PakistanOilfieldsLimited:

Theinfinitepotentialofexploration

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POL:AccumulatewithPOofPKR507!
PakOilfieldsLtd. BriefSnapshot Sector SymbolKATS SymbolBloomberg SymbolReuters O/Shares(mn) LastTradedDay LastPrice Mkt.Cap.PKR(bn) Mkt.Cap.US$(bn) FreeFloatShare(mn) FreeFloatasa%ofO/S FairValue(PKR) Recommendation Oil& Gas POL POL:PA PKOL.KA 236.55 Mar 1213 462.18 109.33 1.10 108.07 46% 507.00 Accum.

We are initiating coverage on Pakistan Oilfields Limited (POLKSE) withapriceobjectiveofPKR507.00(NAVbased),therebyassigning anACCUMULATErating. We believe Pakistan Oilfields Limited offers investors an opportunitytoinvestinahighdividendyieldingandcapitalgrowth stock on the premise of sizable production additions from TAL block and healthy dividend payouts history. For the company, declining production from Pindori poses a contentious question on the balance recoverable reserves estimates, although revenue dependence has now shifted from Pindori towards other fields i.e. TAL Block. Furthermore, the company is in solid financial position andmaycapitalizeonitwithfutureinvestmentinwildcats.

Analysis
WehavearrivedataNAVbasedvalueofPKR507including a portfolio value of PKR24.36 and no exploration value. We have used WACC (16.75%) for discounting the cash flows of the company. POL offers highest dividend yield among its peers. Earnings growth is largely dependent on high international oil pricesandPKRdepreciationwhiledividendincomefromassociates also augments the bottomline. POL is trading at adiscount of 10% to its fair value which requires us to assign an ACCUMULATE ratingforthestock. Rising production with sizeable additions in 4QFY13 to come online from TAL Block with particular focus on Mamikhel2, Maramzai2, Makori East2 and Tolanj X1. Further enhancements from Pakistan Petroleum Limited operated Adhi field (POLs stake: 11.00%) are also anticipated. Additionally, revenue from Natural Gas Liquids (LPG, Solvent Oil & Sulphur) is also foreseen as contributingsignificantlytothecompanystopline. We assert our mediumterm forecast of Arab Light Crude of US$105/bbl till 2020 and expect it to increase gradually by 1% over the next 20 years and onward on the premise of sustained demand from emerging economies particularly from China and India in FY13 and beyond while from United States & other DevelopedEconomiesinFY15andbeyond. Three major risks have been indentified firstly, volatility in international crude oil price which may result in sharp decline in realized revenue manageable through derivatives instruments. Secondly, POLs heavy reliance on TAL Block which may face abnormal shutdowns if law & order situation worsens in the region, a scenario that could be managed through securing the installations. Lastly, POLs increased dividend payout policy, compromising on its exploration activity; making the stock less attractiveforlongerterm.

POLv/sKSE100Index

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POLcompanyprofile
POL offers highest dividend yield among its peers in the region We have assumed Development Expenditure to be PKR 4.3bn in total for the next five years including FY13 Equity investments are valued at PKR 24.36 per share after applying 25% discount tomarketprice POLs cash & cash equivalents (NET DEBT) are valued at PKR 37.00 per share

POL is a subsidiary of The AttockOil Company Limited (AOC) which was incorporated on Nov 25, 1950. In 1978, POL took over exploration and production business of AOC. Since then, POL has been investing independently and in JVs with other exploration andproductioncompaniestoexploreoilandgasinPakistan. In addition, 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 Pakistans only local refinery producing lube base oils and is the singlelargestproducerofhighqualityasphalts.

Attractive:Valuation
We have arrived at a NAV based value of PKR507.00 including a portfolio value of PKR24.36 and no exploration value. POL offers highest dividend yield among its peers in the region. Earnings growth is largely dependent on international oil prices and PKR fluctuation while dividend income from associates also augments thebottomline.

Valuation
We have used NAV based valuation to arrive at POLs fair value of PKR507.00 from its existing 2P oil & gas reserves. The NAV based valuation methodology assumes that the company never increases its existing reserves, so there is no additional CapEx in future years beyond what is required to develop existing reserves. Therefore we have assumed Development Expenditure at PKR4.3bn in total for next five years (including FY13) and have incorporated production only from its existing reserves. We have used WACC (16.75%)todiscountfuturecashflowsofPOLfromitsreserves. In addition to above, POL holds strategic interest in its listed associates, Pakistan Refinery Limited (PRL) and Attock Petroleum Limited (APL) which is valued at PKR24.36 per share after applying 25% discount to market price of both the companies. POLs cash & cashequivalents(NetDebt)arevaluedatPKR37.00pershare. Furthermore, we have held international crude oil price (Arab Light) constant at US$105/bbl for the mediumterm till year 2020 beyondwhicha1%increaseonannualbasisandPKRtodepreciate by 5% on average over the longterm. The average tax rate of the companyisassumedat25.87%forcalculatingaftertaxcashflows. POL is trading at a discount of 10% to its fair value which requires ustoassignanACCUMULATEratingforthestock.

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VALUATIONMA ATRIXDCF FBASEDNA AV

PKR,Millio on EBIT Add:NonCashCharges TaxExpense Capex WorkingCapital C Changes s FreeCashflows PresentVa alueOfFreeCa ashflows Enterprise eValue NetDebt MarketVa alueOfUndeve elopedLand IntrinsicValuePerShare e PortfolioValue V PerShare e NAVBASEDSHAREVALU UE 105,545.64 8,733.40 50.00 483.33 24.36 507.69 FY13E 17,994.95 2,513.00 (4,655.55) (1,877.08) (900.67) 13,074.65 12,482.79 FY14F 22,465.52 2,606.60 (5,812.15) ) (1,620.86) ) (398.58) 17,240.53 14,096.13 FY15F 22,642.0 04 2,557.65 5 (5,857.82 2) (1,230.92 2) 48.30 18,159.2 24 12,715.5 53 FY16F 18,202.64 2,386.2 26 (4,709.2 28) (944.9 90) 534.8 85 15,469.57 9,276.5 52 FY17F 18,443.21 2,255 5.92 (4,771 1.52) (774. .06) 42.0 09 15,195.64 7,805 5.21

Enterpr riseValueinrelation ntokeyrat tios:

16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 FY13E FY1 14F FY15F FY Y16F FY17F EV/EBIT TDAX
Source:DataStr ream(Reuters),AHC CMLestimates

100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 FY13E FY14F F FY15F FY16F FY17F EV V/BOE(RESERV VES) EV/BOE E(PRODUCTION N)

EV/D DACF

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PeerCo omparison:

Pakistan Oilfields O Limited trades on most m attractive PE multiples, trading at 8.1 13x on FY13 EPS, E compared to its local and regional r peers. Furtherance to the above, POL offers hig ghest dividend d yield, 11.41% % at current pr rice on FY13DPS,amongitsregionalpeers.PO OLisalsowellpositioned p inte ermsofROEan ndROAamong gitspeers.

P/ /ERatio
45 40 35 30 25 20 15 10 5 0 CNOOC OGDC SANTOS JPEX PPL WPL POL INPEX OILINDIA ONGC OILSEARCH 12 10 8 6 4 2 0

Divi idendYie eld

CNOOC

OGDC

SANTOS

OILINDIA

ONGC

INPEX PPL

JPEX SANTOS

PPL

WPL

POL

Source:DataStr ream(Reuters),AHC CMLestimates

Net profit margins for Pakistan P Oilfields Limited are e also among the t highest in its peers. Cou untry peers ar re also among the e highest, repr resenting high profitability of o Pakistans oil o & gas explo oration sector at large. Its peers p Pakistan Petroleum and Oil and Gas Development Co o. are highly cash rich com mpanies with no o longterm de ebt on theirbalan ncesheets.

Net tMargin
60 50 40 30 20 10 0 CNOOC OGDC SANTOS WPL PPL POL JPEX INPEX ONGC OILINDIA OILSEARCH 90 80 70 60 50 40 30 20 10 0

Lo ongTerm mDebtto oEquity

C OOC CNOOC

OGDC

INPEX

JPEX

ONGC

OILINDIA

Source:DataStr ream(Reuters),AHC CMLestimates

OILSEARCH

WPL

POL

OILSEARCH

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Sensitivity:CrudeOilPrice&PKR
We expect Pak Rupee to depreciate on average at 5% in our base case scenario and international crude oil price (Arab Light) to remain at US$105 per bbl for the mediumterm There is a significant impact of both these variables; Crude oil price and PKR depreciation on expected earnings and on FairValueofthecompany
CrudeOilPrice ArabLightUS$ 3% 115.00 110.00 105.00 100.00 90.00 496.84 485.02 473.20 461.38 437.73

High international crude oil prices and depreciating Pak Rupee have significantly contributed to POLs topline in the recent past. We expect Pak Rupee to depreciate on an average at 5% in our base case scenario and international crude oil price (Arab Light) to remainatUS$105perbblforthemediumterm.However,wehave also provided the impact of both these variables on expected earningsandonFairValueofthecompany.

SensitivityTable:CrudeOilPriceChange&PKR depreciationimpactonFAIRVALUE
PKRdeprecation 4% 514.04 501.80 489.55 477.30 452.79 5% 532.60 519.89 507.19 494.48 469.06 6% 552.65 539.46 526.26 513.06 486.67 7% 574.37 560.65 546.93 533.21 505.76

Sensitivity: Crude Oil Price change impact on EPS (E)

EarningsPerShare FY13 CrudeOilPrice ArabLightUS$ 115.00 110.00 105.00 100.00 90.00 58.36 56.29 54.23 52.16 48.03 FY14 73.73 70.97 68.21 65.46 59.95 FY15 74.17 71.46 68.75 66.03 60.61 FY16 58.46 56.64 54.81 52.99 49.33 FY17 59.13 57.34 55.54 53.75 50.16

Sensitivity:PKRdepreciationimpactonEPS(E)
EarningsPerShare FY13 PKRDepreciation 3% 4% 5% 6% 7% 54.23 54.23 54.23 54.23 54.23 FY14 66.67 67.44 68.21 68.99 69.76 FY15 65.68 67.21 68.75 70.30 71.86 FY16 51.31 53.05 54.81 56.61 58.44 FY17 51.01 53.25 55.54 57.91 60.33

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Divi idendsfromassociat tes!

APL and NRL both hav ve maintained pay yout ratio of o aroun nd 84% and 46% %; augm menting PO OLs bottom line POL is also focusing on o increasing prod duction from opera ated fields i. .e. from Bela a 1, Dhulian, Pindori P an nd Pariw wali hestchalleng ge POLfacestough in arresting the e productio on declin nefromoperatedfields

POL holds 25% sta ake in National Refinery Limited (NRL), 7% in Attoc ck Petroleum Limited L (APL) and 51% in Capgas (Pvt) Lim mited. POL benefits b from strong dividend income fro om APL and NRL N as both companies ha ave maintained d payout ratio of around 84% and 46%, respectively for FY12. The Company C also received a div vidend of PK KR90.00 per share from Capg gas (Pvt) Ltd. During D 1HFY13 3 none of th he associates have announced any divid dends; howeve er we expec ct NRL and APL A to announce a divided d of PKR18.00 0 and PKR52.00,respectiv velyforFY13E.

Size eableaddit tions:POLproductio onprofile

Pakist tanOilfieldsLimitedsstrateg gyofheavilyre elyingonproduction from company operated fields has significan ntly shifted to owards produ uction from nonoperated fields (JVs). . TAL Block (MOL opera atedJV,POLst take21.05%)remainedthemajor m sourceof o oil& gas production p in the t recent pas st with quanti ifiable support t from PPL operated o Adhi Field (POL stake: 11.0%) and d Pariwali (ope erated field: 82.5% stake). POL is also focusing f on increasing production from operated field ds i.e. from Bel la1, Dhulian, Pindori P and Pariwali. Furth hermore, POL has started fo ocusing on making additions to its existing portfolio of o fields i.e. at a Ikhlas Bloc ck where drilling of Sadria al1 well is in completion ph hase, while 2D D seismic acqu uisition hasbeen b completed datD.G.KhanandRajanpurBlocks.

We expect the companys c to otal productio on to increase to 5,588 8.56boepd, 6,3 303.03boepd and a 6,291.91b boepd in FY13, , FY14 and FY15, respec ctively, on the t back of major production enhancementsfrom mTALblock.

DecliningproductionfromPOL P operate edfields

POL faces f toughest t challenge in arresting prod duction decline e from opera ated fields. To otal oil production (POLs Sh hare) from ope erated fields s dropped from m 4,007boepd d in 2008 to 2,090boepd 2 in n 2012 depic ctingadeclineof15.02%(CA AGR).Similarlytotalgasproduction

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Afte er sever ral effor rts comp panywasun nabletoarre est the production p decline fro om Pindo ori; which h poses a conte entious que estion on th he credi ibility of fie elds reserves estim mates duction from m Pariwali is Prod declin ning

dropped from 25.7mmscfd to 16.2mmscfd in 2012 depicting a declin neof10.9%(C CAGR).IncaseofNaturalGas sLiquids(NGLs s),LPG production also de eclined from 102.9Tpd 1 in to o 65.0Tpd, dec clining 10.8% %(CAGR)overthesameperiod.

We expect e total production p (own fields) to further decli ine to 2,387 7boepd, 1,897boepd and 1,7 755boepd in FY Y13, FY14 and FY15, respe ectively,depict tinganaturalproduction p dec cline.

Crud deOil
In cru ude oil, major r production declines were witnessed w in Pindori P and Pariwali. P In Pin ndori, product tion dropped from f 1,034boe epd in 2008 to 219boepd in 2012 reflec cting a drop of f 32.2% (CAGR R). POL has disclosed d in its s latest annual accounts tha at at Pindori, the t JV partn ners have agr reed to drill another a well to test the up u dip poten ntial of the fie eld. Despite se everal efforts, the company is still unab bletoarrestthe edeclinewhichposesacont tentiousquestionon the credibility of f Pindoris reserves estim mates. In Pariwali, productiondroppedfrom1,642boepdin2008to t 598boepdin n2012 depic ctingadeclineof22.32%(CA AGR).

Weexpect e totalcru udeoilproduct tion(ownfield ds)tofurtherdecline d to 1, ,784boepd, 1,252boepd and d 1,158boepd in FY13, FY14 and FY15, ,respectively,depictinganaturalproductio ondecline.

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Natu uralGas&NGLs N LPG production n was main nly witne essed in bot th Pindori an nd Pariw walifields

In na atural gas, maj jor production n declines have e been witnessed in Pindo ori followed by y Pariwali. In Pindori, P produ uction dropped d from 3.1m mmscfd in 2008 8 to 0.6mmscfd in 2012 de epicting a decline of 33.4% % (CAGR). In Pariwali, production dropped from 15.8mm mscd in 2008to 7.3mmscfd d in 2012depic ctinga decline of17.7%(CAG GR). In Natural Gas Liquids (NGLs), decli ine in LPG pro oduction was mainly m witne essed in both Pindori and Pariwali fields s where production dropped by 24.9% and 18.6% (C CAGR) respectively over the same perio od.

NGL Ls productio on is expecte ed to remain r fairly stable by b FY15

TAL Block prom mises a hug ge potential for bot th oil and gas productioninfut ture

We expect e total natural n gas pr roduction (ow wn fields) to further declin ne to 12.75mm mscfd, 11.58m mmscfd and 10 0.59mmscfd in FY13, FY14 and FY15, respectively, depicting a natural production declin ne. However NGLs product tion is expected to remain fairly stablebyFY15.

Unexploredpot tential:NonoperatedJV Vs
TAL Block promis ses a huge potential p for both oil and gas production, in futu ure, with signif ficant production coming online in 4QFY Y13. Significant t development t and explorati ion activities are still in pr rogress in the e Block and we w expect many surprises in the coming days in term of both b product tion and res serves enhancements. To otal oil prod duction from nonoperated d JVs increased from 1,1 139.5boepd in n 2008 to 2,5 545.2boepd in 2012 depic cting CAGR of 22.3%. Similarly total gas production incr reased from 18.4mmcfd to o 70.5mmcfd in 2012 depict ting CAGR of 39.8%. 3 In NG GLs, LPG produ uction remaine ed fairly flat wi ith 13.93tpd in n 2008 to13 3.73tpdin2012 2.

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[Type e sidebar conte ent. Asidebar is ias Maj jor productio onupside wa witne essed supple from m TAL the Bloc a stan ndalone ement to ck; main nly fromMak kori East 2d main document. Itis i often aligned onthe eleftorrightof o thepage,or r locate edatthetoporbottom.Use theTe extBoxToolstab t tochange thefo ormattingofth hesidebartext t box. Typesidebar s conten nt.Asidebaris sa stand dalonesupplem menttothema ain docum nalignedonth he ment.Itisoften leftor rrightofthepage, p orlocated at the e top or bottom m. Use theText t t crude oil o Weexpectthetotal BoxTools Tuction tab tocha ange the JV prod (non operated Vs) to fu rtherof increas totextbox forma atting thesise x.] debar
TALBlo ock:Imagesource:MOL M Pakistanwebsit te

3030 0.10bpdinFY Y13

In cru ude oil, major r upside was witnessed w in TAL T Block (Manzalai, Mako ori, Makori Ea ast, Mamikhel & Maramzai) where production increased from 52 22.7boepd in 2008 to 1,762.7boepd in 2012 depic cting a CAGR R of 35.5%. Production from f Ratana Field (Operated byOcean Petroleum, POL P stake5%) also increased d from 3.66b bpdin2008to32.03bpdin2012depictingaCAGRof72.1 1%. We expect e total cru ude oil produc ction (nonoperated JVs) to further increase to 3,030.1 10boepd, 4,22 21.59boepd an nd 4,361.56boe epd in FY13, , FY14 and FY15, respe ectively stem mming from major productionenhancementsfromTAL T block. In Na atural Gas and NGLs, major production p ups side were witn nessed inTA ALBlockwhereproductionincreasedfrom13.2mmscfdin n2008 to 65 5.8mmscfd in 2012 depictin ng a CAGR of f 49.57%. For NGLs, increaseinLPGpro oductionwasmainly m witnesse edfromRatanafield which hincreasedfro om0.1tpdin2008to1.27tpd din2012depic ctinga CAGR Rof96.22%. We expect e total Natural N Gas production p (no onoperated JV Vs) to further increase to o 74.18mmscfd d, 76.20mmscf fd and 72.39m mmscfd in FY Y13, FY14 an nd FY15, resp pectively, stem mming from major

ral We expect the total Natur p (non ( operate ed Gas production JVs) to further r increase to 74.18 8mmscfdinFY13

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produ uction enhan ncements from m TAL block k. However NGLs produ uctionisexpec ctedtoremainfairlystableby yFY15.

Sizable add ditions ar re expec cted to come online from Mam mikhel2, Ma aramzai2 an nd Mako oriEast 2 and furthe er flows s from Mardankhel M 1, Mako oriEast 3, Tolanj1 an nd Manz zalai10

Prom misingOutlo ook:product tioninFY13&beyond

Pakist tan Oilfields Limiteds pro oduction profi ile has signifi icantly chang ged in the rec cent past (5ye ear period, 200 0812). Contrib bution of oil production from company operated o fields s in total production dropp ped from 78% in 2008 to 45 5% in 2012. Similarly, share in gas produ uction also dro opped from 58 8% to 9% duri ing the same period p while e LPG proport tion remained unaffected. The T trend ind dicates POLs s increasing re eliance on nonoperated JVs for its produc ction 20%contribution c in n2008to51%in2012.Furthermore,thistr rendis also expected e to co ontinue in the e near future, FY13, FY14 & FY15, when n sizable add ditions are expected e to come online from Mamikhel2,Maram mzai2andMa akoriEast2and dfurtherflows sfrom Mard dankhel1, Ma akoriEast 3, Tolanj1 and d Manzalai10 0. We foresee continuatio on of explora ation activity and foresee upside u poten ntial through acquisition, a pro ocessing and in nterpretation of o 398 sq km m new 3D surv veys. The JV ha as also planned the drilling of o two explo oratorywellsat tKot1andMa algin1(eastern npartofTalBlock).

Prod ductionConcentratio on:Oil

120 0%

TAL Block, Manzalai10 1 drillin ng is in the completin ng phase e whereby y productio on flows sareawaited

100 0% 80 0% 60 0% 40 0% 20 0% 0 0% Y09 FY10 FY Y11 FY12 FY1 13 FY14 FY1 15 FY08 FY TAL A Adhi Others

Furth hermore, at Ra atana (operated by Ocean Pa akistan Limited d, POL stake e 4.54%), Rata ana4 well ha as been tested d and is prod ducing 17.5m mmscfd of gas from Wargal formation. f Adhi19 well (ope erated by Pa akistan Petrole eum, POL stak ke 4.54%) was s spudin on Nov N 3, 2012anddrillingisinprogress.At A TALBlock,Manzalai M 10drillingis in the e completing phase p whereby y production flows are await ted. At Chak Naurang Sout th2 (operated d by OGDC, PO OL stake 15%) more than 50% (of target depth) has been b drilled an nd is expected to be comp pletedin3QFY1 13.

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Tota al revenue contributio [Type e sidebar conte ent. Asidebaron i is from NGLs supple stand ds atto averag astan ndalone ement the ge 20% the la 5years mainduring document. It is iast often aligned d
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We expect e total pr roduction (oil, gas & LPG) to o further increase to 5,588 8boepd, 6,303boepd and 6,2 292boepd in FY Y13, FY14 and FY15, respe ectively despite a natural production decli ine from own fields. Furth hermore, the proportion of o nonoperat ted fields in total production is expe ected to increa ase to 57%, 70% 7 & 72% in FY13, FY14andFY15,resp pectively.

Dive ersification:revenuefro omNGLs

Natural Gas Liquid ds (LPG, Solve ent Oil & Sulphur) revenue e also contr ributes major portion in tot tal revenue besides conven ntional sourc ces i.e. gas an nd crude oil. POL P sells Lique efied Petroleum m Gas (LPG) ) produced fro om its operate ed and nonop perated fields under the brand b name of o POLGAS thr rough its subs sidiary Capgas s (Pvt) Limited. Total reve enue contribut tion from NGL Ls stands at av verage 20% during the last 5 years. Going forwar rd, we expec ct this contr ribution to dro op in FY14 & FY Y15 on the back of rising oil & gas productionmainlyfrom f TALBlock k. RevenueMix(PKRMillion)

Typesidebar s conten nt.Asidebaris sa stand dalonesupplem menttothema ain ment.Itisoften nalignedonth he docum leftor rrightofthepage, p orlocated at the e top or bottom m. Use theText t BoxTools T tabtocha angethe forma attingofthesidebartextbox x.]

tors determ mining Crud de Fact Oil Price: glob bal econom mic recov very determ mining energ gy dema and and unr rests in the oil o produ ucing nation ns deter rminingoilsupply s
4 40,000.00 3 30,000.00 2 20,000.00 1 10,000.00 F FY13E CRUDEOIL FY14F GA AS FY15F FY16F FY17F

POLGAS&LPG

Inte ernationalCrudePric ces

International crude e prices are la argely dependent on two fa actors; globa aleconomicrecoverydeterm miningenergydemand d andunrests in oil l producing na ations determining oil supply y. In this repo ort, we willdiscuss d thepric cescenarioinlightoftheseis ssues:

Glob baleconomy y:thedemandfunction

Globa al economy is expected to grow by 2.4 percent p in FY1 13 and will steadily s gain momentum in FY14 and beyond. Deve eloped economies are exp pected to grow w by 1.3 percen nt in FY13 and 2.0 & 2.3 percent p in FY14 4 and FY15 dr riven by public c spending cut ts and weak k prospects of improving tor rmented financial system. Despite D thesupportivemon netarypolicyin nthedevelope edeconomiesbythe

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central banks; global financial system still remains delicate and controlledbudgetaryspendingmightslowtherecovery.

Leading emergingblock BRIC,Brazil,Russia,Indiaand China,isexpectedtogrowby 5.38 percentinFY13and5.70 and5.68percentinFY14and Globalfinancialsystemstill FY15 remainsdelicateand controlled budgetary spendingmightslowthe recovery. Itisexpectedthattotalliquid fuelconsumptioninUStorise slowlyoverthenexttwoyears toanaverage18.8mmbpdin 2014

Emerging economies have gained major share in global economic growth after financial crisis of 2008 and are expected to grow by 5.5percentinFY13and5.7&5.8percentinFY14andFY15.
RealGDP growthForecast World EuroArea Japan UnitedStates Developing Countries EastAsia& Pacific China Europe& CentralAsia Russia Turkey Latin& Caribbean Brazil MiddleEast&N. Africa SouthAsia India Pakistan SubSaharan Africa
Source:IMF

2011 2.7 1.5 0.7 1.8 5.9 8.3 9.3 5.5 4.3 8.5 4.3 2.7 2.4 7.4 6.9 3 4.5

2012 2.3 0.4 1.9 2.2 5.1 7.5 7.9 3 3.5 2.9 3 0.9 3.8 5.4 5.1 3.7 4.6

2013E 2.4 0.1 0.8 1.9 5.5 7.9 8.4 3.6 3.6 4 3.5 3.4 3.4 5.7 6.1 3.8 4.9

2014F 3.1 0.9 1.2 2.8 5.7 7.6 8 4 3.9 4.5 3.9 4.1 3.9 6.4 6.8 4 5.1

2015F 3.3 1.4 1.5 3 5.8 7.5 7.9 4.3 3.8 5 3.9 4 4.3 6.7 7 4.2 5.2

Growth is maintainable on the back of these countries ability to fund large public infrastructure projects in times of waning global demand mainly form developed economies. Leading emerging block BRIC Brazil, Russia, India and China is expected to grow by 5.38percentinFY13and5.70and5.68percentinFY14andFY15. The main driver will be China which is expected to achieve economic growth of 8.4, 8.0 and 7.9 percent in FY13, FY14 and FY15, respectively followed by India having expected growth rate of 6.1, 6.8 and 7.0 percent in FY13, FY14 and FY15, respectively. High employment growth and increasing consumption and easing of macroeconomic policies continue to boost demand and support investmentandgrowthintheseeconomies. U.S. liquid fuels consumption fell from an average of 20.8mmbpd in 2005 to 18.6mmbpd in 2012. It is expected that total consumption would rise slowly over the next two years to an average 18.8mmbpd in 2014. Chinas liquid fuel consumption has

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Global liquid fuel demand is also expected to increase by 0.5 percent annually on averagethrough2020 Unrest in the Middle East remains a major challenge haunting the world crude oil supplies Crude production is continuously increasing from U.S. tight oil formations, Canadian oil sands and Shale oil&gasresources

increased from 8.5mmbpd in 2009 to 10.2mmbpd in 2012. Global liquid fuel demand is also expected to increase by 0.5 percent annually on average through 2020 helping crude prices to sustain andconsolidateatthecurrentlevelsforthemediumterm.
Worldoildemandoutlook (mmbbl/day) 2010 2015 2020 2025 46.8 45.8 45.2 44 35.4 4.8 87 40.8 5.2 91.8 46.3 5.4 96.9 51.3 5.5 100.9

OECD Developing Countries Eurasia World

2030 42.6 56 5.6 104.2

2035 41.1 60.6 5.6 107.3

Source:OPECWorldOilOutlook(2012)

Politicalunrests:Thesupplyfunction
Unrest in the Middle East remains a major challenge haunting the world crude oil supplies with particular focus on regime change battle in Syria, poor law and order situation in Sudan and increasing sanctions from US and EU, which will restrict Irans ability to arrest normal production declines, through investing in wildcats and development wells. Supply disruptions from these countries are not expected to end in the near future and may worsenparticularlyintheIraniancase. Good news is coming from Libya, where production has nearly reached the precrisis levels, and Iraq where export infrastructure developments have helped government to increase its production frompreviouslevels.Anothermajordevelopmenttakingplaceisin North America where crude production is continuously increasing from U.S. tight oil formations, Canadian oil sands and shale oil & gas resources. Though the investment in these fields is generating interests of many oil producers, however, any quantum jump in crude supplies in the near future is not foreseen. Currently, world liquid fuel supply stands at 89.38mmbpd which is expected to increaseonanaveragerateof0.5percentannuallythrough2020.
Worldoilsupplyoutlook (mmbbl/day) OECD Asia China Eurasia World 2010 2015 2020 20 3.7 4.1 13.4 86.5 21.8 4 4.3 13.9 92 22.6 4.3 4.4 14.3 2025 23.3 4.1 4.4 14.7 2030 24.1 3.8 4.5 15.1 2035 24.9 3.6 5 15.5

97.1 101.1 104.4 107.5

Source:OPECWorldOilOutlook(2012)

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Sustainablebalance:Determiningprice Iran, produces about 56 percent of world oil, faces serious threat of further sanctions on its exports; which may spark a short term spikeinthecrudeprices An average annual increase in crude oil price of 1 percent on the long term basis after 2020isforesighted

Currently, world liquid fuel demand and supply seems fairly balanced with demand at 89.70mmbpd and supply at 89.38mmbpd. But a supply disruption in the short term is also foresighted asIran, which produces about56 percent ofworld oil, faces threat of further sanctions on its exports; which may spark a short term spike in crude prices. We believe the demand supply balance is expected to continue, with minor seasonal and structuralsupplyadjustments,inmediumtermbyendof2020.
ProjectionsofOilPrices(20152035) (2010dollarperbarrel) 2015 2020 2025 117 127 133 82 92 99 99 94 85 106 73 104 102 89 113 87 106 107

Projection IEA EnergyVentures Analysis INFORUM HISGlobalInsight Purvin&Gertz Advisory EnergySEER

2030 138 95 118 96 107 111

2035 145 102 117 98 107 122

Source:IEAAnnualEnergyOutlook2012

We expect Arab Light price to remain rangebound between US$105 till 2020. Thereafter, we believe, with world economic growth gaining momentum and the resultant surge in energy demand will eventually bolster crude price momentum we thus foreseeanaverageannualincreaseof1percentonlongtermbasis after2020.

WorldLiquidFuelsSupplyandDemandOutlook 93.00 92.00 91.00 90.00 89.00 88.00 87.00 86.00 10/12 10/13 10/14
ArabLight
(millionbarrelsperday)

$140.00 $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $

1/12

4/12

7/12

1/13

4/13

7/13

1/14

4/14
WTI

Supply

Demand

7/14

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Safe elyPlaced:Noimpac ctofCircu ularDebt

alE&Pcomp panieshas Loca rema ainedfairlyhigh h among their rregionalcou unterparts butstocks s havenot n ormedcomp paratively perfo well on "Oil & Gas exploratio ness is extreme ely busin lucra istan" ativeinPaki Lremainedfairly fa POL prote ectedfromC CircularDeb bt issue e

Circular debt has proved p as me enace for the Pakistans eco onomy durin ng the last 56 years, strictl ly limiting the e Power Comp panies abilitytopayforth hefuelcosts.It thascreatedaverticalchaininthe whole energy sect tor. Exploration and Produc ction companie es are alsonot n anexceptio ontothisprob blem.Thishasledtoanincre easein the amount a of rec ceivables for exploration e com mpanies, main nly for public sector companies i.e. OG GDC and PPL. As a result, these comp panies have si ignificantly red duced dividend payouts and also the exploration activity. a Altho ough Oil & Gas Explorati ion is extre emely lucrative e business in Pakistan as th he return on equity (avg. 32.67%) of E& &P companies s has remained fairly high among a their regional counterparts bu ut stocks have not perfo ormed comp parativelywell.

ReturnonEquity
40 4 3 35 3 30 2 25 2 20 1 15 1 10 5 0

Howe ever, POL remained fairly pr rotected from Circular Debt issue dueto t itsrefineryagreement a wit thgroupcompanyAttockRef finery. Incontrasttoitspe eers,accountreceivables r day ysareat49.21much lower than OGDC and PPL have e receivables days at 236.5 54 and 160.6 65 respectively y. As a result POL P has been able to maintain its highdividendpayoutduringthisperiod. p

Acco ountReceiva ableDays(FY Y2012)

250 200 150 100 50 0

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Awordofcaution:understandingrisks
Most of the POLs fields are directly linked to international crudeoilprices.Thereforeany sharp decline may hurt its topline International Oil Price Hedgingisavailableoption E&P companies usually operate in highly volatile regions Concentrationrisk:heavyrelianceonTALblock

Three major risks factors have been indentified; firstly, high volatility in international crude oil price, secondly, POLs heavy relianceonTALBlockandlastly,POLshighdividendpayoutpolicy.

Managingtheuncertainty:volatilecrudeoilprices
International crude oil prices (WTI) have remained highly volatile during the FY11 and FY12 by escalating to a high of US$110 per barrel in March 2011 then going down to as low as US$80 per barrelinOct2011.AsmostofthePOLsfieldsaredirectlylinkedto international crude oil prices; any sharp decline in these prices will adversely influence the topline of the company. Keeping in view thisuncertainty,POLsmanagementmighthavedevisedplansbuilt on scenario analysis and through the use of derivative to provide hedge against it. We have also provided the oil price to earnings sensitivitytableintheprevioussectionsofthereport.

Pakistan Oilfields Limited production (both oil & gas) is largely dependent on TAL block located near Karak, Kohat and Hangu districtsofKhyberPakhtunkhwaprovinceandsomeareasofNorth Waziristan and Orakzai agencies of FATA. Being located in highly volatile region in the context of waronterror, any production disruptions may result in significant impact on POLs topline due to its smaller size in terms of production diversification as compared to the rest of JV partners. As earlier discussed in the report POL is heavily relying on nonoperated fields for its revenue andTALblockisthebiggestamongtherest.Wediscounttheserisk on the basis of international history of E&P companies usually operate in highly volatile regions, Nigeria, Iraq, Libya etc are few amongthemany.

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TALBlock k(BOEin'000) )
Prod duction from m TAL block is more e likely to su urprise on th he posit tiveside

2,5 500.00 2,0 000.00 1,5 500.00 1,0 000.00 5 500.00

8 FY09 FY10 FY11 FY12 FY Y13 FY14 FY15 FY08 Others TALBlock

High h payout may m result in comp promise on future explo oration and development activities

Furth hermore, we believe that kee eping in view these t risks the e Block opera ator(MOL)has ssituatedtheCPFs C nearmor restableareasinthe regio on. However, we w state that production p from m TAL block is s more likely y to surprise on the othe er side, by delivering significant productionandreservesenhance ements.

Disb bursinggene erously:ave eryhighdividendpayou ut

Pakis stan Oilfields Limited dividend payout has h increased from 76.5% % in FY11 to 105% 1 in FY12 depicting a 37 7% rise YoY. As we know w exploration is s a highlycapit tal intensive business POLs such s a high payout may cr reate difficulties in the longe er term. Such a high payout may resul lt in comprom mise on future exploration n and development activ vities. Howeve er, POLs bala ance sheet depicts d sound financial strength with abundant a reve enue reserves s (PKR 32.8b bn for FY12) at t disposal. The e company may afford to con ntinue this payout policy for the sh hort to medium term without w comp promisingontherest.

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FINANCIALSTATEMENTS:
PAKISTANOILFIELDSLIMITED INCOMESTATEMENT
PKR(Million) GROSSSALES SALESTAX NETSALES OPERATINGCOSTS EXCISEDUTY&DEV.SURCHARGE ROYALTY AMORTIZATIONCOSTS GROSSPROFIT EXPLORATIONCOSTS ADMINISTRATIVEEXPENSES FINANCIALCHARGES OTHERCHARGES OPERATINGPROFIT OTHERINCOME PROFITBEFORETAX PROV.FORTAXATION PROFITAFTERTAX EPS EBIT EBITDA EBITDAX
AHCML:Estimates

FY11A 27,102.44 (2,151.73) 24,950.71 5,537.83 352.49 2,310.47 1,122.20 (9,322.98) 15,627.73 (1,075.05) 14,552.68 83.10 223.93 1,104.24 (1,411.27) 13,141.41 1,808.60 14,950.01 (4,135.00) 10,815.01 45.72 15,173.94 16,900.75 17,975.80

FY12A 30,822.66 (2,198.60) 28,624.06 6,262.36 317.53 2,730.54 1,807.19 (11,117.63) 17,506.43 (593.55) 16,912.87 113.34 684.58 1,286.59 (2,084.50) 14,828.37 2,547.21 17,375.58 (5,522.78) 11,852.80 50.11 18,060.15 20,501.14 21,094.69

FY13E 31,399.11 (2,325.86) 29,073.25 6,635.61 348.88 2,720.34 1,814.25 (11,519.08) 17,554.17 (257.51) 17,296.66 106.02 691.42 1,556.70 (2,354.14) 14,942.52 2,361.01 17,303.53 (4,476.67) 12,826.86 54.23 17,994.95 20,250.44 20,507.95

FY14F 38,415.39 (2,845.58) 35,569.81 7,707.46 426.84 3,383.13 1,894.94 (13,412.36) 22,157.44 (245.20) 21,912.24 129.75 698.34 1,972.10 (2,800.18) 19,112.06 2,655.13 21,767.19 (5,631.48) 16,135.71 68.21 22,465.52 24,826.93 25,072.13

FY15F 37,155.13 (2,752.23) 34,402.89 7,117.58 412.83 3,366.98 1,855.51 (12,752.90) 21,650.00 (236.09) 21,413.90 124.03 705.32 1,927.25 (2,756.60) 18,657.30 3,279.42 21,936.72 (5,675.34) 16,261.38 68.75 22,642.04 24,963.59 25,199.69

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PAKISTANOILFIELDSLIMITED BALANCESHEET
PKR(Million) EQUITYANDLIABILITIES SHARECAPITAL REVENUERESERVES FAIRVALUEGAINONA.F.S.INVESTMENTS NONCURRENTLIABILITIES LONGTERMDEPOSITS DEFERREDLIABILITIES CURRENTLIABILITIES TRADEANDOTHERPAYABLES PROVISIONFORTAXATION TOTALLIABILITIES ASSETS NONCURRENTASSETS PROPERTY,PLANT&EQUIPMENT DEV.&DECOMMISSIONINGCOST EXPLORATIONANDEVALUATIONASSETS L.T.INVESTMENTSINSUBSIDIARY OTHERL.T.INVESTMENTS LONGTERMLOANSANDADVANCES 4,257.76 10,568.41 4,810.73 19,636.90 9,615.60 69.68 20.07 9,705.35 29,342.25 CURRENTASSETS STORESANDSPARES STOCKINTRADE TRADEDEBTS ADVANCES,DEPOSITS&PREPAYMENTS SHORTTERMINVESTMENTS CASHANDBANKBALANCES TOTALASSETS
AHCML:Estimates

FY11A 2,365.46 31,048.22 9.41 33,423.09

FY12A 2,365.46 32,847.81 57.97 35,271.24

FY13E 2,365.46 32,664.64 65.87 35,095.97

FY14F 2,365.46 37,630.45 72.45 40,068.37

FY15F 2,365.46 39,335.77 79.70 41,780.92

487.31 7,710.10 8,197.42 4,045.04 1,373.66 5,418.70 47,039.21

504.45 10,504.45 11,008.90 4,465.71 1,593.67 6,059.39 52,339.53

524.63 12,226.02 12,750.65 4,644.93 1,365.29 6,010.21 53,856.83

545.61 14,177.73 14,723.34 5,395.22 1,717.48 7,112.70 61,904.41

567.44 16,145.55 16,712.99 4,982.30 1,730.86 6,713.16 65,207.07

4,163.78 15,687.79 2,883.06 22,734.63 9,615.60 658.67 16.27 10,290.55 33,025.18

4,169.24 16,282.21 1,904.78 22,356.22 9,615.60 658.67 16.27 10,290.55 32,646.77

4,175.17 16,257.13 1,183.38 21,615.68 9,615.60 658.67 16.27 10,290.55 31,906.23

4,181.61 15,692.00 651.44 20,525.05 9,615.60 658.67 16.27 10,290.55 30,815.60

2,632.49 126.41 4,343.53 662.88 3,226.55 6,705.10 17,696.95 47,039.21

2,939.31 134.20 3,006.57 601.97 3,898.91 8,733.40 19,314.35 52,339.53

3,218.27 137.68 3,198.06 979.53 4,232.69 9,443.84 21,210.06 53,856.83

3,738.12 190.54 3,912.68 1,193.27 4,655.96 16,307.61 29,998.18 61,904.41

3,452.02 195.55 3,784.32 1,154.88 5,121.55 20,683.15 34,391.47 65,207.07

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PAKISTANOILFIELDSLIMITED CASHFLOWSTATEMENT
PKR(Million) CASHFLOWFROMOPERATINGACTIVITIES PROFITAFTERTAX ADJUSTMENTFOR: DEPRECIATIONONPROPERTY,PLANT& EQUIPMENT PROFITBEFOREWORKINGCAPITALCHANGES 10,815.01 11,852.80 12,826.86 16,135.71 16,261.38 FY11A FY12A FY13E FY14F FY15F

604.62 11,419.63 (666.64)

633.79 12,486.59 1,051.59 13,538.18

441.24 13,268.10 (1,234.45) 12,033.65

466.47 16,602.17 (821.85) 15,780.32

466.05 16,727.43 (417.30) 16,310.13

EFFECTONCASHFLOWDUETOWORKINGCAPITALCHANGES NETCASH(USEDIN)/FROMOPERATING ACTIVITIES CASHFLOWFROMINVESTINGACTIVITIES CAPITALEXPENDITURE NET(INCREASE)/DECREASEINOTHERASSETS NETCASHFROMINVESTINGACTIVITIES CASHFLOWFROMFINANCINGACTIVITIES INCREASE/(DECREASE)INNONCURRENT LIABILITIES INCREASE/(DECREASE)INCURRENTMATURITY OFL.T.FINANCE INCREASE/(DECREASE)INFRESHEQUITY DIVIDENDSPAID NETCASHUSEDINFINANCINGACTIVITIES NET(DECREASE)/INCREASEINCASH&CASH EQUIVALENTS CASH&CASHEQUIVALENTSATTHE BEGINNINGOFTHEYEAR CASH&CASHEQUIVALENTSATTHEENDOF THEYEAR
AHCML:Estimates

10,752.99

(2,965.53) 61.76 (2,903.77)

(3,731.51) (585.20) (4,316.71)

(62.83) (62.83)

274.07 274.07

624.58 624.58

1,332.19 (11.66) (6,505.01) (5,184.48) 2,664.74 4,040.36 6,705.10

2,811.48 48.56 (10,053.20) (7,193.16) 2,028.31 6,705.10 8,733.40

1,741.75 7.89 (13,010.02) (11,260.38) 710.44 8,733.40 9,443.84

1,972.69 6.59 (11,169.90) (9,190.62) 6,863.77 9,443.84 16,307.61

1,989.65 7.25 (14,556.07) (12,559.17) 4,375.54 16,307.61 20,683.15

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RATIOANALYSIS
CURRENTRATIO NETWORKINGCAPITALRATIO CASHRATIO RECIEVABLESTURNOVERRATIO INVENTORYTURNOVERRATIO PAYABLETURNOVERRATIO CASHCONVERSIONCYCLE GROSSPROFITMARGIN NETPROFITMARGIN DEBTTOEQUITYRATIOS OPERATINGPROFITMARGINS TOTALASSETTURNOVERRATIO INTERESTEXPENSERATIO FINANCIALLEVERAGEMUTIPLIER RETURNONEQUITY
AHCML:Estimates

FY10A 3.68x 0.23x 1.21x 8.09x 4.96x 3.04x 1days 61.01% 41.68% 0.35x 55.34% 0.48x 0.72% 1.35x 27.17%

FY11A 3.27x 0.26x 1.24x 7.20x 6.80x 2.94x 20days 62.63% 43.35% 0.41x 60.82% 0.58x 0.48% 1.41x 35.29%

FY12A 3.19x 0.25x 1.44x 7.79x 7.62x 2.61x 45days 61.16% 41.41% 0.48x 63.09% 0.58x 1.31% 1.48x 35.47%

FY13F 3.53x 0.28x 1.57x 9.37x 7.17x 2.53x 54days 60.38% 44.12% 0.53x 61.90% 0.55x 1.28% 1.53x 37.09%

FY14F 4.22x 0.37x 2.29x 10.00x 7.36x 2.67x 51days 62.29% 45.36% 0.54x 63.16% 0.61x 1.13% 1.54x 43.16%

FY15F 5.12x 0.42x 3.08x 8.94x 6.73x 2.46x 53days 62.93% 47.27% 0.56x 65.81% 0.54x 1.08% 1.56x 39.96%

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Contact:
HeadOffice: GF01,TechnoCity, HasratMohaniRoad,Karachi Ph:+92213227080813 Fax:+922132270519 StockOffice RoomNo.16GroundFloor, NewStockExchangeBldg., StockExchangeRoad,Karachi Ph:+92213246086732460869 MuhammadAliKhan,SeniorResearchAnalyst ali.khan@ahcml.com

Disclaimer
The views expressed in this research accurately reflect the personal views of the AL Habib Capital Markets (Pvt.) Ltd.analystaboutthesubjectsecuritiesorissuersandnopartofthecompensationoftheanalystwas,is,orwillbe directly or indirectly related to the inclusion of specific recommendations or views expressed by the analyst in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of AL Habib Capital Markets (Pvt.) Ltd. and has taken reasonable care to achieve and maintain independenceandobjectivityinmakinganyrecommendations. All rights reserved. The information presented in this report is compiled from sources we believed to be reliable in preparation of this report. However, we do not accept any responsibility for its accuracy and completeness. This report is not intended to be an offer or solicitation to buy or sell any security. AL Habib Capital Markets (Pvt.) Ltd. and its employees may or may not have a position in or with respect to the securities mentioned in this report. In particular, the report takes no account of investment objectives, financial situation & particular needs of investors whoshouldseekfurtherprofessionaladviceorrelyupontheirownjudgmentbeforemakinganyinvestment. Dateofdistribution:March13,2013 Pricesasat:March12,2013

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