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Mari Petroleum Company Limited – BR Research

Mari Petroleum Company Limited (PSX: MARI) is the second largest producer of natural gas by exploiting the largest gas reservoir in the country at Mari Gas Field, Daharki, Sindh. MPCL is an integrated oil and gas exploration and production company and an exploration success rate of approximately 70%, which is well above industry averages of approximately 33% nationally and 14% internationally, according to the company’s annual accounts.

Mari’s major customers include fertilizer manufacturers, power generation companies, gas distribution companies; and refineries. In addition to Mari Gas Field, it holds development and production leases as well as operating exploration blocks, and is also a non-operating joint venture partner with leading domestic and international E&P companies, D&P leases and exploration blocks.

Ownership model for Mari

The Pakistani government owns more than 18% of Mari Petroleum, with divestment plans long on the cards that were recently scrapped. Apart from that, Mari has two key shareholders: the Fauji Foundation with a 40% stake; and OGDCL with a 20 percent share.

Previous performances

Mari Petroleum Company Limited has seen an increase in crude oil production and relatively stable gas production streams over the past 6-7 years as the entire industry faced a slump. Its revenues and profits also followed an upward trajectory. In FY16, MARI’s revenue increased 12% year-on-year due to the sale of incremental gas at an incentive price provided at the Guddu power plant, as well as the overall increase in production from hydrocarbons. At the same time, exploration and prospecting expenditures doubled year on year.

The good fortunes continued in fiscal 2017, with revenue continuing to grow by 30% and profits increasing by more than 50% year-over-year. Operating expenses continued to fall as they have since fiscal 2012, while its production strategy has been to increase oil and gas flows to make the most of the incentive offered in the 2012 Petroleum Policy on improving gas production from existing reservoirs by at least 10 percent. In fiscal 2017, Mari Petroleum recorded additional production of 18 billion cubic feet.

FY18 was a good year for production; the company experienced the highest production rates ever. At the same time, profits were also record high at that time. During the year, total production increased by 5% year-on-year in FY18, alongside additional production as expected. The company’s gross sales exceeded 100 billion rupees for the first time in the company’s history. Its net profit jumped 68% year-on-year, as other income also supported the bottom line.

Crude oil prices were high in FY19 which, along with currency depreciation, boosted earnings for E&P companies. MARI also announced a strong increase in its profits for the 2019 financial year – 58.2% year-on-year due to the increase in net sales and financial income, and somewhat contained operating expenses. The 17.5% year-on-year growth in gross sales was driven by better gas volumes sold as well as higher wellhead/consumer gas prices. And higher foreign exchange gains further improved the bottom line. Earnings growth, however, was halted by higher royalty expenses and exploration and prospecting expenses, which were higher due to increased drilling activity.

Fiscal 2020 was a challenging year as lower oil and gas prices and the pandemic impacted exploration and production companies. Mari Petroleum’s gross sales were up about 8%, while the company’s net sales were up nearly 21%, year-over-year. The company’s revenue growth was solely due to the approximately 20% increase in gas wellhead prices and currency depreciation. Oil and gas production fell 8% and 2% respectively year-on-year during the year. Its net income increased by more than 24% year-on-year. Where revenue growth helped boost Mari Petroleum’s earnings, higher exploration and production spending during the year contained growth. The company experienced a 2.5x increase in exploration and prospecting expenditures.

FY21 was better than FY20, which was also reflected in the performance of the E&P sector. Mari Petroleum Company Limited reported a 4% increase in profits for FY21. While 1HFY21 saw earnings growth, the company’s earnings fell slightly in 3QFY21 due to lower oil prices which had a negative impact on gas wellhead prices. This was followed by another positive quarter despite the continued decline in oil prices.

Despite price weakness, Mari’s revenue growth was supported by improved hydrocarbon production flows in FY21. Mari’s overall oil production in FY21 increased 17% year-on-year, while natural gas production increased 8% year-on-year. E&P’s earnings growth was fueled by lower exploration and production spending.

However, the decline in other income and the increase in financial charges did the opposite.

MARI in 1HFY22 and beyond

The fate of E&P revenues largely rests not only on rising international crude oil prices and currency depreciation, but also on rising domestic oil and gas production. With reserves depleted and discoveries dwindling, the E&P sector faces a challenge on the production front, which could be met by reinvigorating investor interest and technology transfer in the domestic upstream sector by reviewing and revising policies.

After a steady start to FY22 in the first quarter, overall gross sales growth for 1HFY22 was 11.6% year-over-year. 1HFY22 net sales increased 8% year-on-year as overall oil production increased 35%, while gas production increased approximately 2-3% year-on-year. Revenue also benefited from higher oil prices during the period. However, the price of gas at the Mari wellhead fell. An improvement in Mari production volumes was seen in FY21 and appears to have continued in FY22.

On the expense side, higher royalty expense was offset by lower operating expenses and exploration and prospecting expenses. The decline in exploration costs is due to the lower cost of dry and abandoned wells during 1HFY22 compared to the corresponding period. Higher revenue and lower exploration spending benefit the bottom line of an E&P company. And in Mari’s case, it was most visible in earnings growth, which was otherwise bogged down by a large share of associate losses. Also, higher taxation left Mari’s bottom line flat in 1HFY22.