LAHORE -  The Oil & Gas Exploration and Production (E&P) reported a dismal 1HFY15 as profitability of the sector declined by 25 per cent annually to Rs75.3b compared to Rs100.6 billion in the corresponding period last year.

According to energy experts, the disappointing earnings performance of the sector can be primarily attributed to a steep downward slide in oil prices which declined by 18 per cent YoY on average. This coupled with i) 3 per cent YoY lower gas production, ii) 88 per cent YoY higher exploration cost and iii) 12 per cent YoY lower other income on exchange losses further dented the bottom-line. On QoQ basis, PAT of the sector declined by 37 per cent primarily due to 15 per cent lower revenues at PKR89.2b on account of 28 per cent lower average oil prices and almost flattish oil and gas production. Lackluster 1HFY15 results coupled with absence of any major volumetric additions led the E&P sector to under-perform the benchmark index by 28 per cent during 1HFY15.  Going forward, experts expect 2HFY15 earnings to remain under pressure on account of i) 44 per cent lower average oil prices ii) 6 per cent-7 per cent reduction in wellhead gas prices and iii) depressed gas production.

However, the absence of one time write-offs in POL and PPL will provide some respite thus limiting the earnings decline in 3QFY15 to 7 per cent-8 per cent QoQ. In the near term, they believe the direction of oil prices will continue to determine the price performance of E&P stocks. Long term case of Pakistan E&Ps remain compelling on account of i) aggressive exploration drilling in largely untapped sedimentary area, ii) strong volumetric addition (3 year oil CAGR of 10 per cent) on increasing development drilling.