation, Pakistan’s cost-recovery tariffs are very high, and will place a huge burden on residential or industrial consumers.

In our opinion, no quick resolution for circular debt is on hand. Reaching a sustainable solution requires a combination of strong political will to undertake reforms targeted at improved efficiencies in generation and distribution, clamping down on protected defaulters, as well as developing cheaper sources of generation such as hydro and coal. It is not that the issue is intractable. Theoretically, even today, the problem can be alleviated by diverting 300 mmcfd of gas from CNG consumers to power generation. Defaulters can also be clamped down upon, and efficiencies of state-owned generation and distribution companies can be dramatically improved. However, the slow and painstaking history of structural reform in developing countries, such as Pakistan, leads us to be uncertain about the timeframe of resolution.

POL shielded from circular debt exposure Circular debt has led to rising levels of receivables for exploration companies, particularly OGDC, resulting in reduced exploration activity and payouts. Being high-margin and cash-accretive businesses, Pakistani E&Ps continue to be able to manage the rise in circular debt-related receivables whilst maintaining cash-rich balance sheets. However, POL’s unique group-level vertical integration limits its involvement in the build up of circular debt-related trade debts. In contrast to peers, its debtor days and receivables as a % of sales have not shown any appreciable increase in the past few years and are at much lower levels than OGDC and PPL. Consequently, it has been able to increase dividend payouts while others have been cutting back.

Figure 39: Trade debts as a % of sales are low for POL … Figure 40: … and so are debtor days

0.0%

15.0%

30.0%

45.0%

60.0%

FY08 FY09 FY10 FY11

OGDC PPL POL

0

50

100

150

200

FY08 FY09 FY10 FY11

OGDC PPL POL


We believe that no quick resolution for circular debt is on hand, and structural changes will take time

Tariff increases alone are not likely to eliminate the issue of electricity subsidy

17 April 2012



Figure 41: POL’s payout ratio on the rise while that of

others have been falling …

Figure 42: … despite POL’s rising exploration and

development activities

0%

20%

40%

60%

80%

100%

FY08 FY09 FY10 FY11

OGDC PPL POL

0.0

4.0

8.0

12.0

16.0

FY07 FY08 FY09 FY10 FY11

Exploration & dev assets (PRs bn)


Attock Group’s vertical integration benefits POL POL escapes the worst of the circular debt due to the vertical integration of the Attock Group (POL’s majority shareholder) in Pakistan’s energy sector. The Attock Group has a majority shareholding (directly or indirectly) of POL in exploration, Attock Refinery (ATRL) and National Refinery (NRL) in refining, Attock Petroleum (APL) in oil marketing, and Attock Power Gen in power. The group actively harnesses the synergies available from this integrated model. POL’s oil production is sold entirely to ATRL, which makes sense from a geographical perspective as well, as POL’s fields are in northern Pakistan, and ATRL in Rawalpindi is the closest refinery. Selling to ATRL has distinct advantages; being a group company, POL receives relatively timely payments. As a result, POL has not seen the build up in trade receivables that have impacted other E&Ps.

Importantly, this integration is achieved at the Attock Group level, rather than the company level. Shareholders of POL benefit from the synergies that group refining offers, particularly in the Pakistani context of circular debt-induced payment delays, without partaking in the low-return and volatile refining business.

We view this arrangement between POL and ATRL as sustainable. For one thing, POL’s oil production accounts for only 15% of ATRL’s total capacity, underscoring the refinery’s ability to manage POL’s payments on a priority basis. Also, POL’s oil fields, including the Tal block, would sell to ATRL based on geographic considerations anyway.

Of central importance in determining the sustainability of this arrangement is the financial health of ATRL. As with other refineries, ATRL does face significant payment delays from oil marketing companies. However, it manages cash flows by delaying onward payments to exploration companies and is therefore able to maintain its cash cycle. This mode of cash flow management is the norm across Pakistan’s power, oil marketing and refining segments in the past few years. In terms of internal cash generation, ATRL is helped by the substantial dividends it receives from its investment in APL, NRL and Attock Power Gen (AGL). At high levels of crude prices, ATRL’s profitability also improves, due to the increase in the PRs value of the government-imposed deemed duty on High Speed Diesel (HSD). Overall, we are confident that the current arrangement between POL and ATRL is sustainable, allowing POL to continue to be insulated from the issue of circular debt-related payment delays.

POL’s unique group level vertical integration limits its involvement in circular debt

17 April 2012



From the perspective of the Attock Group, it makes business sense to keep POL’s cash flows healthy, even if this is achieved at the expense of ATRL. This is because refining payouts are restricted to 50% of paid-up capital in Pakistan. The high dividends that the Attock Group receives from POL could not be made by ATRL, even with an improved cash position. From the sponsor’s perspective, this adds to the sustainability of the current arrangement.

Private ownership deserves a premium in current environment Given the backdrop of circular debt under which Pakistan’s oil, gas and power sector is operating, we believe private ownership is advantageous from the perspective of secondary market shareholders. The issue of circular debt has created a conflict of interest between the government and private shareholders, both in terms of business strategy and payout policies.

In terms of business strategy, privately owned companies can seek to reduce their exposure to circular debt by refusing business or changing strategic focus. Government-owned companies on the other hand often have less flexibility in their strategic plans.

The second and more important advantage from private shareholding is in terms of payout policies. Under private ownership, POL, APL and Hub Power (HUBC) have all increased payouts since 2008, despite the rising problem of circular debt. On the other hand, payouts at government-owned entities, such as PSO and OGDC, have seen a sharp decline. The government has been a major determinant of payout policies at these companies and payouts have been cut back as the circular debt burden escalated.

POL’s private ownership, coupled with its unique group-level vertical integration, makes it better placed than other E&P peers in terms of minimising the impact of circular debt on cash flows and dividends.

Figure 43: Payout ratios rising at private companies … Figure 44: … but falling in government-owned ones

0%

30%

60%

90%

120%

2008 2009 2010 2011

HUBC APL POL

0%

25%

50%

75%

100%

2008 2009 2010 2011

PSO OGDC PPL


Payouts at private companies have been rising while those at government-owned firms have been declining

17 April 2012



Valuations compelling on standalone and relative basis

Total return of 50% on offer We initiate coverage on POL with an OUTPERFORM rating and a target price of PRs515 per share. In addition, it offers a dividend yield of 14%, providing a total return of 50%.

We have used a 2P reserve-based DCF valuation. In terms of the valuation breakdown, the 2P reserves’ DCF value is PRs490 per share. In addition, POL’s listed investments National Refinery (NRL) and Attock Petroleum (APL) have been valued based on their market prices (less a 30% discount), and account for PRs30 per share, and cash value is PRs 40 per share. We subtract the dividend of PRs45 per share expected over the next 12 months to arrive at our target price, but add it back to the total return calculations.

Figure 45: Key assumptions and valuation Risk free rate (%) 13.0

Market risk premium (%) 6.0

Cost of equity (%) 19.0

2P reserve value/share (PRs) 490

Value of investments and cash (PRs) 70

12-month dividends per share (PRs) 45

Target price (PRs) 515

Total return (%) 50

Source: Credit Suisse estimates

The potential upside from standalone valuations is compelling. POL is also attractive on a roll-out P/E and EV/EBITDAX. These multiples look even cheaper once POL’s high dividend yield is taken into account.

Figure 46: Looks attractive on the basis of roll-out P/Es … Figure 47: … and on an EV/EBITDAX basis as well

0

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PE

-

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2 .0

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Dividend yield: Sustainable and best in class globally POL’s dividend yield of 14% is the highest in CS’ global oil and gas universe. The average dividend yield for CS’ global E&P universe is 1.3% while that for the APAC E&P companies is 1.8%. We believe POL’s high dividend yield strengths its investment case. In the context of this high yield, POL is even cheaper than its P/E and EV/EBITDA ratios suggest.

POL offers the highest dividend yield in the CS oil and gas universe and very attractive on P/E and EV/EBITDAX

17 April 2012



With such a high yield, sustainability needs to be assessed. In POL’s case, we believe dividend yields are sustainable, as its ability to remain shielded from circular debt remains intact and therefore free cash flows should remain strong. Also, the company has a cash-rich balance sheet at its disposal, and has underscored its preference to maintain high payouts in the current environment.

Figure 48: POL’s dividend yield is the highest among CS’ global and APAC E&P universe

0.0%

4.0%

8.0%

12.0%

16.0%

POL

PPL

OG

DC

CNO

OC

ON

GC

Cairn

Indi

a

Woo

dsid

e

Sant

os

Oil S

earc

h

INPE

X

Dividend Yield (FY13) Average

Source: IBES estimates, Credit Suisse estimates

Deserves a premium to the Pakistan market Apart from the market risk, POL is hedged against much of the macro, currency, political and circular debt risks that Pakistan faces. Because of this bottom-up strength, we believe it should trade at a premium to the domestic market. At the moment, however, POL trades at a 15% discount to MSCI Pakistan’s 12-month forward P/E of 6.1x.

Within Pakistan’s E&P sector, OGDC trades at a significant premium to both POL and PPL, and the broader market. Its re-rating is largely owing to the majority of its free float being with foreign investors. However, we believe that with the unique combination of bottom-up strength that POL offers, it also deserves to trade at a premium to the Pakistan market.

International discount is excessive given bottom-up strength We also feel that the valuation gap with regional E&P companies is excessive, and with POL being hedged against most Pakistan-specific risks, a blanket Pakistan discount should not be applied to it. Although POL does face Pakistan market risk, it is hedged against most other forms of country-specific risks. At the moment, POL looks very inexpensive compared to global peers based on most valuation metrics, such as P/E, EV/EBITDAX, dividend yield and potential upside to target price.

We expect the valuation discount to regional E&P companies to narrow once the strong bottom-up characteristics of POL are recognised by international investors.

POL deserves premium to Pakistan market; currently trading at a 15% discount on a PE basis

Blanket Pakistan discount should not apply as most Pakistan specific risks are hedged

17 April 2012



Figure 49: POL one of the cheapest in Asia on P/E basis ... Figure 50: … and on an EV/EBITDAX basis

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5

10

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20

25PO

L

PPL

OGD

C

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e

Sant

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Oil S

earc

h

INPE

X

PE (FY13) Average

0.0

2.5

5.0

7.5

10.0

POL

PPL

OGD

C

CNO

OC

ONG

C

Cairn

Indi

a

Woo

dsid

e

Sant

os

Oil S

earc

h

INPE

X

EV/EBITDAX (FY13) Average

Source: Company data, IBES, Credit Suisse estimates Source: Company data, IBES, Credit Suisse estimates

Figure 51: EV/Reserves (1P) is low compared to peers … Figure 52: … and so is EV/production

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PPL

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FY11 EV/Reserves (US$/boe) Average

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EV/production (US$/boe) Average


POL is under-owned by foreign investors An important trigger for POL’s price performance will be increased foreign interest in the stock. Historically, in Pakistan, stock reratings have depended heavily on foreign investor participation. This is true in the case of OGDC even today.

At the moment, POL is significantly under-owned by foreign investors, compared to peers OGDC and PPL. Historically, OGDC and PPL have been the preferred investment vehicles for taking Pakistan E&P exposure, due to their large size and liquidity. Given its strong potential upside, we feel now is a good time to redress the balance. POL’s investment case has become very compelling, and in addition, it is the most liquid stock in Pakistan’s oil, gas and power sector, with an average daily trading value of US$2 mn.

The other trigger for POL’s re-rating will be consensus earnings upgrades, which we expect in FY13.

17 April 2012



Investment risks High dependence on TAL block POL’s revenue and earnings depend significantly on production from TAL fields, and being of a smaller size, its production base is less diversified than OGDC. However, this risk is mitigated by the fact that TAL has a huge acreage of 3,690 sq km (the size of Karachi) and it remains in an early stage of development. Production from TAL is more likely to surprise on the upside, given the block’s rich hydrocarbon potential and continued development activity. In such a scenario, POL is the biggest beneficiary.

Dependence on group refinery Another other risk that POL faces is if its current arrangement with ATRL breaks down and it becomes exposed to the same circular debt risk as peers. However, we feel this is a low risk, given that ATRL remains financially viable. Even if oil production has to be diverted from ATRL at some point, the Attock Group can utilise its other group-owned refinery, NRL, to facilitate POL. So, a back-up option is in place.

A sharp decline in oil prices POL’s faces earnings risk from a dramatic decline in oil prices, the kind witnessed in 2008. As POL’s earnings sensitivity to oil prices is high, a sharp decline in oil prices would impact earnings significantly. However, our sensitivity analysis shows that POL retains strong valuation upside, even if oil prices decline significantly from current levels.

Figure 53: Sensitivity of POL’s EPS and target price to oil price changes (PRs) FY12E FY13E FY14E Target price Total return (%)

-US$30 54 58 69 470 35

-US$20 54 63 72 480 40

-US$10 54 67 77 495 45

Base case 54 72 82 515 50

+US$10 54 76 86 530 55

+US$20 54 80 91 550 62

+US$30 54 85 96 570 67


TAL production more likely to surprise on the upside

17 April 2012



Financial summary Figure 54: Profit and loss account Year-end 30 Jun (PRs mn) 2010 2011 2012E 2013E 2014E 2015E

Turnover 17,845 24,951 31,457 38,949 44,077 50,310

Operating costs (7,051) (8,780) (11,398) (13,451) (15,233) (16,814)

EBITDA 10,793 16,171 20,059 25,498 28,843 33,495

Depreciation & amortisation (1,587) (1,701) (2,571) (2,264) (2,253) (2,243)

Operating profit 9,207 14,470 17,488 23,234 26,591 31,252

Financial charges (284) (224) (280) (294) (299) (305)

Other income/(charges) 668 704 739 571 608 609

Pre-tax profit 9,591 14,950 17,947 23,511 26,899 31,556

Tax (2,154) (4,135) (5,209) (6,598) (7,619) (9,139)

Profit after tax 7,437 10,815 12,738 16,913 19,279 22,417


Figure 55: Balance sheet Year-end 30 Jun (PRs mn) 2010 2011 2012E 2013E 2014E 2015E

Cash & equivalents 6,317 9,932 12,839 17,265 22,228 28,556

Trade debts 2,584 4,344 4,309 5,335 6,038 6,892

Inventory 2,729 2,759 3,412 3,953 4,550 4,905

Other working capital assets 650 663 836 1,035 1,171 1,337

Current assets 12,279 17,697 21,396 27,589 33,987 41,690

Fixed assets 17,276 19,637 20,202 21,196 22,330 23,607

Investments 9,754 9,685 9,682 9,678 9,675 9,672

Other non-current 13 20 18 16 15 13

Total assets 39,322 47,039 51,298 58,480 66,007 74,982

Creditors 154 205 211 218 224 231

Other working capital liabilities 3,179 5,214 4,917 4,747 4,667 4,652

Dividends payable 4,140 5,914 6,623 8,279 9,438 10,928

Current liabilities 7,472 11,332 11,751 13,244 14,329 15,811

Deferred liabilities 6,398 7,710 8,250 8,827 9,445 10,106

Other long-term liabilities 467 487 512 537 564 592

Total liabilities 14,337 19,530 20,513 22,608 24,339 26,510

Shareholders' equity 24,985 27,509 30,785 35,871 41,668 48,473

Total sources 39,322 47,039 51,298 58,480 66,007 74,982


Figure 56: Cash flow details Year-end 30 Jun (PRs mn) 2010 2011 2012E 2013E 2014E 2015E

EBITDAX 12,400 17,246 21,916 27,541 31,053 35,885

Taxes on EBITDAX 3,486 5,267 7,155 8,453 9,514 11,073

Changes in NWC -409 -683 -709 -1,679 -1,352 -1,286

Maintenance capex -894 -921 -795 -825 -854 -884

Free cash flow 2P 7,611 10,375 13,257 16,584 19,333 22,642

NPV of free cash flows 2P 7,611 10,375 13,257 15,202 14,891 14,654


17 April 2012



Figure 57: Key ratios Year-end 30 Jun (PRs) 2010 2011 2012E 2013E 2014E 2015E

EPS 31 46 54 72 82 95

DPS 25 35 40 50 57 66

BVPS 106 116 130 152 176 205

P/E (x) 11.8 8.1 6.9 5.2 4.5 3.9

EV/EBITDA (x) 7.5 4.8 3.7 2.8 2.3 1.8

P/BV (x) 3.5 3.2 2.8 2.4 2.1 1.8

Dividend yield (%) 6.9 9.4 10.8 13.5 15.4 17.8

Price/Sales 4.91 3.51 2.79 2.25 1.99 1.74

ROA (%) 20.1 25.0 25.9 30.8 31.0 31.8

ROE (%) 30.3 41.2 43.7 50.7 49.7 49.7

Turnover growth (%) 27.0 39.8 26.1 23.8 13.2 14.1

EBITDA growth (%) 46.0 49.8 24.0 27.1 13.1 16.1

Net profit growth (%) 32.4 45.4 17.8 32.8 14.0 16.3


17 April 2012



Companies Mentioned (Price as of 16 Apr 12) Attock Petroleum Limited (APL.KA, NOT RATED, PRs456.75) Attock Refinery Limited (ATOR.KA, NOT RATED, PRs127.75) Hub Power Company (HPWR.KA, PRs37.49, NOT RATED) Mari Gas Company Limited (MGAS.KA, PRs95.85, NOT RATED) MOL (MOLB.BU, HUF17,100.00, OUTPERFORM, TP HUF22,100.00) Oil & Gas Development Company (OGDC.KA, PRs164.00, NOT RATED) Pakistan Oilfields Ltd (PKOL.KA, PRs371.26, OUTPERFORM, TP PRs515) Pakistan Petroleum Ltd (PPL.KA, PRs193.49, NOT RATED) Pakistan State Oil Company Ltd (PSO.KA, PRs244.00, NOT RATED) Please refer to Figure 7 for other companies mentioned in the report.

Disclosure Appendix

Important Global Disclosures I, Farrukh Khan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for PKOL.KA PKOL.KA Closing

Price Target

Price

Initiation/ Date (PRs) (PRs) Rating Assumption 21-May-09 149 218 O X 25-Jun-09 146.25 220 23-Oct-09 204.4 241 18-Nov-10 255 NC 16-Apr-12 X 218220

241

21-May-09 16-Apr-12

NC

O138

188

238

288

338

388

18-A

pr-09

18-Jun-0

9

18-A

ug-09

18-Oct-

09

18-Dec

-09

18-Feb

-10

18-A

pr-10

18-Jun-1

0

18-Aug-1

0

18-Oct-

10

18-Dec

-10

18-Feb-1

1

18-A

pr-11

18-Jun-1

1

18-Aug-1

1

18-O

ct-11

18-D

ec-11

18-Feb-1

2

Closing Price Target Price Initiation/Assumption Rating

PRs

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

17 April 2012



Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 46% (59% banking clients) Neutral/Hold* 42% (58% banking clients) Underperform/Sell* 10% (51% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

See the Companies Mentioned section for full company names. Price Target: (12 months) for (PKOL.KA) Method: Our target price of PRs515 has been determined on the sum of parts method. The core oil and gas exploration business has been valued using a 2P reserves based DCF, with cost of equity of 19%. The value of strategic investments has been taken at market price less a 30% discount. Risks: Risks to our PRs 515 TP are production risk, particuarly from TAL block, and a sharp fall in oil prices. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (PKOL.KA) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (PKOL.KA) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (PKOL.KA) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (PKOL.KA) within the past 12 months.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: MOLB.BU.

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Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors:

17 April 2012



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17 April 2012 Asia Pacific/Pakistan

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