IFSL AnchOil and GAS E&P (HD)

www.investfinance.com.pk 1

Pakistan EquityOil and Gas ExplorationAttractive Valuations - time to chip in!

Released Date: Monday, March 14, 2016

Pricing Date: Friday, March 11, 2016

Invest and Finance Securities LimitedDanish M. [email protected](021) 32276932-35 (Ext .326)http://investfinance.com.pk/ResearchReports/IFSL_%20Anchor-PakE&P.pdf

IFSL Anchor

Research Entity Notification No. REL-41www.investfinance.com.pk

www.jamapunji.com.pk

12th Floor, Corporate Towers, Techno City Building, I. I. Chundrigar Road


Table of Content

Pakistan Oil & Gas Exploration: Attractive Valuations - time to chip in!

I Executive Summary 03II Global O i l Scenario 04-09

i) Present Oil Slump 05ii) US Shale Revolution 06

iii) OPEC’s Move 07iv) Iran Sanctions 07v) Comparing the Past Crisis 08-09

vi) Proposed Coordinated Production Cuts 09III Pakistan E&P Sector 10-17

i) Summary 11ii) Reserve Replacement Ratio 11-12

iii) Petroleum Policies 13-14iv) Tight/Shale Formations 15v) Regional Peer Valuations 16

vi) Exploration Costs 16vii) Risks to Thesis 17

IV O GDC - O i l and Gas Development Company 18-25i) Profile 18

ii) Summary 19iii) Efforts to Discover More 19-20iv) Development Projects 21v) Ideal Product and Revenue Mix 21

iv) 1HFY16 Result Review 21v) Investment Perspective 21

vi) Appendices 22-25V PPL - Pakistan Petroleum Limited 26-33

i) Profile 26ii) Summary 27

iii) Ongoing Exploratory Efforts 27-28iv) Sui Mining Lease 28v) Low Operating Costs 29

vi) Yemen Interest 29vii) 1HFY16 Result Review 29

viii) Investment Perspective 29ix) Appendices 30-33

V PO L - Pakistan O i l Fields 34-40i) Profile 34

ii) Summary 35iii) Curtailing Down Exploratory Efforts 35iv) High Operating Costs 36v) 1HFY16 Result Review 36

vi) Investment Perspective 36vi) Appendices 37-39

VI Disc laimer 40


Oil Exploration & Production - Pakistan a Long Call

Executive Summary After posting an exuberant average annual return of over 40% during CY12-CY14, KSE100 halted its bullish momentum and mostly remained

stressed in CY15 (↑2.1%YoY) & CY16TD (↓0.4%YoY) on the grounds of 1) Global factors like weakening of major economies and currency devalua-tions, faltering commodity prices (particularly oil crisis), hike in Fed rate by 25bps etc. and 2) Local factors such as unrest on political front to-gether with increased vigilance by the regulator on broker activities.

Oil prices have headed southwards (WTI ↓63% since Jun’14) owing to the supply glut led by the US shale revolution, incremental flows from OPECto maintain market share and recent lifting of sanctions from Iran. While these factors are expected to further test the int’l oil prices, we foreseea negotiation to take place among OPEC and non OPEC members to cut excess supply and stabilize oil prices. Even then remaining conservative,we have assumed oil prices to average US$37, US$40 and US$45 per bbl for FY16, FY17 and FY18 onwards.

After losing 35% in CY15, Pakistan E&P sector has further shed over 29%FYTD. In the backdrop of sizable reduction in stock prices along with poten-tial of rich discoveries owing to escalated exploratory activities, continuous efforts to replenish reserves and policy incentives, we constitute ourliking for the Pak Oil and Gas Exploration & Production sector and have an Overweight stance. We initiate coverage of OGDC, PPL & POL.

Oil and Gas Development Company (OGDC) - Buy with Dec’16 TP PkR166/shareAfter losing 32% in FY15, the scrip has further shed 36%FYTD which we believe offers fresh entry points to cash in lucrative returns. Our convictionis underpinned by additions in hydrocarbon reserves of Oil and Gas (↑156%YoY & ↑21%YoY in FY15, respectively), along with potential of new discov-eries in blocks like Zorgarh, Thal etc. Moreover, the ongoing developments in Tal and Nashpa are expected to expand the hydrocarbon extraction,which would augment the production base. Additionally, with product mix tilted towards gas and major (contributing) gas fields falling under favor-able pricing policies, OGDC is able to operate with the second lowest cost per BOE (within IFSL space), better realized prices & increased operatingmargins (highest in the E&P space). We have a BUY stance on the scrip with Dec’16 DCF TP of PkR166/share (potential upside of 42% exc. D/Y), thestock currently trades at FY16E and FY17F P/E of 8.7x & 7.7x and D/Y of 4.3% & 4.8%.

Pakistan Petroleum Limited (PPL) - Buy with Dec’16 TP PkR176/sharePPL has also shed 24%FYTD, after losing 27% in FY15. We believe depressed stock prices supplemented by incremental extractions from GambatSouth, Tal and Nashpa, with ongoing developments in Sadiqabad, Dhok Sultan and Hala should boost PPL’s hydrocarbon production, hence provid-ing an opportunity for value investors. Moreover, the expected conversion of Sui Mining Lease to D&P Lease post May’16 could escalate the well-head gas prices, consequently improving operating margins. The scrip offers a potential upside of 40% as per our Dec’16 DCF TP of PkR176/share(Buy), and trades at FY16E and FY17F P/E of 11.6x & 9.0x and D/Y of 4.4% & 5.6%.

Pakistan Oil Fields (POL) - Buy with Dec’16 TP PkR336/shareSimilar to it’s peers, POL also dropped by over 35%FYTD, making valuations attractive. Our liking is based on the incremental production from TalBlock, where flows from MardanKhel 1 are expected to add up to ~795bopd and 9.38mmcfd from FY16 end. Moreover, drilling activities in TolanjSouth & West 1, Makori Deep 1, Makori East 5 would further increase POL’s hydrocarbon production profile. Apart from Tal Block, exploratory ef-forts carried out in Gurgalot Lease could further excite investors with positive surprises. We initiate an active coverage with a Buy call havingDec’16 DCF TP of PkR336/share (potential upside of 29% exc. D/Y), the stock currently trades at FY16E and FY17F P/E of 11.7x & 8.5x and D/Y of7.7% & 10.8%.

Oil Exploration & Production - Pakistan a Long CallInvest and Finance Securities Limited Oil & Gas Exploration: Freed up valuations—fresh opportunities

P er fo rm an c e Cu rren t CYTD (%) CY1 5 (%)

WTI US$38.7 +4.4% -30.5%

KSE100 Index 32669pts -0.4% +2.1%

E&P Sector US$8.39bn +-0.5% -35.2%

OGDC PkR117 -0.4% -43.0%

PPL PkR125 +2.8% -31.0%

POL PkR260 -3.9% -29.3%Source: Bloomberg & IFSL Research

Source: IFSL Research

Co d e D ec '1 6 TP Clo sin g P r ic e FY1 6 E EP S

OGDC BUY PkR166 PkR117 13.5

PPL BUY PkR176 PkR125 10.8

POL BUY PkR336 PkR260 22.2



Global Oil ScenarioStill Murky



Present Oil Slump – Realigning Pricing Power

”It’s a gamble, that low oil prices would actually increase its leverage, may well go horribly wrong” - Niall Ferguson

Owing to the supply glut backed by higher production from both OPEC and non OPEC members, international oil prices have witnessed a whoppingdecline of over 63% since Jun’14 where WTI after marking a high of US$107.5/bbl nose dived to the lows of US$26.7/bbl in Jan’16. Since resilience ofSaudi Arabia (KSA) continues to persist, worsening economies of oil producing countries such as Venezuela, Nigeria, Libya, Iraq and Algeria couldpotentially turn the current price war into a crisis which has already mopped up the revenues and earnings of E&P companies around the world.

The present situation of over-supplied market hammering the oil prices is based on various factors, including:

1. The United States (US) oil production growing at a staggering 5yr (CY10-CY15) CAGR of 11.5%, further reducing its dependence on oil imports.In CY15, the US fulfilled 45% of its total oil requirement via import vs. the previous 5yr (CY09-CY14) average of 54%,

2. Increments in oil production by OPEC members to further augment their market share and provide stiff competition to non OPEC. In CY15,Iraq and KSA increased their production by 455k bopd (↑14%YoY) and 214k bopd (↑2%YoY), respectively, and

3. Lifting of sanctions from Iran, where it is expected to regain its previous market share. To recall, Iran’s market share in OPEC’s total produc-tion averaged at ~20% back in 1970’s against its current market share of 9%.

The global oil industry’s pricing power, withheld with Saudi Arabia for decades, seems to be saturating as not only technological advancementbrings down the shale fracturing costs in the United States (constraining its imports) but Iran is also heading towards regaining its lost marketshare (additional supply). Although Saudi Arabia with massive conventional hydrocarbon reserves (266.58bn bbls of oil as of CY14 end) togetherwith the lowest drilling costs, may well retain pricing power on the lower side (ability to bring down prices by oversupplying the market) but itseems to have lost its grip to maintain the prices at higher levels unless major oil producing countries (OPEC and non OPEC) agree over the oli-gopolistic approach to maintain oil prices. Else, a standalone move by KSA (or OPEC collectively) to elevate the pricing levels would further enticeshale production, cementing the current supply glut. Resultantly, OPEC members are faced with a tough choice to rethink about the frameworkand substance of their policies to support the oil prices, where some of the small producers have no choice than to follow the lead of the heavyweights.

Source: Bloomberg

Crude Oil Volatility Index

1,600

1,650

1,700

1,750

1,800

1,850

1,900

1,950

2,000

2,050

2

4

6

8

10

12

14

16

18

20

CY09 CY10 CY11 CY12 CY13 CY14 CY15

US Imports mnbopd (LHS) US Production mnbopd (LHS)US Inventories (RHS) mnbbls

Source: EIA & IFSL Research

US Imports, Production & Inventory

0

20

40

60

80

100

120

CY09 CY10 CY11 CY12 CY13 CY14 CY15

Other Non OPEC Russia US Other OPEC KSA Iraq Iran


World Production (mn bopd)

0

10

20

30

40

50

60

70

80

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16



US Shale Revolution – The combination of horizontal drilling and hydraulic fracturingFollowing shale revolution, the US has witnessed a hefty growth in oil production by ~3.98mn bopd over the past five years (5yr CAGR CY10-CY15of 11.5%). The increment is significantly material because the increase (alone itself) is greater than the output of each of the OPEC members(excluding Saudi Arabia). Advancements in hydrocarbon extraction technology including combination of horizontal drilling and hydraulic fracturinghave unlocked the shale oil production. These technological advancements along with high int’l oil prices averaging at ~US$85.6/bbl (CY09-CY13)enabled the upstream players to spend more in drilling technology. Even after such a sizable growth in shale production, the US has continued toremain a net importer of oil. Back in 1973, when the American demand stood at 16.37mn bopd, the country met 37% of its total requirement viaimports, out of which ~47% (2.9mn bopd) came from the OPEC region. Within OPEC, Venezuela was the largest exporter to the US (met ~18% tothe total US imports), followed by Saudi Arabia, Nigeria and Iran contributing 8%, 7% and 4%, respectively. Up till 2008, OPEC continued to providesimilar proportion of oil to US, with major contributors being the KSA (12%) and Iraq (5%) leaving Venezuela behind at 9.2%. However since 2009,the shale boom has flowed in extra oil production, dragging down the US imports by 10%YoY in CY09 and OPEC contribution from 46% in CY08 to41% in CY09. Since then, the US imports have headed southwards, going down by 21% (CY15 vs. CY09), and consequently bringing down importsfrom OPEC to 35%.

Technological advancements - Reducing Costs: On the heels of falling oil prices, number of rigs under operation in the US have come down sizablyby 71% to 502 (Feb’16 end) from 1,769 (Feb’14 end). Despite such reduction, average incremental production per rig from shale formations hasincreased exuberantly by 38%YoY or 124bopd in Feb’16 as a result of continuous innovation and improvements in the productivity. With every welldrilled the exploration companies are getting more effective at reducing costs. As per a recent statement released by EOG Resources (a companyengaged in exploration and production of shale oil in the US), average operating cost of shale oil well per BOE have declined by 48% over the pastthree years, making the production commercially viable at US$50/bbl for the company against US$95/bbl in 2012. Additionally, the ability of shaledrillers to quick start production flows (~30 days estimated drilling time) in the event of oil price rebound, could open the supply taps to the globaloil market thus hijacking the upper end of the pricing power from OPEC. Going forward, we believe OPEC might be inclined to negotiate a dealwith non OPEC oil exporting countries to curtail production or perhaps expand the OPEC forum to include non members to derive a policy frame-work to stabilize the oil prices and maintain fair share in the market for all oil exporting countries.

Shale reserves are found around the world including Pakistan, where according to a recent study conducted by USAID, sizable reserves of 10,159tcf of shale gas and 2.3tn bbls of shale oil are present. However, the scale and speed of the US boom is unique, and cannot be easily replicatedelsewhere. Reasons include well documented geology, an experienced & competitive exploration industry, and well-established ownership &property rights.

Source: Fossil Energy & IFSL Research

Horizontal Drilling with Hydraulic Fracturing

Source: Baker Hughes & IFSL Research

Rig Count vs. WTI US$/bbl

0

20

40

60

80

100

120

0

500

1,000

1,500

2,000

2,500

Feb-

07

Feb-

08

Feb-

09

Feb-

10

Feb-

11

Feb-

12

Feb-

13

Feb-

14

Feb-

15

Feb-

16

Rig Count (LHS) WTI US$/bbl (RHS)


Oil Production per Rig (bopd)

0

250

500

750

1,000

Bakken Eagle Ford Niobrara Permian Utica

Feb-15 Feb-16



Oil Exploration & Production - Pakistan a Long Call

OPEC’s MoveResponding to the current scenario of increasing supply glut due to incremental provisions from non OPEC, OPEC members are seen to continuewith their old school strategy to augment their market share by raising their production levels. Although some of the OPEC members such asVenezuela, Nigeria and Algeria are pressurizing the cartel to curtail production and stabilize prices, but the Saudis and its Gulf Allies are stringentin their approach. The stance appears dominant by the fear that the production cuts will prop up prices and possibly benefit the US shale produc-ers to pump more, thus improving US domestic production with OPEC losing its market share.

Iran Sanctions - Additional Stress to the Global Oil MarketThe return of Iran to the global oil market, following the lifting of sanctions, has further aggravated the supply situation thus pressurizing the oilprices. Recall that, prior to Iranian Revolution (1977–1979) and damages caused by Iran-Iraq War (1980-1988) to the country’s producing fields,pipelines, terminals and refineries, Iran was producing up to 6mnbopd, having a market share of ~20% in the OPEC’s total production. Therefore,after the recent removal of sanctions, Iranian exports are now expected to increase by ~500k bopd within three months with further marginalincrease of a million bopd anticipated in coming 12m driven by higher flows from its older fields and the sale of Iranian oil in storage. Moreover,possibility of development projects in new fields and additional exploratory activities cannot be ruled out, given Iran would rigorously purse shareexpansion. Since the quotas on OPEC forum are based on individual member’s oil production capacity, Iran’s additional capacity might create riftsamong the member countries and force them to limit their quotas, where any coordinated production cuts from OPEC and non OPEC will createmore complications to imply, if Iran remains stringent on its stance.

Invest and Finance Securities Limited

Old School Strategy!During the Oil Crisis of mid 1980s, OPEC membersescalated its production levels to drive out oil supplyfrom non OPEC (North Sea).

0%

10%

20%

30%

40%

50%

CY80

CY81

CY82

CY83

CY84

CY85

CY86

CY87

CY88

CY89

CY90

CY91

CY92

CY93

CY94

CY95

CY96

CY97

CY98

CY99

CY00

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

Saudi Arabia Iran Iraq

Iraq production sloweddue to previous wardamages, and the UNimposing a ban on itsexports (1991)

Iraq-Kuwait War(1990)

US Invasion of Iraq (2003)

EU Sanctions against Iran(2012- 2015)

Iran-Iraq War(1980-1988)


Contribution of Saudi Arabia, Iraq and Iran



Comparing the Past CrisisUS conducted Nuclear Test at Nevada; Soviets evacuated the city of Pripyat after the Chernobyl Nuclear accident. Yes! That is how far we have togo to find the precise parallel comparisons to understand the fundamentals of the present oil price slump.

Whether the slump is driven by strong supply or weakened demand, the oil exporting countries have to bear the brunt in the form of reducedrevenues. Historically, majority of price slumps (as shown in the table below) have been led by uncoordinated production enhancements by the oilproducing countries (OPEC and non OPEC) and solved via production curtailments by OPEC. Resultantly, we believe a similar stance might be oncards to reduce the excess supply but this time by both groups.

The oil price crash of CY08-09 is not mentioned below since it was driven by consumption slowdown where the demand from non OPEC declinedby 2%YoY in CY09 rather than excess supply. However to support the oil prices Saudi Arabia and Kuwait curtailed its production by ~1.1mn & ~222kbopd in CY09. The production cuts supported the prices where WTI increased from US$30.3/bbl in Dec’08 to US$79.4/bbl Dec’09.

Crisis Comparison 1985-1986 1997-1998 2014-2016WTI (High - Low) US$30.12 - US$10.20 US$26.55 - US$10.82 US$107.95 - $26.68Type of Crisis Supply Glut Supply Glut Supply Glut

World Production

The production from non-Opec grew by 2%YoY in 1985, where majori tyincrease came from the North Sea (Brent). Responding to the s i tuation,OPEC opted for higher market share over price cut, resul tantly exceeding

the supply more than the demand by 2.4mnbopd.

Whi le production from non OPEC grew by a 3yr (CY95-98) CAGR of 3%,incrementa l production from Venezuela (an Opec member) created ri ftsamong the OPEC cartel . In reply, other OPEC members l ike Iraq, KSA and

Nigeria a lso increased their production by 579k, 162k &133K bopd,respectively. Incrementa l supply of 1.35mn bopd from OPEC flooded the

market, widening supply demand gap from ~0% in CY96 to 2% in CY98.

Non OPEC production grew at a 3yr (CY12-CY15) CAGR of 3.5%, where theUS a lone added cumulative additional production of 3mn bopd over

the period of three years (3yr CAGR of +13.4%, driven by sha lerevolution). As usual , OPEC members such as Iraq (455k bopd) & KSA

(214k bopd) increased production and further aggravated the s i tuation.Widening the supply/demand gap to 2.1% in CY15 aga inst -1.1% inCY13.Resultantly, WTI prices nose dived from US$108.0 in Jun’14 to

US$26.68 in Jan’16.

World DemandBack in 1985, when the oi l prices soared to US$30/bbl (his toric highback then), global oi l demand settled in at 60mn bopd, ↑0.5%YoY.

Regardless of the As ian Cris i s , led by devaluation of Remnimbi , Yenand Thai Bhat coupled with the As ian financia l markets crash, the oi l

consumption surged by 2%p.a (5yr( CY94-CY99) CAGR).

During the period under review, oi l consumption exibi ted a 3yr CAGR of1.4%(CY12-CY15) . Regardless of the fear aris ing from China 's economic

s lowdown and As ian currency wars .

Response andImpact

Fol lowing the s lump in prices , KSA reached an agreement with otherOPEC members to curta i l production which included major cuts from KSA

(i tsel f) by 581k bopd, Nigeria by 126k bopd, Libya by 63k bopd andIndones ia 53k bopd. Resul tantly WTI surged from US$11 in Jul '86 to

US$21 in Aug'87.

The oi l price decl ine, pushed OPEC members to clear the ri fts andstabl i ze the oi l prices through cordinated production cuts where major

supply was withdrawn by KSA 565k bopd and Venezuela 300k bopd. Thetota l production cuts from OPEC were 936k bopd in CY99 thus recovering

the oi l prices from US$10.8 in Dec'98 to US$25.0 in Sep'99.

Recently KSA, Russ ia , Qatar and Venezuela conditional ly agreed tofreeze their ouput on Jan'16 levels , only i f Iran and Iraq comply with thesame freeze. The resul t of the production freeze, i f implemented, wi l lmainta in the supply glut of 950k bopd over demand. However, further

actions are anticipated to s tabl i se the oi l prices .

Source: Oxford Institute of Energy Studies, EIA and IFSL Research



Proposed Coordinated Production Cuts - A SolutionAs per a recent news item, Saudi Arabia has proposed a 5% coordinated cut in oil production from key exporting countries. Since production cuthas remained the most usual solution for oil crisis historically, the particular news improved the overall sentiments and supported the price levels.WTI prices rose from US$26.7 to US$33 in two weeks time, after the proposed news. However the effectiveness of proposal’s acceptance andimplementation can vary. We have developed a sensitivity analysis of the proposed cut and its impact on the supply demand gap (shown in thetable) based on the assumption that the top 12 oil exporting countries which contribute ~56% to the total world production (inc. 4 non OPECmembers) may be involved in the coordinated production cuts.

Following the agreement of freezing the oil output at Jan’16 levels by KSA, Russia, Qatar and Venezuela (conditional to Iran and Iraq compliancewith the freeze) may still hold the supply glut where excess supply would stand at ~950k bopd over world consumption. Regardless of the foreignreserve cushion with the big players where KSA holds US$608bn (↓16%YoY in CY15) and Russia holds US$309bn - as per the Central Bank (↓5%YoY

in CY15), the significance of coordinated production freeze highlights the willingness of oil producing countries to stabilize the oil prices. We be-lieve this conditional agreement is the first step, going forward we expect the major oil exporting countries to negotiate a deal for coordinatedproduction cuts to stabilize the oil prices. However, in our company specific models, we have used conservative oil price estimates of US$37,US$40 and US$45 per bbl for FY16, FY17 and FY18 onwards, to mitigate any downward risk driven by failed negotiations among oil producers.

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20

40

60

80

100

120

CY85 CY86 CY87 CY88 CY89 CY90 CY91 CY92 CY93 CY94 CY95 CY96 CY97 CY98 CY99 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16

Supply glut Supply glutSupply glut

Source: Bloomberg & IFSL Research

Oil Prices WTI (US$/bbl)

WeakenedDemand

Demand and Supply levels based on EIA estimates


Potential Cut CY16 CY17

At Current Production Levels (%) 1.83% 1.53%

1% Production Cut 1.26% 0.96%

2% Production Cut 0.69% 0.39%

3% Production Cut 0.12% -0.17%

4% Production Cut -0.45% -0.74%

5% Production Cut -1.02% -1.31%

Supply e xc e e ding de ma nd (%)



Pakistan Oil & Gas Exploration andProductionLucrative returns around the corner



Pakistan Exploration and Production SectorMainly dominated by hefty downfall in int’l prices (↓35%YoY FY16TD), the upstream sector has underperformed the KSE100 Index by 24%FY16TD.However on the extraction front, the oil production in Pakistan has witnessed robust growth, growing at a 3yr CAGR (FY12-FY15) of 10.4%. As per thepreliminary estimates, oil production for FY15 stands at 33.0mnbbls (90,560bopd) vs. 31.5mnbbls (86,533bopd) in FY14, up 4.6%YoY. Production hikewas primarily driven by improved well flows from Aassu (↑ ~36%YoY), Nashpa (↑~7%YoY) and Makori East (↑~7%YoY). On the other hand, gas produc-tion clocked in at 1,459.5bcf (4bcf/d) in FY15, down 2.3%YoY mainly due to lower production from maturing fields like Sui (↓~7%YoY), Qadirpur(↓~12%YoY) and Zamzama (↓~29%YoY), whereas incremental gas supplies from Uch (↑~9%YoY), KandhKot (↑~6%YoY) and Tal Block (↑~3%YoY) partiallyoffset the decline.

Reserve Replacement Ratio - Need to worry?Despite higher domestic oil production witnessed a 3yr CAGR of 9.5% (FY11-F14), comfortable Oil Reserve Replacement Ratios (RRR), averaging241% (FY11-FY14*) in previous three years, seems to secure the long term prospects of oil production in the country. On the other hand, unsatis-factory low levels of Gas RRR averaging at 19% (FY11-FY14) are worrisome. The deteriorating Gas RRR can be attributed to: 1) the failure of theregulatory body to incentivize well head gas pricing policy to encourage investments in exploration activities (as discussed later in the report), 2)slow pace of commercially viable discoveries owing to heavy reliance on old methods for identification of prospecting fields, and 3) poor law &order situation. .Over the years, majority of the upstream companies within Pakistan have focused on the 2D seismic surveys for the identification of potential hy-drocarbon reserves, which although is low cost (~70% cheaper than 3D) but can result in considerable uncertainty in identifying exploratory pros-pects, hence effecting the replacement ratios. However, taking advantage of the lower oil servicing costs (↓~35%YoY)consequent of recent plungein int’l oil prices, upstream players have started to focus more on geological analysis through 3D seismic surveys, which we believe would aid thecompanies to identify hydrocarbon prospects with greater success, in future years to come.

Exploration Process:Exploratory activity starts with the identification ofprospective hydrocarbon reserves through seismicsurveys (2D & 3D). On prospective finds, the upstreamcompanies drill an exploratory well. the assurance ofhydrocarbons on a particular location can not beconfirmed unless a company drills an exploratory well,analyze the log notes recorded during the drillingphase and extract the initial testing results.

Low RRR means ??The Reserve Replacement Ratio is a measure of themagnitude of reserve additions compared to produc-tion levels. Low RRR means companies are not able toreplenish their reserves as per the marginality of thehydrocarbons produced, which would eventually hurtthe production levels , going forward.

Source: Energy Year Book, PPIS & IFSL Research

Oil Production (bopd)

-

15,000

30,000

45,000

60,000

75,000

90,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15


Gas Production (mmcfd)

3,700

3,800

3,900

4,000

4,100

4,200

4,300

4,400


(*RRR for FY15 is not available yet, therefore figures up till FY14 are used)

Source: Energy Yearbook & IFSL Research

Oil Production - Company-wise contribution

OGDC50%

MOL20%

UEPL16%

PPL7%

Others5%

POL2%


Gas Production - Company-wise contribution

Others30%

OGDC28%

PPL21%

ENI12%

MOL7%

POL2%



In the past, upstream companies have remained reluctant in carrying out exploration activities in major parts of Khyber Pakhtunkhwa (KPK) andBaluchistan owing to poor law and order situation, foregoing of potential additions. Nonetheless successful Army operations have improved thesecurity situation in the country, making easier for the upstream players to carry out exploration activities in the aforementioned areas. Recent,exploration leases under survey on these locations include Rakhshan (OGDC), Bela West (PPL), Ziarat (MPCL) and Kohat (OGDC). Additionally, com-panies have also shown interest to bid for exploration leases in blocks including Khuzdar South (OGDC) and Paharpur (KPBV).

Source: Energy Year Book & IFSL Research

Oil Reserve Replacement Ratio

-150%

-50%

50%

150%

250%

350%

450%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Source: Energy Year Book & IFSL Research

Gas Reserve Replacement Ratio

-150%

-50%

50%

150%

250%

350%

450%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14


Oil Exploratory and Development Wells

0

20

40

60

80

100

120


Development Wells Exploratory Wells

Source: PPIS & IFSL Research

2D & 3D Seismic Surveys

0

200

400

600

800

1,000

1,200

Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15

2D (L.Kms) 3D (Sq.Kms)



Petroleum PoliciesFrom the beginning of oil and gas exploration activities in Pakistan, the Government has adopted various policies to incentivize exploration com-panies and attract foreign investors. However, its failure to respond to the changing dynamics of the oil industry has always impacted the explora-tion companies, so much so that lack of returns due to low wellhead gas pricing led a few foreign upstream players such as Petronas (2011) andNiko Resources (2013) to exit Pakistan. Recall, during 1950—1980’s, wellhead gas prices were derived on a Cost Plus Return on Equity mechanismunder the Pakistan Petroleum (Production) Rules 1949, then policies of 1991 and 1993 were introduced under which wellhead gas prices werederived using percentage discounts to energy equivalency of High Sulphur Furnace Oil (HSFO). Soon after the introduction of 1994 and 1997 PPs,which linked the wellhead gas prices to the Crude Prices (Arabian/Persian Basket plus AFRA*) less zonal discounts, 2001 PP came up. However,2001 policy’s cap of US$36/bbl failed to factor in the oil price hike during 2004-2007 where OPEC basket marked a high of US$73.8/bbl in Jul’07.To encounter the aforementioned weakness, the Ministry of Petroleum and Natural Resources (MPNR) came up with 2007 Petroleum Policy,which increased the cap to US$45/bbl for wellhead gas pricing with a Gas Price Gradient (GPG) applied between (0.2 – 1.0) over US$45/bbl. Onceagain the policy failed to factor in the magnitude of oil price hike of 2008 rally where OPEC basket touched a peak of US$140.7/bbl in Jul’08. How-ever in the 2009 PP, the MPNR fixed the cap at US$100/bbl which was further raised to US$110 in 2012 Petroleum Policy.

*AFRA: Average Freight Rate Assessment

The table below shows wellhead gas prices (US$/mmbtu) with respect to different oil price levels under 2001, 2007, 2009 and 2012 policies:

2001 2007 2009 2012 2001 2007 2009 2012 2001 2007 2009 2012Oil P riceUS$ / bbl

30 2.87 3.01 3.40 3.67 2.68 2.84 3.18 3.50 2.50 2.70 2.96 3.33

40 3.03 3.37 3.81 4.28 2.84 3.11 3.56 4.08 2.64 2.90 3.32 3.89

50 3.03 3.65 4.08 4.89 2.84 3.35 3.82 4.67 2.64 3.02 3.55 4.44

60 3.03 3.85 4.35 5.26 2.84 3.55 4.07 5.02 2.64 3.06 3.79 4.78

70 3.03 4.05 4.62 5.62 2.84 3.75 4.32 5.37 2.64 3.10 4.03 5.11

80 3.03 4.25 4.76 5.87 2.84 3.95 4.45 5.60 2.64 3.14 4.14 5.33

90 3.03 4.45 4.89 6.11 2.84 4.15 4.58 5.83 2.64 3.18 4.26 5.56

100 3.03 4.65 5.03 6.35 2.84 4.35 4.71 6.07 2.64 3.22 4.38 5.78

110 3.03 4.85 5.03 6.60 2.84 4.55 4.71 6.30 2.64 3.26 4.38 6.00

120 3.03 5.05 5.03 6.60 2.84 4.75 4.71 6.30 2.64 3.30 4.38 6.00

Z o ne 1 Z o ne 2 Z o ne 3

US$ / mmbtuWellhead Gas P rices

Source: MPNR & IFSL Research



Policy Incentives - Explore More!Responding to the requests made by the E&P companies, Ministry of Petroleum and Natural Resources (MPNR) has recently approved the supple-mentary agreements to convert various existing blocks to 2012 PP. However, this conversion will be effective only for the new discoveries (not theexisting ones), whereas incremental production from old discoveries will be priced according to their old concessionary agreements. We believethis step, will bode well for the E&P companies as (it can be seen in the table on pg. 13) wellhead gas prices derived from the 2012 PP are higherfor all zones (in any oil price environment) against the rest of the policies (2001, 2007 and 2009). In this regard, 47 exploration leases have beenapproved under supplementary agreements.To counter the gas production constraints, the GoP has further provided additional incentives to the E&P companies to extract hydrocarbons fromuneconomic low quality gas fields. In this regard, MPNR has announced a Low Btu Gas Price Policy in 2012 and a Marginal Gas Field Policy in 2013.

1) Low Btu Gas Pricing Policy - 2012: In the absence of incentives, it is commercially unviable for E&P companies to produce low quality gas fromthe proven reserves. The gas below the pipeline quality (900btu/cft) incurs additional cost, since companies have to produce higher volumesof gas to generate pipeline-comparable heating values. However, greater volumes of low btu gas contains more Carbon dioxide, Nitrogen andHydrogen Sulphide molecules, which makes it highly corrosive for the gas processing plants, reducing its useful life. In this regard, MPNR an-nounced a Low Btu policy back in 2012, which pertained to the fields having heating value below 450btu/cft. The price of gas with heatingvalue of 450btu/cft is fixed at US$6/mmbtu, which shall be increased by US$0.01/mmbtu for each btu/cft reduction below 450btu/cft up to175btu/cft. The maximum price at 175btu/cft shall be US$8.75/mmbtu. However, the low btu gas with a heating value ranged between 450and 600btu/cft would entail a price of US$6/mmbtu.

2) Marginal / Stranded Gas Policy - 2013: Marginal and Stranded gas fields have low proven reserves that cannot be exploited due to poor com-mercial economic viability. Higher drilling costs, low pressures with low reserve volumes makes it less feasible for E&P companies to pursueproduction from such fields, leaving it stranded. MPNR announced another policy in 2013 i.e. Marginal / Stranded Gas Policy, according towhich the marginal field gas prices will be set in accordance with 2012 PP with an additional premium of US$0.25/mmbtu for the three zones.Furthermore, for marginal fields having low Btu gas, either the premium of marginal gas field or low Btu gas will be applied. In no case thetwo prices can be applied simultaneously.

Why Low Quality Gas was commercially non-viable?If a company operates two gas fields: .1) First field with pipeline quality gas (900btu/cft) and2) Second field with low btu gas (450btu/cft).The company will have to extract 2cft of gas from thesecond field against the production of 1cft of gas fromthe first field to equate the heating values.Therefore, it would incur additional cost for extractingan extra 1cft of gas from the second field, although theselling price of gas would be based on the heatingvalue (900btu) rather than volume (cft). Thus, makingthe low BTU gas unviable to extract.



Source: ENI & IFSL Research

Tight Gas known reserves in Pakistan


Tight vs. Shale Formations

Tight and Shale formation - Hydrocarbon potentialAfter the US Shale revolution, ample hydrocarbon reserves have been found across the world including Pakistan. According to the Energy Informa-tion Administration’s (EIA) Technically Recoverable Shale Oil and Shale Gas Resources report published in 2013, the country has sizeable gas andoil reserves of over 586tcf and 227bn bbls, respectively in tight/shale formations, of which 105tcf of Shale Gas, 33tcf of Tight Gas and 9.1bn bblsof Shale Oil are considered recoverable. Adding to it, a study was conducted with the help of US Agency for International Development (USAID)which quoted a figure much higher than the EIA, estimating total reserves of 10,159tcf of Shale Gas and 2.3tn bbls of Shale Oil. The map (on theright) highlights the location of tight gas reserves in Pakistan with majority of the reserves expected to be in Sulaiman and Kirthar Belt.

Difference between Tight and Shale Formation: In tight formation, hydrocarbon reserves are trapped in small, poorly connected holes between therocks mostly in sandstone and limestone sources. These rocks are hard capped with low porosity which hinders hydrocarbon flow to the well. Onthe other hand, in shale formation the hydrocarbon reserves remain in the rock where it is formed (generally the mudstone), and has not mi-grated to more permeable rock. Since shale rock is less porous and permeable comparatively to tight rock, the production process for shale gas ismuch more complicated than for the tight gas.

The main issue that hinders the shale / tight gas extraction in Pakistan is unavailability of water & its subsequent disposal. As per MPNR, shalewells require ~3mn to 8mn barrels of water (as per their depth levels) with an initial estimated cost of US$10/mmbtu for gas production. The costis expected to decline if the companies continuously improve the drilling methods and production volumes.

Extracting Hydrocarbons from Tight Formations - Policy 2011: In 2011, MPNR approved the Tight Gas policy, according to which a 40% premium isapplied over the respective zonal price of 2009 PP. This, itself is soon expected to be revised in order to encourage investments in joint venturesbetween local and foreign exploration companies which further would help in technological transfers for drilling and extraction. As far as a ShaleGas is concerned, there is no active policy but assessment of potential resources, technology for extraction, infrastructural requirements, environ-mental risks, regulatory measures and production costs is under process to draft a policy.

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Regional Peer ValuationsFollowing the int’l equity markets meltdown owing to weakening commodity prices, struggling economies and currency wars, valuation of up-stream Oil & Gas production companies across the region have become attractive. However, volatility in the oil prices and broader negative senti-ments has kept investors at bay. In this backdrop we initiate coverage of the Pakistani Oil and Gas Exploration and Production Sector, where ouruniverse includes OGDC, PPL and POL with Dec’16 TP of PkR166, PkR176 and PkR336 per share, respectively. Moreover, the sector provides acushion against the PkR devaluation as pricing for hydrocarbons is based in US$, enabling investors to hedge the currency devaluation risk. Thetable below provides relative comparison of local E&P companies with its regional peers, further cementing our stance of liking the sector.

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Exploration Costs - Red Flag!While the int’l oil prices have remained in the downward trajectory for over 12m, we flag this trend alarming where further declines might forcethe players to cut down their exploration activities in the short term. In this scenario, although curtailment of exploration costs by 50% wouldbring down companies the FY16 break-even levels from US$9.6, US$11.74 and US$19.25 per BOE to US$8.36, US$11.07 and US$17.97 per BOE forPPL, OGDC and POL, respectively, but would hinder companies to opt for more exploration activities to replenish their reserves, going forward.

Nam e Tic ker Co u n t ry ROE % D /Y % M. Cap (US$ m n )

FY1 6 E FY1 6 E FY1 7 E FY1 6 E FY1 6 E FY1 7 E Cu rren t

Pakistan Oil Fields Ltd. POL PA Pakistan 17.6 11.7 8.5 7.7 6.0 5.0 585

Oil & Gas Development Company Ltd. OGDC PA Pakistan 12.1 8.7 7.7 4.3 4.8 4.3 4,784

Oil India Ltd. OINL IN India 11.0 7.8 8.3 5.8 5.0 5.2 2,843

Pakistan Petroleum Ltd PPL PA Pakistan 10.5 11.6 9.0 4.3 6.7 5.4 2,351

Oil and Natural Gas Corporation Limited ONGC IN India 9.6 9.8 9.6 3.9 4.5 4.5 26,361

CNOOC LTD 883 HK China 4.9 18.5 82.5 4.1 4.2 4.9 52,604

Cairn India Limited CAIR IN India 3.2 13.4 12.9 3.3 2.6 2.5 3,789

PTT Exploration and Production Company PTTEP TB Thailand 2.8 28.3 16.8 1.8 3.1 2.8 8,690

P /E (x ) EV/EBI TD A (x )

Source: Bloomberg & IFSL Research

Op erat io n al Co st s (US$ /BOE) P P L OGD C P OL P P L OGD C P OL

Royalty (US$/BOE) 1.60 2.52 2.41 1.60 2.52 2.41

Operating Expenses (US$/BOE) 5.53 7.87 14.27 5.53 7.87 14.27

Exploration and Prospecting Expenditure (US$/BOE) 2.47 1.35 2.57 1.24 0.68 1.29

To t al Co st US$ /BOE 9 . 6 0 1 1 . 7 4 1 9 . 2 5 8 . 3 6 1 1 . 0 7 1 7 . 9 7

FY1 6 Est im at ed Op erat io n al Co st s Cu rt ailm en t o f Ex p . Co st s b y 5 0 %



Co d e D ec '1 6 TP Clo sin g P r ic e FY1 6 E EP S

OGDC BUY PkR166 PkR117 13.5

PPL BUY PkR176 PkR125 10.8

POL BUY PkR336 PkR260 22.2



Risks - not to be ruled outWhile we maintain an Overweight stance on the sector, we do highlight potential risks that might affect the earning profiles and investment thesis ofthe companies under coverage. .

1. Commodity Price Risk: The pricing of the Oil and Gas Production is benchmarked with the int’l prices of Crude Oil (Arabian/Persian Baskets).Any unfavorable variance in the int’l prices is likely to adversely affect the profitability.

2. Exploration Risk: Exploration activities include the risks of incorrect selection of exploration acreage, error processing and analyzing seismicdata coupled with incorrect location of drilling.

3. Drilling Risk: The companies are exposed to a number of risks during the drilling process including well blow out, fishing, casing collapse, firehazards, and human injuries. Additionally, the provisioning of dry wells, adversely affect earnings.

4. Security Risk: Although recent operations by Pak Army has iron out the law and order situation country wide, any possible disturbance mightimpact Exploration and Production activities, again. Additionally the companies usually take an insurance cover to mitigate the losses in-curred. Moreover, historically locals have also created hurdles in the production of hydrocarbons from the fields located in their domicile spe-cifically Tal block, to force E&P companies to meet social demands. Any repetition of such events can again affect the earnings profile.

5. Exchange Rate Risk: Appreciation of Pakistan Rupee against US$ negatively impact earnings since revenue base is denominated in the US$.

6. Regulatory Risk: Any adverse changes in regulatory pricing framework can have negative impact on the bottom line.

7. Extraction Bottlenecks: E&P companies’ operations are dependent upon the production and reserves of its oil and gas fields. The actual pro-duction recovery from the fields may materially differ based on maturity of the fields, lower pressures, less efficient rigs and other relatedfactors.

8. JV Related Risks: E&P companies operate in a joint venture environment and many of projects are operated by major stake holders. A com-pany’s ability to influence is sometimes limited due to its small stake in non operated ventures. Non-alignment on various operational andstrategic decisions may result in production delays and inefficiencies.

9. Material Procurement Risks: Vulnerability in the procurement process before & during the drilling and extraction can give rise to potentialrisks and delay the production extraction thus eroding earnings of the companies involved.

10. Environmental Risks: More global focus on environmental issues including emissions, proper disposal of acidic waste, and health & safety ofemployees etc. may influence changes in local laws and regulations, and increase the cost of compliance and penalties (in case of non-compliance).

11. Natural Disasters: Earthquake, floods or any other natural disaster in the vicinity of the hydrocarbon extraction fields or transport route candisrupt production causing negative impact on the earnings.

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Oil & Gas Distribution Company (OGDC)Oil and Gas Development Company Limited (OGDC) is engaged in exploration, production and development of Oil and Gas resources. Its exploration assets currently constitutes ofsixty three owned and operated JV exploration licenses along with holding working interest in six non operated JV blocks. The company’s exploratory licenses covers 32% of the coun-try’s total exploration acreage. The Development and Production Lease portfolio comprises of sixty nine owned and operated JVs and working interest in thirty four non operated JVblocks. Government of Pakistan with 67.48% of holdings remain the largest shareholder of the company.

Sn ap sh o t FY1 6 E FY1 7 F FY1 8 FEarnings Per Share - EPS (PkR) 13.5 15.1 16.3EPS Growth -33.6% 12.4% 7.7%Price To Earnings Ratio - PER (x) 8.7 7.7 7.2Book Value Per Share - BVPS (PkR) 111.4 120.9 131.1P/BVPS (x) 1.0 1.0 0.9Dividend Per Share - DPS (PkR) 5.0 5.6 6.2

Sym b o l OGD CBloomberg Ticker OGDC.PAReuters Ticker OGDC.KADec'16 TP 166Current Price 117Upside / (Downside) Potential 42%Rec o m m en d at io n Bu y

Outstanding Shares (mn) 4,300.9Free Float (mn) 645.1Free Float 15%

Market Capitalization (PkR mn) 502,348Market Capitalization (US$ mn) 4,784

3m Avg. Daily Volume (mn) 3.263m Avg. Daily Value (PkR mn) 3543m Avg. Daily Value (USD mn) 3.37

3m Avg. Price 1093m High Price 1183m Low Price 96

Oil Production (bopd) 40,818Gas Production (mmcfd) 1,143LPG Production (tpd) 262

Source: PSX & IFSL Research

Price Performance - OGDC vs. KSE100

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OGDC (LHS) KSE100 Index (RHS)



Inline with the E&P sector underperforming the benchmark, OGDC also shed 36%FYTD, which we believe has made valuations attractive. In this re-gard, we initiate coverage of Oil and Gas Development Company (OGDC) with a BUY stance and Dec’16 DCF TP of PkR166/share (potential upside of42%). Apart from reduced pricing levels, our liking for the stock further stems from expansion in hydrocarbon reserves of Oil and Gas in FY15 (↑156%YoY and ↑21%YoY), along with potential of new discoveries in blocks like Zorgarh, Thal, Soghri and Gurgalot. Moreover, the on-going developments inTal and Nashpa are expected to enhance the hydrocarbon extraction, which would augment the production base. Additionally, with product mixtilted towards gas and major contributing gas fields falling under favorable pricing mechanism (unlike PPL), OGDC is able to operate with the secondlowest cost per BOE (within IFSL space), better realized prices & increased operating margins (highest in the E&P sector). Our valuations are basedon oil price assumption of US$37, US$40 and US$45 for FY16, FY17 and FY18 onwards, respectively. The stock trades at FY16E and FY17F P/E of 8.7x& 7.7x and D/Y of 4.3% & 4.8%.

Efforts to discover more!Following the decline in the oil servicing costs owing to int’l oil price meltdown, OGDC has intensified its exploratory efforts by conducting recordnumber of 2D and 3D seismic surveys in past 12m to identify hydrocarbon prospects. Additionally, the company has increased its drilling efforts tomaximize the production from current producing wells. The table below highlights the seismic survey under progress in various high potential ex-ploration leases which may become value enhancing triggers going forward.

Oil and Gas Development Company (OGDC) - Buy!

Source: OPEC, Financial Reports & IFSL Research

Hydrocarbon Reserves

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2010 2011 2012 2013 2014 2015

Gas Reserves bcf (LHS) Oil Reserves mnbbls (RHS)


Seismic Surveys

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Oil P r ic es FY1 6 E FY1 7 F FY1 8 F TPUS$30/bbl 12.24 12.63 12.42 133.25US$40 /bbl 14.11 15.54 15.52 161.75US$50 /bbl 15.68 17.53 17.67 188.62US$60 /bbl 17.20 19.47 19.76 210.50

Earnings Sensitivity to Int'l Oil Prices

Seismic Activity

Op erat o r Blo c ks Typ e Zo n e P ro v in c e Near b y P ro d u c in g Field s P o t en t ial

OGDC Zorgarh 2D Zone 3 Sindh 1) Sui: Oil Production 43b/d, Gas Production 445mmcfd High

2) Kandhkot: Oil Production 10b/d, Gas Production 186mmcfd

OGDC Thal 3D Zone 3 Sindh 1) Miano: Oil Production 45b/d, Gas Production 92mmcfd Medium

2) Kadanwari: Oil Production 28b/d , Gas Production 78mmcfd

OGDC Khewari 3D Zone 3 Sindh 1) Latif: Oil Production 70b/d, Gas Production 107mmcfd Low

OGDC Ranipur 3D Zone 3 Sindh 1) Gambat:Gas Production 6.1 mmcfd Low

OGDC Layyah 2D Zone 2 Punjab Low

OGDC Ladhana 2D Zone 2 Punjab Low

OGDC Fatehpur 2D Zone 2 Punjab Low

OGDC Armala 2D Zone 3 Sindh Not Available Low

OGDC Rakhshan 2D Zone 1 Baluchistan Not Available Low

1) Dhodak: Oil Production 36b/d, Gas Production 3mmcfd2) Rodho: Oil Production 82b/d, Gas Production 13mmcfd




(i) Zorgarh: OGDC holds 96% stake in Zorgarh block, which covers an area of 2,400sq km and falls under Zone III. Since it is located in between gasproducing fields of Sui (Gas Original Recoverable Reserves (ORR) of 12.8tcf) and KandhKot (Gas ORR: 1.7tcf), probability of presence of potentialhydrocarbon reserves is fairly high. The seismic activity in the block started in Oct’15, which as per our sources, is expected to continue till Jun’16after which OGDC would go for exploratory well. Any potential discovery from Zorgarh is expected to come up in between 6-9m, from now.

(ii) Thal: OGDC has 100% interest in Thal block which covers an area of 1,623sq km and comes under Zone III. Thal is located in close proximity toMiano (Gas ORR: 604bcf) and Kadanwari (Gas ORR: 688bcf) making it a medium resource potential block. In Jan’16 OGDC announced a discoveryin Thal East Well-1 with an initial flow of 23.5mmcfd (annualized PkR0.17/share cont. to net earnings). Additionally, the 3D seismic activity whichstarted in Dec’14 is still under progress and as per our channel checks the block is expected to have potential reserves of ~300bcf.

(iii) Soghri and Gurgalot: OGDC with working interest in Soghri (100%) and Gurgalot (75%) blocks is drilling up a development well (Soghri 2) inSoghri Block and an exploratory well (Surqamar 1) in Gurgalot lease. Recall that Soghri1 was explored in Aug’14 yielding 220bopd and 17mmcfd ofgas. Both wells are expected to be completed in a month’s time adding up potential hydrocarbon reserves to OGDC’s portfolio. The blocks aregeographically located near the rich hydrocarbon leases of Tal (ORR Gas: 1.5tcf & Oil: 65mnbbls) and Dakhni (ORR Gas: 402bcf & Oil: 13.6mnbbls).

iv) Tal: Tal block currently contributes ~ 14% and ~6% to the company’s oil and gas profile respectively. The first discovery in Tal Block was madeby MOL Group Pakistan in Manzalai Field back in 2002. The concession, to date, includes Manzalai, Makori, Makori East, Maramzai, Mamikhel,Mardan Khel and Tolanj fields. Presently Tolanj South 1, Tolanj West 1, Makori Deep 1 and Makori East 5 are under drilling. . Furthermore, produc-tion from Mardan Khel 1 is expected to come online from May’16, adding ~954bopd and ~11.26mmcfd of gas to OGDC’s portfolio with an esti-mated net earnings impact of PkR0.21/share.

(v) Nashpa and Mela: The on-going development project in the block which includes installation of well head compressors, crude stabilization unitand laying of 22km gas pipeline for transportation of gas from Mela to Nashpa, is expected to be completed by Jun’17. OGDC having ~56% interestin the block, recently discovered hydrocarbons in Nashpa X5 producing 1,032bopd and 0.78mmcfd of gas with a well head flowing pressure of600psi (which is fairly low). To counter low psi of the well, OGDC is expected to perform acid test to increase the production flow in the comingmonths. Furthermore, Nashpa 6 & 7 and Shahwa 1 are still under drilling, which is expected to yield better flows in the near future.

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Map: Zorgarh Block


Map: Thal Block


Map: Gurgalot, Soghri, Tal, Nashpa and



Development Projects Underway:(a) KPD-TAY Development Project - The project is located adjacent to existing Kunnar LPG plant. The company is in process of installing well head

facilities, gas gathering system, LPG extraction feed/sales gas compressors and power generation for Phase II of the project. The completion(expected in 4QFY16) would result in additional processing capacity of 125mmcfd of gas, 4100bopd and 410tpd of LPG.

(b) Jhal Magsi Development Project - Surface installation of facilities is under progress and the project is expected to yield 15mmcfd of gas.

(c) Nashpa & Mela Development Project - Upon completion of the project which is expected by Jun’17, the project is anticipated to add an incre-mental 280tpd of LPG into the system.

(d) Uch-II Development Project - On completion (Jun’16), the project is expected to yield additional 100mmcfd of gas into the system.

OGDC - Ideal Product and Revenue Mix for higher Operating Margins!OGDC maintains a balanced product and revenue mix, which together with favorable pricing policies helps the company in yielding higher operat-ing margins, compared to its peers (PPL and POL). On the cost front, OGDC benefits from its product mix tilt towards gas (BOE measure) averaging79% over the four year horizon, compared to PPL (~92%) and POL(~70%), thus clocking in second lowest operating cost of US$12.8/BOE for thecompany (PPL:US$10.9/BOE and POL:US$25.4/BOE) in FY15. Whereas on the revenue front, since majority of the company’s gas fields fall underbetter concessionary pricing agreements, the company in FY15 was able to realize US$4.1/mmbtu (PPL: US$3.0/mmbtu and POL: US$2.4/mmbtu).Resultantly, yielding better operating margins of 55.1% (PPL: 40.39% and POL 38.6%). Going forward, we expect the company to clock in operatingmargins of 43.8% in FY16 (↓~1130bps YoY) still the highest among its Peers.

1HFY16 Result Review:OGDC reported net earnings of PkR15.9bn (EPS: PkR3.71) in 2QFY16, (↓18%YoY) against NPAT of PkR19.5bn (EPS: PkR4.54) in 2QFY15. Despitelower effective tax rate of 27.0% in 2QFY16 vs. 41.6% in 2QFY15, net earnings declined due to ~950bpsYoY deterioration of gross margin, whichclocked in at 54.4% during 2QFY16 owing to international oil prices meltdown. Subsequently, OGDC’s net earnings in 1HFY16 settled in atPkR34.2bn (EPS: PkR7.95), (↓29%YoY). The company paid interim dividends of PkR2.7 (1Q: PkR1.5 and 2Q: PkR1.2).

Investment Perspective:On account of substantial decline in int’l oil prices and overall plunging equity indices globally, OGDC also shed a whopping 36%FYTD, underper-forming the broader index by 31%. Considering slight recovery in oil prices (OPEC basket recovered over 36% from the lows of US$25.21/bblmarked in Feb’16), expected production enhancement, successful exploratory activities and policy incentives, we believe the decline in stock pricehave opened up valuations. We prefer OGDC backed by its highest operating margins in the E&P space, the stock offers an upside potential of 42%from current price levels based on our Dec’16 TP of PkR166/share. We have a BUY stance on the stock.



Appendix I

Op erat io n al Co n t r ib u t io n FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOPEC Basket (US$/Bbl) 110.1 106.1 106.0 71.1 37.0 40.0 45.0Realized Price (US$/BOE) 32.2 32.7 33.4 28.4 20.9 21.8 22.9Total Operational Cost (US$/BOE) 10.7 12.2 12.0 12.8 11.7 12.0 12.6 Royalty (US$/BOE) 3.76 3.79 3.86 3.20 2.52 2.61 2.74 Operating Expenses (US$/BOE) 5.59 5.50 6.35 7.14 7.02 7.35 7.81 Transportation Charges (US$/BOE) 0.33 0.33 0.31 0.27 0.12 0.13 0.15 Exploration and Prospecting Expenditure (US$/BOE) 0.66 2.19 1.13 1.57 1.35 1.22 1.17 General and Admin Expense (US$/BOE) 0.36 0.39 0.39 0.58 0.73 0.73 0.78Operating Margins per BOE(%) 66.75% 62.68% 63.96% 55.09% 43.80% 44.81% 44.84%



Appendix II

K ey Rat io s FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FEarnings Per Share - EPS (PkR) 22.5 21.1 28.8 20.3 13.5 15.1 16.3EPS Growth 52.3% -6.3% 36.5% -29.6% -33.6% 12.4% 7.7%Price To Earnings Ratio - PER (x) 5.2 5.5 4.1 5.8 8.7 7.7 7.2Book Value Per Share - BVPS (PkR) 62.4 75.3 92.0 102.9 111.4 120.9 131.1P/BVPS (x) 1.9 1.6 1.3 1.1 1.0 1.0 0.9Return On Equity - ROE 36.1% 28.0% 31.3% 19.7% 12.1% 12.5% 12.5%Return On Assets - ROA 28.6% 21.9% 25.0% 15.8% 10.2% 10.6% 10.6%Dividend Per Share - DPS (PkR) 7.3 8.3 9.3 7.8 5.0 5.6 6.2Dividend Yield - D/Y 6.2% 7.1% 7.9% 6.6% 4.3% 4.8% 5.3%Payout Ratio 32.2% 39.1% 32.1% 38.2% 37.2% 37.1% 37.7%

Fu rt h er Rat io s FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FEnterprise Value - EV (PkRmn) 516,716 550,094 562,520 580,552 538,105 549,779 564,060EBITDA* (PkRmn) 146,401 154,123 187,620 141,119 112,735 128,474 139,677EV/EBITDA 3.5 3.6 3.0 4.1 4.8 4.3 4.0Sales Growth 27.0% 12.9% 15.1% -18.0% -22.1% 12.2% 8.1%Gross Profit Margin 69.9% 70.6% 68.5% 62.7% 53.7% 53.7% 53.3%Net Profit Margin 49.0% 40.6% 48.2% 41.4% 35.3% 35.4% 35.3%Operating Expense Growth -29.4% 182.6% -33.8% 36.3% 2.4% 0.7% 3.0%Net Profit Before Tax (NPBT) Growth 46.1% 9.6% 18.2% -26.3% -34.8% 12.4% 7.7%Profit After Tax (PAT) Growth 52.3% -6.3% 36.5% -29.6% -33.6% 12.4% 7.7%EBITDA Margin 74.0% 69.0% 73.0% 67.0% 68.7% 69.8% 70.2%Asset Turnover (x) 0.6 0.5 0.5 0.4 0.3 0.3 0.3

Realized & Co m m o d it y P r ic es FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOil Sales (US$/bbl) 89.2 84.0 86.0 63.7 34.3 37.1 41.7Gas Sales (US$/mmbtu) 3.7 4.0 4.0 4.1 3.8 3.8 3.9LPG Sale (US$/M.Ton) 964.7 1,101.5 880.0 766.2 398.8 414.2 452.4Realized Price (US$/BOE) 32.2 32.7 33.4 28.4 20.9 21.8 22.9OPEC Basket (US$/bbl) 110.1 106.1 106.0 71.1 37.0 40.0 45.0

*EBITDA = Earnings Before Interest, Taxation, Depreciation & Amortization



Appendix III

I n c o m e St at em en t FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FNet Sales 197,839 223,366 257,014 210,625 164,034 184,094 198,996Cost of Sales 59,532 65,700 80,941 78,658 75,867 85,180 92,860Gross Profit 138,307 157,667 176,073 131,967 88,167 98,914 106,137Operating Expenses 6,248 17,659 11,687 15,935 16,314 16,429 16,914Operating Profit 132,059 140,008 164,385 116,032 71,853 82,485 89,222Financial Charges 1,719 2,315 2,204 2,550 1,841 1,942 1,993Other Charges 7,004 7,675 9,071 6,686 4,349 4,888 5,265Other Income 9,748 15,799 19,240 20,230 17,143 17,418 18,312Profit Before Taxation 133,083 145,817 172,350 127,026 82,807 93,073 100,276Taxation 36,177 55,040 48,435 39,776 24,842 27,922 30,083Profit After Taxation 96,906 90,777 123,915 87,249 57,965 65,151 70,193

Balan c e Sh eet FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FCurrent Assets 214,877 134,330 194,160 219,779 194,400 199,947 193,362Long Term Assets 123,445 279,682 302,073 334,013 372,985 414,849 470,227Total Assets 338,321 414,011 496,233 553,791 567,385 614,796 663,589Current Liabilities 24,594 38,741 48,046 61,902 38,815 44,963 49,776Long-Term Loans 45,363 51,611 52,516 49,368 49,618 49,868 50,118Total Liabilities 69,956 90,352 100,561 111,270 88,433 94,831 99,894Paid Up Capital 43,009 43,009 43,009 43,009 43,009 43,009 43,009Reserves and Unappropriated Profits 225,446 280,741 352,662 399,512 435,943 476,955 520,686Total Equity 268,455 323,750 395,671 442,521 478,952 519,965 563,695Total Equity and Liabilities 338,412 414,103 496,233 553,791 567,385 614,796 663,589

Cash flo w St at em en t FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FCashflow from Operating Activities 52,100 187,026 94,718 91,069 108,039 93,936 109,782Cashflow from Investing Activities (38,994) (158,849) (43,578) (37,371) (82,310) (77,323) (89,787)Cashflow from Financing Activities (23,180) (29,234) (38,879) (36,480) (21,284) (23,888) (26,213)

Sales Vo lu m e - Break Up FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOil Sales (K.Bbl) 13,713 14,183 14,734 14,591 14,786 14,948 15,344Gas Sales (mmcf) 381,863 392,513 416,238 404,128 415,250 429,993 423,551LPG Sale (Tons) 75,005 41,003 64,088 95,629 124,318 161,613 210,097

K . Barrels o f Oil Eq u ivalen t 6 8 , 8 5 7 7 0 , 5 6 2 7 4 , 6 9 4 7 3 , 0 8 7 7 5 , 1 1 1 7 7 , 6 9 1 7 7 , 5 7 4Oil Sales (K.Bbl) 13,713 14,183 14,734 14,591 14,786 14,948 15,344Gas Sales (K.BOE) 54,514 56,035 59,422 57,693 59,281 61,385 60,466LPG (K.BOE) 630 344 538 803 1,044 1,357 1,764



Appendix IV

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Fully owned leases Operated JV leases Non-operated JV leases

Source: Financial Reports & IFSL Research

Oil Production—Breakdown

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Uch Qadirpur Kunar/Pasakhi Bhit & Badhra Kadanwari


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Gas Production - Breakdown

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Operating Cost (US$/BOE)


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OPEC Basket vs. Realized Oil Prices (US$/bbl)

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Sym b o l P P LBloomberg Ticker PPL.PAReuters Ticker PPL.KADec'16 TP 176Current Price 125Upside / (Downside) Potential 40%Rec o m m en d at io n Bu y

Outstanding Shares (mn) 1,971.7Free Float (mn) 481.0Free Float 24%

Market Capitalization (PkR mn) 246,821Market Capitalization (US$ mn) 2,351



Oil Production (bopd) 15,019Gas Production (mmcfd) 825LPG Production (tons/d) 158

Sn ap sh o t FY1 6 E FY1 7 F FY1 8 FEarnings Per Share - EPS (PkR) 10.8 13.9 15.5EPS Growth -38% 28% 12%Price To Earnings Ratio - PER (x) 11.6 9.0 8.1Book Value Per Share - BVPS (PkR) 102.8 109.7 117.5P/BVPS (x) 1.2 1.1 1.1Dividend Per Share - DPS (PkR) 5.4 6.9 7.8

Pakistan Petroleum Limited (PPL)Pakistan Petroleum Ltd (PPL) is engaged in exploration, prospecting, development and production of Oil and Gas resources. The company has a portfolio of forty seven exploratoryassets which includes twenty seven operated blocks and twenty non operated JV blocks. PPL operates eight producing fields across the country at Sui (Pakistan’s largest gasfield), Adhi, Kandhkot, Chachar, Mazarani, Adam, Adam West & Shadad and holds working interest in fifteen partner-operated producing fields, including Qadirpur, country’s secondlargest gas field. The Government of Pakistan holds 67.5% of the company as of Dec’15.


Price Performance - PPL vs. KSE100

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We initiate an active coverage on Pakistan Petroleum Limited (PPL) with a DCF Dec’16 TP of PkR176/share, offering an upside potential of 40% fromcurrent price levels. Similar to its peers, PPL also underperformed the benchmark by 19% during FY16TD driven by 35% decline in int’l oil prices. Webelieve incremental extractions from Gambat South, Tal and Nashpa with ongoing developments in Sadiqabad, Dhok Sultan and Hala should continueto augment the company’s hydrocarbon production. Moreover, the expected conversion of Sui Mining Lease to D&P Lease after May’16 could po-tentially raise the wellhead gas prices, thus increasing the realized prices per BOE and improving the operating margins. Our valuation is based on theoil price assumption of US$37, US$40 and US$45 for FY16, FY17 & FY18 onwards, respectively. We have not incorporated the impact of Sui Conver-sion in our workings, since the negotiations between the government and provincial authorities have not been finalized yet. The scrip trades at FY16Eand FY17F P/E of 11.6x & 9.0x and D/Y of 4.4% & 5.6%.

Ongoing Exploratory EffortsPPL, alike its peers, also carried out higher number of seismic activities in previous months (pre-Aug’15) in pursuit of additional hydrocarbon re-serves. However owing to persistent decline in oil prices, the company has temporarily curtailed down its field expenses. Resultantly, the explora-tory activities have been limited to ongoing efforts in Sadiqabad, Bela-West, Dhok Sultan, Hala, Gambat South & Shahbandar.

Sadiqabad: PPL holds 100% stake in this block which covers an area of 2,492sq km and falls under Zone III. It is located in the North Eastern side ofMari Gas field (Gas ORR: 8.2tcf), where we believe the block might have higher quantum of gas reserves. As per the company’s geologists, thesources surrounding the block have shown attractive potential in wells Chak255-1 (drilled within the block) and Sabzal-1 (drilled in the west). InOct’15, PPL completed 3D seismic survey in 475sq. km and now plans to increase its target survey by 250sq. km (expected completion by May’16).

Dhok Sultan: PPL has 75% working interest Dhok Sultan which is located in District Attock (Punjab), and falls under Zone I. The block lies to the eastof Nashpa (ORR Oil: 80mnbbls & Gas: 0.45tcf) and south of Dakhni Field (ORR Oil: 14mnbbls & Gas: 0.40tcf). In recent months, PPL has made adiscovery in first exploratory well of Dhok Sultan-X1, where the well flowed 468bopd along with 0.617mmcfd of gas having an annualized impactof PkR0.13/share on the net earnings. Our channel checks suggest that company plans to drill additional wells including X2 and X3 in the currentcalendar year.

Pakistan Petroleum Limited (PPL) - Buy!

Oil P r ic es FY1 6 FY1 7 FY1 8 TPUS$30/bbl 9.77 11.84 11.55 126.00US$40 /bbl 12.24 13.90 14.50 165.00US$50 /bbl 14.41 16.00 17.10 224.20US$60 /bbl 16.14 18.30 20.50 265.00

Earnings Sensitivity to Int'l Oil Prices


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Map: Sadiqabad

Seismic Activity

Op erat o r Blo c k/EL /L ease Typ e Zo n e P ro v in c e Near b y P ro d u c in g Field s Reserve P o t en t ial

PPL Sadiqabad EL 3D Zone 3 Punjab Mari: Gas Production 594 mmcfd and Oil Production 52bopd Medium

PPL Bela West 2D Zone 1 Baluchistan Not Available Low

PPL Shah Bandar EL 3D Zone 3 Sindh Not Available Low




Hala: PPL, with 65% stake, have made three discoveries in the block which includes AdamX1, WestX1 and Fazl-X1.The total hydrocarbon flow fromthe block is 38.3mmcfd of gas and 165bopd. The block as of Jul’15 had recoverable reserves of 37.5bcf of gas and 0.857mnbbls of oil. The qualityof gas discovered in the block is above average pipeline quality. After discussions with our sources, we expect the block to have potential gas re-coverable reserves of 300bcf.

Gambat South: The block is located to the west of Sinjhoro (Oil ORR: 17mnbbls) and falls under Zone III. PPL (holding a stake of 65%) have madeeight discoveries to date with the recent one announced in Dec’15, when it struck positive results from Hatim-X1 where potential hydrocarbonbearing sources were identified with initial testing flow of 56mmcfd of gas. However, as per our channel checks, the quality of gas from Hatim-X1is 550mmbtu which is quite below the pipeline gas quality, thus expected to be priced at Low Btu gas pricing policy 2012.

Tal Block: With working interest of 28%, PPL places itself as one of the beneficiaries of the rising production from Tal Block along with POL andOGDC. The concession to date includes Manzalai, Makori, Makori East, Maramzai, Mamikhel, Mardan Khel and Tolanj fields. Currently TolanjSouth-1, Tolanj West-1, Makori Deep-1, and Makori East-5 are under drilling. Tal concession constitutes ~38% and ~10% of total PPL’s oil and gasproduction volume. Additionally, production from Mardan Khel 1 is expected to come online from May’16, adding 954bopd and 11.26mmcfd tothe PPL’s portfolio with an annualized net earnings impact of PkR0.46/share.

Nashpa and Mela: PPL holds 29% working interest in Nashpa and Mela where total combined production of oil and gas from both fields is22,772bopd & 89mmcfd, respectively. The Development Project in the block is expected to be completed by Jun’17 to transport gas from Mela toNashpa for processing. Furthermore, the operator has discovered hydrocarbons in Nashpa-X5 producing 1,032bopd and 0.78mmcfd of gas with awell head flowing pressure of 600 PSI (fairly low). To counter the low PSI of the well, the operator is expected to perform acid test to increase theproduction flow in the coming months. Furthermore, Nashpa-6 & 7 and Shahwa-1 are still under drilling.

Sui Mining Lease - a potential catalyst!Contributing over 50% to the total gas volumes of the company, the Sui Mining Lease’s one-year extension granted to PPL is expiring in May’16.We believe that the government would convert the Mining Lease into a Development & Production (D&P) Lease, which would then require a con-version of the gas pricing mechanism to 2012 Petroleum Policy. Recall, that Sui wellhead gas prices are derived on the basis of negotiated settle-ment that was inked in early 2000s between the government and the company. Any such conversion would raise the realized prices, yielding bet-ter operating margins. However, some pricing discounts might be applied since Sui contributes ~11% to the country’s gas production. On theother hand, the raised prices would further facilitate the company to dig the field deeper in pursuit of further reserves enhancement. We havenot incorporated the Sui conversion in our model, since the government and the provincial authorities are still under the consultation phase,which could take a couple of months to reach a conclusion.


Map: DhokSultan, Tal, Nashpa & Mela


Map: Hala & Gambat South



Low Operating Costs – A BufferPPL’s product mix inclined towards gas (~90% in FY15) has aided the company in reducing its total operating cost per BOE. In FY15, PPL’s operatingcost stood at US$10.9/BOE, (↑25%YoY - still lowest in the IFSL E&P space) driven by 1) an impairment charge of ~PkR5.3bn (US$0.9/BOE) againstPPL Europe E&P Ltd. and 2) higher field expenditures. In FY16, we expect the company to incur operating cost of ~US$9.6/BOE (↓13%YoY), wherewe foresee a reduction of US$0.7/BOE in field expenditures as a result of lower oil servicing costs. On the other hand, we expect the company tofurther charge an impairment loss of ~PkR5.5bn against its investments in PPL Europe, which is a further reduction to its previously recorded re-coverable amount of PkR10.3bn (FY15 end) due to its suspended assets in Yemen.

Yemen Interest:PPL via its wholly owned subsidiary PPL Europe E&P Ltd has interest of 20% & 44% in Yemen’s Block 3 and Block 29. Troubled with continuoussecurity problems, the operators i.e. Total (Block 3) and OMV (Block 29) have suspended all operations in these blocks since Apr’15. However, theupstream players have requested the Yemeni President Abd Rabbuh Mansour Hadi to take urgent actions to provide security to exploration blockswhich have been shut down for months.

1HFY16 Result Review:During 2QFY16, PPL posted consolidated net earnings of PkR6.3bn (EPS: PkR3.20), (↓30%YoY) against NPAT of PkR9.0bn (EPS: PkR4.55) in 2QFY15.Decade low oil prices (↓30%YoY), not only dragged down the top-line by over 20%YoY but also eroded the gross margin to 43.0% (vs. 54.8% in2QFY15). The company also provisioned out an impairment charge of ~PkR2.2bn (PkR0.96/share) on its investments in PPL Europe E&P limited.Subsequently, the company’s net earnings clocked in at PkR12.1bn (EPS: 6.12) in 1HFY16 (↓47%YoY). PPL also declared an interim dividend ofPkR2.25/share (vs. PkR4.5/share in 1HFY15).

Investment Perspective:Pakistan Petroleum Ltd (PPL) shed over 24%FYTD, underperforming the benchmark by 19% mainly due to plunging int’l oil prices. We believe thissignificant decline provides an opportunity to build new positions. Our preference for PPL is also based on expected additional production fromblocks like Tal, Nashpa and Gambat, coupled with potential discoveries in Sadiqabad, Dhok Sultan and Hala. Our DCF based Dec’16 TP of PkR176/share offers a potential upside of 40%. The stock is trading at FY16E & FY17F P/E of 11.6x & 9.0x and D/Y of 4.4% & 5.6%, respectively. We have aBuy stance on the stock.



Appendix I

Op erat io n al Co n t r ib u t io n FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOPEC Basket (US$/Bbl) 110.14 106.06 105.99 71.08 36.98 40.00 45.00Realized Price (US$/BOE) 16.81 17.92 20.49 18.35 13.72 14.04 14.91Total Operational Cost (US$/BOE) 7.54 8.09 8.76 10.94 9.57 8.74 9.26 Royalty (US$/BOE) 2.00 2.15 2.45 2.15 1.62 1.66 1.76 Field Expenditure (US$/BOE) 4.73 5.36 5.61 7.39 6.68 6.59 6.97 Other Operating Expenses (US$/BOE) 0.81 0.58 0.70 1.40 1.27 0.49 0.52Operating Margins per BOE (%) 55.13% 54.84% 57.25% 40.39% 30.24% 37.76% 37.94%



Appendix II

K ey Rat io s FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FEarnings Per Share - EPS (PkR) 14.9 17.8 26.1 17.4 10.8 13.9 15.5EPS Growth 8.6% 19.5% 46.7% -33.4% -37.6% 28.2% 11.6%Price To Earnings Ratio - PER (x) 8.4 7.0 4.8 7.2 11.6 9.0 8.1Book Value Per Share - BVPS (PkR) 96.1 90.9 92.3 97.4 102.8 109.7 117.5P/BVPS (x) 1.3 1.4 1.4 1.3 1.2 1.1 1.1Return On Equity - ROE 23.2% 23.5% 28.3% 17.8% 10.5% 12.7% 13.2%Return On Assets - ROA 17.2% 16.5% 21.8% 13.8% 7.9% 9.6% 9.9%Dividend Per Share - DPS (PkR) 11.5 10.5 12.5 8.5 5.4 6.9 7.8Dividend Yield - D/Y 9.2% 8.4% 10.0% 6.8% 4.3% 5.5% 6.2%Payout Ratio 77.3% 59.1% 47.9% 48.9% 50.0% 50.0% 50.0%

Fu rt h er Rat io s FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FEnterprise Value - EV (PkRmn) 171,022 232,678 279,066 279,109 267,606 263,190 263,764EBITDA* (PkRmn) 71,632 70,720 83,443 64,422 40,074 48,962 55,387EV/EBIDTA 2.4 3.3 3.3 4.3 6.7 5.4 4.8Sales Growth 23% 6% 17% -13% -22% 8% 13%Gross Profit Margin 60% 58% 61% 48% 39% 41% 41%Net Profit Margin 30% 34% 43% 33% 26% 31% 31%Operating Expense Growth 30% -28% 23% 94% -5% -59% 13%Net Profit Before Tax (NPBT) Growth 21% 5% 34% -34% -38% 28% 12%Profit After Tax (PAT) Growth 9% 20% 47% -33% -38% 28% 12%EBITDA Margin 74% 69% 70% 62% 49% 56% 56%Asset Turnover (x) 0.6 0.5 0.5 0.4 0.3 0.3 0.3

Realized & Co m m o d it y P r ic es FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOil Sales (US$/bbl) 100.6 96.3 104.3 71.4 37.2 40.2 45.2Gas Sales (US$/mmbtu) 2.8 2.8 2.9 3.0 2.7 2.7 2.7LPG Sale (US$/M.Ton) 964.1 966.9 857.8 695.6 398.8 414.2 452.4Realized Price (US$/BOE) 16.8 17.9 20.5 18.3 13.7 14.0 14.9OPEC Basket (US$/Bbl) 110.1 106.1 106.0 71.1 37.0 40.0 45.0




Appendix III

I n c o m e St at em en t FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FNet sales 96,222 102,357 119,811 104,377 81,377 87,603 98,719Cost of sales 38,522 42,895 47,118 54,272 49,237 51,449 57,799Gross profit 57,700 59,461 72,694 50,105 32,141 36,154 40,920Operating Expenses 4,655 3,333 4,103 7,951 7,529 3,077 3,467Operating Profit 53,045 56,129 68,591 42,154 24,612 33,077 37,453Financial charges 179 394 426 554 490 522 506Other Income - net 68 - 6,382 7,570 6,162 6,269 6,379Profit before tax 52,934 55,734 74,547 49,170 30,284 38,823 43,326Taxation 23,605 20,677 23,129 14,916 8,916 11,430 12,756Net Profit 29,329 35,058 51,418 34,254 21,368 27,394 30,571

Balan c e Sh eet FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FCurrent assets 93,254 84,159 82,749 97,689 119,038 125,848 138,637Long term assets 77,297 128,742 153,594 149,987 150,234 159,091 168,794Total assets 170,551 212,901 236,343 247,676 269,272 284,939 307,431Current Liabilities 21,268 36,672 21,741 22,988 31,329 30,098 33,804Long term Liabilities 22,899 26,875 32,685 32,731 35,302 38,503 42,003Total Liabilities 44,167 63,547 54,426 55,719 66,631 68,601 75,807Paid up capital 13,145 16,431 19,717 19,717 19,717 19,717 19,717Reserves and Unappropriated Profits 113,239 132,923 162,200 172,240 182,924 196,621 211,906Total Equity 126,384 149,354 181,917 191,957 202,641 216,338 231,624Total Equity and Liabilities 170,551 212,901 236,343 247,676 269,272 284,939 307,431

Cash flo w St at em en t FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FCashflow from Operations 20,766 64,837 33,471 31,001 40,290 35,630 40,024Cashflow from Investing Activities (21,512) (59,143) (33,323) (5,738) (9,798) (18,786) (21,646)Cashflow from Financing Activities (2,416) (13,277) (18,837) (16,713) (8,113) (10,496) (11,785)

Sales Vo lu m e - Break Up FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOil Sales / NGL / Condensate (K.bbl) 3,169 3,686 4,686 5,482 5,607 5,863 6,032Gas Sales (mmcf) 364,948 331,510 311,719 301,302 303,879 305,012 312,935LPG Sales(Tons) 20,869 17,136 27,933 57,699 75,009 97,511 126,765

K . Barrels o f Oil Eq u ivalen t 6 4 ,0 6 4 5 8 ,9 8 6 5 6 ,7 8 4 5 6 ,0 9 7 5 6 ,7 9 6 5 7 ,4 3 0 5 9 ,16 3Oil Sales / NGL / Condensate (K.bbl) 3,169 3,686 4,686 5,482 5,607 5,863 6,032Gas Sales (K.BOE) 60,720 55,156 51,864 50,130 50,559 50,748 52,066LPG Sales (K.BOE) 175 144 235 485 630 819 1,065



Appendix IV

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FY14A FY15A FY16E FY17F FY18FSource: Financial Reports & IFSL Research



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Sym b o l P OLBloomberg Ticker POL.PAReuters Ticker PKOL.KADec'16 TP 336Current Price 260Upside / (Downside) Potential 29%Rec o m m en d at io n Bu y

Outstanding Shares (mn) 236.5Free Float (mn) 108.2Free Float 46%

Market Capitalization (PkR mn) 61,410Market Capitalization (US$ mn) 585



Oil Production (bopd) 6,301Gas Production (mmcfd) 71LPG Production (tpd) 134

Pakistan Oilfields Limited (POL)Pakistan Oilfields Limited (POL) is involved in the exploration and production of Oil and Natural Gas resources. The company’s assets currently constitutes of seven exploration leases(three operated and four non operated JV’s). Whereas the Development and Production Lease portfolio comprises of eighteen leases (nine owned and operated JVs and workinginterest in nine non operated JV blocks). Additionally, POL also markets LPG under its own brand named POLGAS as well as through its subsidiary CAPGAS (Private) Limited. With therevenue mix tilted towards oil ~53% in FY15,the company is highly susceptible to Int’l oil price volatility. Attock Oil Company Ltd. an associate of the company holds 52.7% stake inPOL.

Sn ap sh o t FY1 6 E FY1 7 F FY1 8 FEarnings Per Share - EPS (PkR) 22.2 30.7 37.5EPS Growth (0.38) 0.38 0.22Price To Earnings Ratio - PER (x) 11.7 8.5 6.9Book Value Per Share - BVPS (PkR) 126.0 135.5 144.9P/BVPS (x) 2.1 1.9 1.8Dividend Per Share - DPS (PkR) 20.0 28.0 35.0


Price Performance - POL vs. KSE100

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Pakistan Oil Fields Limited (POL) - Buy!We initiate an active coverage of Pakistan Oil Fields (POL) with a DCF based Dec’16 TP of PkR336/share (Buy), providing a potential upside of 29%from current pricing levels. The stock currently trades at FY16E & FY17F P/E of 11.7x & 8.5x and D/Y of 7.7% & 10.8%. Alike the E&P sector, POL alsounderperformed the broader index by 31% FY16TD mostly because of faltering int’l oil prices and overall depressed equity indices. Our long termconviction on the stock stems from incremental production from Tal Block, where flows from Mardan Khel 1 are expected to add upto ~795bopd and9.38 mmcfd of gas from FY16 end. Moreover, drilling activities in Tolanj South 1, Makori Deep 1, Tolanj West 1 and Makori East 5 may further im-prove the company’s hydrocarbon production profile. Apart from Tal Block, exploratory efforts carried out in Gurgalot Lease could further exciteinvestors with positive surprises. Our valuation is based on the oil price assumption of US$37, US$40 and US$45 for FY16, FY17 & FY18 onwards, re-spectively.

Curtailing Down Exploratory EffortsPOL (in its operated fields), has curtailed down the exploratory efforts to reduce exploration costs in the low oil price environment. However, ac-tivities in the partner operated fields still provide room for additional hydrocarbon reserves for the company’s portfolio as discussed below:

Gurgalot: Located in between the rich hydrocarbon blocks of Tal (ORR Gas: 1.5tcf & Oil: 65mbbls) and Dakhni (ORR Gas: 402bcf & Oil: 13.6mnbbls)conforms to the sizable hydrocarbon potential. Since POL has a 20% interest in the block, any discoveries in the Gurgalot lease will aid the com-pany in unlocking long-term revenue growth. Presently, an exploratory well Surqamar-1 is under drilling with a target depth of 5,600m, the opera-tor (OGDC) has already achieved the present depth of 77%. As per our channel checks, the drilling is expected to be completed within a couple ofmonths.

Tal Block: Pakistan Oil Fields holds 25% interest in the Tal block. Discovery in the block was first made when MOL Group Pakistan (operator)achieved success in Manzalai Field. Currently, Tolanj South 1, Makori Deep 1, Tolanj West 1 and Makori East 5 well are under drilling phase. Addi-tionally, production from Mardan Khel 1 is expected to come online from May’16, adding another 795bopd and 9.38mmcfd of gas to POL’s portfo-lio having an annualized earnings impact of PkR3.23/sh to the bottom-line. As of FY15 end, Tal concession contributed ~65% and 78% to POL’stotal oil and gas volumes.

Balkassar D&P Mining Lease: POL with a 100% interest in the lease has drilled a well Balkassar-B7A with a target depth of 2,595m. The well hasbeen a replacement for B7, which was suspended due to casing collapse. Presently, B7A is under the testing phase where the company has re-corded decent hydrocarbon flow pressure. We expect the well to be completed within 2 months, where any success would increase the balancerecoverable reserves from the lease which currently stands at 3mnbbls of oil.

Adhi: Following the recent production enhancements from Adhi-20, 21, 22, 23 & 24, PPL (operator) is in process of drilling Adhi-25. With an initialtarget of 3,000m, PPL has drilled ~ 900m up till now. We expect the well to achieve target depth within three months if drilling activities are car-ried out at the same pace. POL has a 11% interest in the field.

Oil P r ic es FY1 6 E FY1 7 F FY1 8 F TPUS$30/bbl 17.52 22.17 22.22 294.12US$40/bbl 25.11 31.12 32.42 355.76US$50/bbl 32.55 39.81 42.27 380.42US$60/bbl 39.86 48.30 51.84 433.05

Earnings Sensitivity to Oil Prices


Map: Gurgalot & Tal


Map: Balkassar and Adhi



High Operating Costs—more susceptible to Oil Price declinesWith oil contributing 30% (measure in BOE) to the total product mix (highest among the E&P sector), POL is expected to clock in operating cost ofUS$19.3/BOE in FY16 (↓24%YoY), led by lower royalty payments, exploration costs and field expenditures. Recall that in FY15, higher explorationexpenditures were fueled by impairment charges of PkR~3.8bn against Pindori and Ikhlas dry wells. However, we expect the exploration costs toreduce significantly by 57%YoY since the company has temporarily curtailed down majority of exploratory efforts in its operated fields, besides re-duced drilling activities (currently being undertaken only in Balkassar block). Owing to highest operating costs (within the E&P universe), and reve-nue tilt bended towards oil (~53% four years average), the company is highly sensitive to oil price movements.

1HFY16 Result ReviewPOL posted net earnings of PkR2.3bn (EPS: PkR9.6) in 2QFY16 (↑92%YoY) vs. PkR1.18bn (EPS: PkR5.00) in 2QFY15. Despite contraction in gross mar-gin by over 900bps YoY to 45.5% in 2QFY16, bottom-line expanded primarily on the back of 1) ↓98%YoY lower exploration expenses owing to zerodry hole costs in 2QFY16 (vs. last year provisioning of PkR~3.8bn from Pindori and Ikhlas block) & reduced geological survey costs, and 2) lowereffective tax rate. Subsequently, net earnings in 1HFY16 clocked in at PkR3.7bn (EPS: PkR15.52), ↓31%YoY dominated by poor 1QFY16 result. Thecompany also paid an interim cash dividend of PkR15/share.

Investment PerspectiveIn line with other E&P companies, POL also shed over 35%FYTD, underperforming the broader index by 31%, which we believe has opened upfresh entry points. Our DCF Dec’16 TP of PkR336/share, offers a potential upside of 29% from current levels and we have a Buy stance. The scriptrades at FY16F/FY17F P/E of 11.7x & 8.5x and D/Y of 7.7% & 10.8%, respectively. We like POL on the heels of successful production increasesfrom Tal and potential of rich discoveries in Gurgalot. However, since POL has the highest expected operating cost of US$19.25/BOE for FY16 inthe E&P space; it is most susceptible to the oil price volatility.

Op erat io n al Margin BreakUp FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOPEC Basket (US$/Bbl) 110.1 106.1 106.0 71.1 37.0 40.0 45.0Realized Price (US$/BOE) 41.7 43.5 45.4 41.4 27.7 28.9 32.1Total Operational Cost (US$/BOE) 18.15 22.23 23.92 25.42 19.25 18.59 19.76 Royalty (US$/BOE) 3.78 3.93 4.22 3.32 2.41 2.51 2.78 Operating Expenses (US$/BOE) 11.76 14.35 16.21 15.46 13.33 12.70 13.13 Exploration and Prospecting Expenditure (US$/BOE) 0.82 2.58 2.10 6.02 2.57 2.55 2.94 Other Operating Expenses (US$/BOE) 1.78 1.37 1.40 0.62 0.93 0.83 0.92Operating Margins per BOE (%) 56.5% 48.9% 47.4% 38.6% 30.5% 35.7% 38.4%




Appendix I

K ey Rat io s FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FEarnings Per Share - EPS (PkR) 50.1 45.8 54.5 35.8 22.2 30.7 37.5EPS Growth 9.7% -8.7% 19.0% -34.4% -38.0% 38.2% 22.2%Price To Earnings Ratio - PER (x) 5.2 5.7 4.8 7.3 11.7 8.5 6.9Book Value Per Share - BVPS (PkR) 148.6 139.3 148.8 136.8 126.0 135.5 144.9P/BVPS (x) 1.7 1.9 1.7 1.9 2.1 1.9 1.8Return On Equity - ROE 34% 33% 37% 26% 18% 23% 26%Return On Assets - ROA 23% 20% 22% 15% 10% 13% 15%Dividend Per Share - DPS (PkR) 52.5 45.0 52.5 40.0 20.0 28.0 35.0Dividend Yield - D/Y 20.2% 17.3% 20.2% 15.4% 7.7% 10.8% 13.5%Payout Ratio 105% 98% 96% 112% 90% 91% 93%

Fu rt h er Rat io s FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FEnterprise Value - EV (PkRmn) 68,576 69,468 76,834 73,663 74,018 78,087 78,216EBITDA* (PkRmn) 20,514 18,114 24,005 16,776 12,274 15,734 18,720EV/EBITDA 3.3 3.8 3.2 4.4 6.0 5.0 4.2Sales Growth 15% 1% 23% -13% -27% 23% 15%Gross Profit Margin 61% 56% 53% 53% 42% 46% 49%Net Profit Margin 41% 37% 36% 27% 23% 26% 28%Operating Expense Growth -40% 172% -3% 166% -52% 16% 19%Net Profit Before Tax (NPBT) Growth 16% -16% 18% -33% -39% 38% 22%Profit After Tax (PAT) Growth 10% -9% 19% -34% -38% 38% 22%EBITDA Margin 72% 63% 68% 54% 55% 57% 59%Asset Turnover (x) 0.5 0.5 0.6 0.6 0.4 0.5 0.5

Realized & Co m m o d it y P r ic es FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOil Sales (US$/bbl) 95.8 91.6 95.2 69.2 37.0 40.0 45.0Gas Sales (US$/mmbtu) 2.5 2.5 2.5 2.4 2.6 2.7 2.8LPG Sales (US$/M.Ton) 2,186.9 2,282.3 1,621.5 1,338.6 697.3 753.3 847.4Realized Price (US$/BOE) 41.7 43.5 45.4 41.4 27.7 28.9 32.1OPEC Basket (US$/bbl) 110.1 106.1 106.0 71.1 37.0 40.0 45.0




Appendix II

I n c o m e St at em en t FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FNet Sales 28,624 28,878 35,540 30,881 22,394 27,448 31,478Cost of Sales 11,118 12,616 16,530 14,614 13,086 14,884 16,139Gross Profit 17,506 16,262 19,010 16,267 9,308 12,564 15,339Operating Expenses 693 1,886 1,832 4,868 2,317 2,689 3,198Operating Profit 16,813 14,376 17,178 11,399 6,991 9,875 12,140Financial Charges 685 830 654 987 777 872 909Other Charges 1,288 949 1,140 486 784 823 944Other Income 2,547 1,954 1,823 1,563 1,566 1,487 1,526Profit Before Taxation 17,388 14,551 17,207 11,489 6,996 9,667 11,813Taxation 5,529 3,722 4,319 3,031 1,749 2,417 2,953Profit After Taxation 11,859 10,828 12,887 8,459 5,247 7,250 8,860

Balan c e Sh eet FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FCurrent Assets 19,226 16,613 21,099 20,245 15,678 16,833 16,682Long Term Assets 33,025 37,025 36,769 35,198 37,350 39,273 41,392Total Assets 52,251 53,638 57,868 55,443 53,028 56,105 58,074Current Liabilities 6,145 7,938 8,334 8,536 8,468 9,091 9,485Long-term Loans 10,953 12,752 14,339 14,544 14,754 14,974 14,311Total Liabilities 17,098 20,691 22,673 23,080 23,223 24,064 23,797Paid Up Capital 2,365 2,365 2,365 2,365 2,365 2,365 2,365Reserves and Unappropriated Profits 32,730 30,581 32,829 29,997 27,438 29,674 31,910Total Equity 35,153 32,948 35,196 32,365 29,806 32,041 34,278Total Equity and Liabilities 52,251 53,639 57,869 55,444 53,028 56,105 58,074

Cash flo w St at em en t FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FCashflow from Operating Activities 19,226 16,613 21,099 20,245 15,678 16,833 16,682Cashflow from Investing Activities 33,025 37,025 36,769 35,198 37,350 39,273 41,392Cashflow from Financing Activities 52,251 53,638 57,868 55,443 53,028 56,105 58,074

Sales Vo lu m e - Break Up FY1 2 A FY1 3 A FY1 4 A FY1 5 A FY1 6 E FY1 7 F FY1 8 FOil Sales (K.bbl) 1,682 1,735 2,189 2,318 2,281 2,341 2,358Gas Sales (mmcf) 31,959 27,165 28,381 25,959 27,291 31,958 31,882LPG Sales (Tons) 26,306 22,872 28,930 49,020 58,824 70,589 77,648

K . Barrels o f Oil Eq u ivalen t 8 , 0 8 0 7 , 1 7 8 7 , 9 1 7 7 , 7 4 7 8 , 0 4 9 9 , 1 1 0 9 , 1 7 2Oil Sales (K.bbl) 1,682 1,735 2,189 2,318 2,281 2,341 2,358Gas Sales (K.BOE) 6,177 5,250 5,485 5,017 5,275 6,177 6,162LPG Sales (K.BOE) 221 192 243 412 494 593 652



Appendix III

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DisclosuresAnalyst Certification, Disclosures and Compensation & Reporting StructureThe research analyst(s) involved in the preparation of this report certifies that: (1) all of the views expressed in this report accurately reflect his/their personal views about any and all of the subject company(ies) /securities or issuers; and (2) no part of any of the research analyst(s) compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) inthis report. Further, the research analyst(s) or any of his/their close relatives do not have a financial interest in the securities of the subject company(ies) aggregating more than 1% of the value of the subjectcompany(ies). The research analyst(s) or his/their close relatives have neither served as director/officer in the past three years nor received any compensation from the subject company(ies) in the past twelvemonths.The research analyst(s), strategists or research associates principally having received compensation responsible of the preparation of this research report based on various factors including quality of research,clients’ feedback, stock picking clubbed with his/their compliance with internal HR Policies/Codes, punctuality, internal assessment, etc. The Research Analyst(s) is/are not subject to the supervision or control ofany employee of non-research department of the Company. No personnel engaged in providing non-research services have any influence or control over the compensatory evaluation of Research Analyst(s). TheResearch Analyst(s) is/are only supervised by Head of Research/Director Research and/or directly by Chief Executive Officer.

Research Dissemination PolicyInvest and Finance Securities Limited (hereinabove and hereinafter referred to as ‘the Company’ or ‘IFSL’) endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely mannerthrough either physical or electronic distribution such as email, fax mail, etc. Nevertheless, all clients may not receive the material at the same time.

Rating SystemIFSL employs a three tier rating system for equity securities and sector’s proposed weight in portfolio. Said ratings are elaborated in table on the right. Ratings are updated frequently on account for the latestdevelopments in the economy/sector/company/analyst’s assumptions or a combination of any of these factors

Valuation MethodologyTo arrive at our period end target prices, IFSL uses different valuation methodologies including• Justified price to book model, Asset & return based valuation model (DCF, DDM, and CAPM)• Relative Valuation (P/E, P/B, P/S etc.)• Equity & Asset return based methodologies (EV/EBITDA, Residual Income etc.)

Company Specific DisclosuresIFSL or any of its officers and directors does not have a significant financial interest (above 1% of the value of the securities) of the subject company(ies). However, IFSL and its associates may trade or have signifi-cant financial interest, under normal course of business, in the subject company(ies) from time to time. IFSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions,research or analysis in which they are based before the material is disseminated to their customers. IFSL, its respective directors, officers, representatives, employees and/or related persons may have a long orshort position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any suchsecurities or other financial instruments from time to time in the open market or otherwise. IFSL may make markets in securities or other financial instruments described in this research report, in securities ofissuers described herein or in securities underlying or related to such securities. IFSL may have recently underwritten/or in the process of underwriting the securities of an issuer mentioned herein. IFSL may alsohave provided/providing advisory services to the issuer mentioned herein. IFSL, its respective affiliate companies, associates, directors and/or employees may have investments in securities or derivatives ofsecurities of subject company(ies), and may make investment decisions that are inconsistent with the views expressed in this report

Key.RisksThis is included in the main body of research report.

DisclaimerThis report has been prepared by Invest and Finance Securities Ltd. [IFSL] and is provided for information purposes only. Under no circumstances, this is to be used or considered as an offer to sell or solicitation orany offer to buy. While reasonable care has been taken to ensure that the information contained in this report is not untrue or misleading at the time of its publication, IFSL makes no representation as to itsaccuracy or completeness and it should not be relied upon as such. From time to time, IFSL and/or any of its officers or directors may, as permitted by applicable laws, have a position, or otherwise be interestedin any transaction, in any securities directly or indirectly subject of this report. IFSL as a firm may have business relationships, including investment banking relationships with the companies referred to in thisreport. This report is provided only for the information of eligible clients who are expected to make their own investment decisions without undue reliance on this report and IFSL accepts no responsibility whatso-ever for any direct or indirect consequential loss arising from any use of this report or its contents.

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Rating Potential Return Rating DefinitionsBuy ≥15% Overweight > Weight in KSE

Hold <-10% but >15% M arketweight = Weight in KSE

Sell ≤ - 10% Underweight < Weight in KSE

Equity Securit ies Secto r’ s Weight in P o rt fo lioR at ing System


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