Gas: Mari Gas Company Limited - Analysis of Financial Statements Financial Year 2004 - Financial Year 2009
OVERVIEW (December 18 2009): Mari Gas Company Limited (MGCL) is a Pakistani E&P company currently operating in the second largest gas fields of the country located at Dharki, District Sukkur. The company is the third largest in the industry, holding 12.3% of the total oil and gas reserves of the country, preceded by OGDC and PPL.
MGCL has the highest reserves' life (28.8 years) in the industry. During FY05, MGCL discovered gas in the Ziarat Block of Balochistan. The company plans to establish early production facilities on a fast-track basis after acquisition of 2D seismic data, completion of Well No 1 and drilling of two appraisal wells. Ziarat Block is a joint venture between MGCL with 60% working interest as operator and MND Exploration and Production Company Limited of the Czech Republic (40% working interest).
Besides this, the company also has exploration licences at Hanna, Harnai and Sujawal as operator with 100% working interest. In addition, the government on 19th July 2007, has granted two petroleum exploration licences to the company along with OGDCL. MGCL entered into Zarghun South Gas Sales and Purchase Agreement with the SSGC during August 2006.
MGCL, with 35% interest, is the operator in the Bolan block in which the Zarghun Gas Field is located. According to the agreement, the Bolan venture will supply 20-22 MMSCFD of pipeline quality gas to SSGC. The gas reserves are expected to last in 15 years and the field development project is in progress. Mari Gas Company Limited has made a significant new gas discovery in Koonj Well No 1A in Sukkur exploration block.
The Sukkur joint venture comprises MGCL - Operation with 50 percent interest share, Petroleum Exploration Limited (PEL) 35 percent, a Pakistani exploration and production company, and International Sovereign Energy Corp - 15 percent, a Canadian exploration and production company.
The well was spud-in on April 22, 2008 and drilled to a depth of 1475 metres in Pab Sandstone of Cretaceous age. As a result, the Koonj Well No 1A discovery was made in the Sui Main Limestone Formation, which tested minimum gas flow rate of 14.28MMSCF/day. The flow rates are expected to increase significantly with acidization treatment, which is planned to be completed well after completion.
The company has also conducted extensive exploration activities in the block area. There exist two other prospects within Sukkur Block area, which will be drilled shortly. The construction of wellhead facilities and laying of pipelines are almost completed and the Foundation Power Co Dharki Ltd will start the commissioning period for their plant from March 2009.
Similarly, the drilling of three deep wells in Mari D&P Lease is in progress. MGCL being one of the major gas producers of the country has also made three new gas discoveries viz. (i) Mari - Sui Main Limestone, (ii) Mari - Pirkoh Limestone Formation and (iii) Ziarat Gas Field. It is a public listed company and listed on all the three stock exchanges of the country.
Gross sales for the period under review, increased to Rs 26,532 million from Rs 21,566 million in 2008-09 (23.03% increase) due to increase in selling price from Rs 125.81/MSCF to Rs 156.33MSCF. After witnessing impressive growth trends in net sales for the past few years sales slowed down and registered a decline of 13% to stand at Rs 578.92 million for FY09. Although sales increased in FY09, however there was a sharp rise in the gas development surcharge of about 47% and sales tax about 30%. This negatively impacted the net sales revenue and chewed away considerable profit margins. Consequently, profit after taxation for the period FY09 fell at a rate of approximately 15 percent and stood at Rs 215.19 million.
The guaranteed return to the shareholders of the company has been increased from 22.5% per annum to 30% per annum with effect from July 01, 2001. The shareholders are also entitled to further increase in return on incremental gas production from the present level to 425-MMSCFD (at the rate of 1% for every 20-MMSCFD of gas or equivalent oil produced, prorated for part thereof on annual basis) subject to maximum of 45% per annum. On the operations side, MARI provided uninterrupted gas supply to its large customers like Fauji Fertiliser Company Limited, Engro Chemicals Pakistan, WAPDA and Sui Southern Gas Co Ltd. The average daily gas production in the six-month period stood at 465-MMSCF as compared to 464-MMSCF in the SPLY.
FINANCIAL ANALYSIS (FY04-08)
MGCL accounts for approximately 8.8% of the total production of oil and gas in the industry and 12.2% of the total gas production. This makes it the third largest producer of gas in the country. Company's net sales growth trend had shown positive trends over the last three years. However, this year the company has suffered a slight setback in terms of profitability. This can be attributed to a number of factors. MGCL's net sales growth showed an impressive 82.13 percent growth in the FY08 but declined slightly by 15 in FY09.
This decline can be attributed to rising operations and other costs as well as rise in duties and taxes, hasn't helped the trend either. Operating expenses have grown by 35%, exploration expenses by 77% and other incomes have declined by 11%. All these factors signal towards tough times but still are not strong enough to erode the solid foundations laid down by years of past profitability. The operating results in the financial statements for the year show profit after tax of Rs 2,152 million as against Rs 2,560 million of the previous year. Lower wellhead price, increase in operating as well as exploration expenses along with increase in finance cost were the major reasons for decrease in profitability.
MGCL was always better in managing its trade debts than the competitors. However this year the DSO stood at 447.7, considerably higher than the previous year's 127.61. This is signaling towards a relaxed policy with respect to trade debtors.
The company's liquidity management, as reflected in the current ratio, is below the industry's standards. The liquidity position, measured in terms of the current ratio continued to deteriorate till FY06 and then after a slight increase in FY07 declined to FY06's level. In FY07-08, both current assets and current showed nominal growth rates of 2.1 percent and 4.59 percent respectively. However, this year, the liquidity position remained tough. The current ratio for FY09 stood at 1.10, lower than FY08.
The debt ratios for MGCL have been considerably higher than those of its competitors; this reflects a much greater degree of leverage for the company compared to the average firm in the industry. The TIE seems satisfactory on a standalone basis but in comparison to -the industry, the company's financial strength appears tarnished. This year ie FY09, the long-term loan of the company grew by a staggering 140%. Similarly the current maturity of long-term liability grew by 180%.
The company in FY08 arranged a term finance loan of Rs 500 million from a consortium led by Bank Alfalah and other financial institutions. The company acquired these loans to finance the drilling of three wells in Mari Deep, Goru-B reservoir.
The trend for EPS and book value seems positive for the company. The EPS in FY09 declined considerably and stood at around Rs 7 per share. The price to earnings ratio remained constant for the period and the dividend yield remained constant in FY09. It is interesting to note that despite mild jolts in profitability, its commitment to shareholders do not falter as a result of various guarantees to the shareholders.
After signing and execution of 2nd Supplemental Gas Price Sale Agreement with Fatima Fertiliser Company Limited, 110-MMSCFD gas from Mari field shallow reservoir will be supplied from November 2009. The commissioning and line pack activities are presently in progress. MGCL has completed the construction and installation of wellhead production facilities, pipeline network and central processing/condensate storage. MGCL has made all necessary arrangement for first gas supply to two IPPs. After the successful drilling and completion of Mari Deep 15 as a Goru-B gas producer, the drilling rig was mobilized to Mari Deep 14 location.
Mari Deep 14 was spud on June 27, 2009 and drilling is in progress. Meanwhile Mari Deep 15 is being hooked up with the Mari Deep Production Facilities. The SML/SUL reservoir simulation study is being conducted by M/s Petresin Integrated Technology, Houston, USA and the consultant has submitted the first progress report. The request for seeking participation of reputed firms was published in national and international print media. A total of 35 firms submitted their interest to participate in different options (EPCC, Rental, and BOOM). The process of pre-qualification of firms was completed and ITB/FEED documents were floated to the pre-qualified contractors on June 15, 2009.
In order to produce oil and obtain well data MGCL has undertaken the EWT program for six months. DG Oil has approved the allocation of produced crude oil during EWT to the refinery M/s Bosicor Pakistan Limited in Balochistan. For conducting EWT, construction of surface production facilities with 7 oil storage tanks (500 barrels capacity each) has been successfully completed. EWT operations were started on May 25, 2009. After producing 2285 bbls of crude oil, the well was shut on June 15, 2009 for pressure build-up. Production logging is being planned and would be executed after necessary approvals. All this is expected to improve the situation for the company, whose operation is essential to the growth of the entire region in terms of energy and fuel requirements, which are only expected to go up.