POL: Strong earnings, mixed production

By Pakistan Oilfields Limited (PSX: POL) started FY27 on a strong note, reporting a 51 percent year-on-year increase in profitability during 1QFY27. The improvement was supported by higher oil prices, stronger gas production, lower exploration expenses and increased other income. However, the performance was not without its weaknesses, as oil production declined and operating costs continued to rise. POL reported a net profit of Rs8.19 billion in 1QFY27, compared with Rs5.43 billion in the same period last year. Net sales increased by nearly 26 percent year-on-year to Rs16.5 billion in 1QFY27. The growth was largely price-driven, with average Arab Light crude prices rising by around 26 percent year-on-year to approximately $90 per barrel. Higher wellhead gas prices following periodic revisions also supported revenues. On the production side, the picture was mixed. POL's average daily crude oil production declined by around 8 percent year-on-year, mainly due to lower output. Gas production per day on average, however, increased by approximately 28 percent, supported by improved output from joint venture fields, and additional production from newer developments. This helped offset some of the weakness in oil volumes. The increase in revenue did not translate into a similar improvement in gross profitability in 1QFY27. Operating costs increased by around 30 percent, while royalty and additional wellhead charges rose by nearly 29 percent year-on-year. As a result, gross profit increased by 24 percent, while the gross margin slipped slightly from 64.9 percent to 64.1 percent. A major contributor to the bottomline improvement was the sharp reduction in exploration expenses. These declined by 83 percent year-on-year to Rs193 million from Rs1.13 billion in 1QFY26, reflecting relatively subdued exploration activity and the absence of dry-well costs during the quarter. While this provided significant earnings relief, lower exploration spending is not necessarily a positive development for longer-term production growth. Other income also provided substantial support, increasing by 58 percent year-on-year in 1QFY27, primarily reflecting higher income from investments. Meanwhile, finance costs declined by 59 percent. These factors helped lift profit before tax by 49 percent. Moving forward, POL's earnings will continue to depend on international oil prices, wellhead gas pricing, and its ability to sustain production from existing fields. The recovery in gas volumes is encouraging, but declining oil output and rising operating costs remain concerns. Ongoing drilling and development activity could provide some production support. However, POL's reliance on a relatively concentrated portfolio of producing fields, highlights the importance of exploration and new discoveries.