Pakistan Petroleum (PPL) declared 1QFY16 unconsolidated earnings of Rs5.9bn (EPS Rs3.0), down 57pc YoY. This result announcement was below market expectations. The PPL posted net sales of Rs20.6bn, down 33.6pc YoY mainly due to 51pc YoY decline in Arab Light crude (benchmark for local E&P companies) during 1QFY16 quarter.

During the quarter, PPL’s oil volumes declined by 8pc YoY to 13.1k barrels of oil per day (bopd). Oil volumes declined primarily due to a 3-week shutdown at Makori gas field in Aug 2015 and decline in production from Nashpa as they both contribute ~70pc to PPL’s oil sales.

Gas volume slightly went up by 3pc to ~828mmcfd mainly on the back of better production from Sui and Kandkhot fields during 1QFY16. PPL’s other income shrunk considerably by 33.6pc to Rs1.5bn. Experts attribute this decline to lower interest rates.

Significant increase in field expenditures of Rs10.9bn, up 25.8pc YoY also dented PPL’s bottom-line.

On quarterly basis, revenues dipped 14pc QoQ while earnings improved by 36pc QoQ. Improvement in earnings is due to low base of 4QFY15 owing to non-recurring impairment charge and higher exploration costs. PPL plans to spud 15 exploratory, 13 development and 11 work-over wells in FY16 which will further unlock company’s potential going forward, we believe.

At current levels, we maintain our ‘Hold’ stance on the company which trades at FY16E and FY17F PE of 9.7x and 8.2x, respectively. Key risks to our investment thesis include: 1) lower than anticipated international oil prices, 2) significant exploration and development cost and 3) unexpected field shutdown.