Strategic Business Plan
MPCL’s Strategic Business Plan serves as a blueprint of the Company’s activities for the coming years. In view of changing internal and external business environment, the Plan is constantly reviewed and monitored to keep it relevant, strategically active and capable of channeling the corporate resources towards achievement of set corporate objectives.
The Plan is operationalised through successive annual Corporate Objectives and Targets (COTs). The allocation of resources for various activities is guided by the priority given under the Plan.
The planning process adopted for developing the Business Plan is systematic, rational and is based on the guiding principle that “planning process is as important as the plan itself”. All possible efforts are made to keep the process open, iterative and flexible, so that it remains substantially evolving over time. While the overall direction is provided by the Managing Director, the strategies and corporate objectives are evolved at the departmental levels to ensure ownership and commitment of those responsible for implementing the plan.
OVERALL STRATEGIC /MANAGEMENT OBJECTIVES
MPCL continuously reviews and adjusts its strategic focus, considering the price volatility in the global petroleum industry. Accordingly, MPCL has strategically aligned itself internally, externally as well as dynamically, to redefine its business objectives over three time horizons:
1. Core Business/E&P: The focus in this area is on reserves enhancement, increase in production and expansion of exploration acreage.
2. Diversification: Futuristic in nature, this area focuses on diversification of the Company’s core operations, by entering into related businesses such as power generation, carbon capture and E&P allied services.
3. Financial: The targets in this area include increasing return to the shareholders, increasing revenues through production enhancement, cost cutting/budgetary control measures and achieving financial self-sufficiency for Mari Services Division.
4. Internal Processes: The focus in this area is on re-engineering of business processes, use of modern technology and innovative techniques to bring-in efficiency in the Company’s operational activities.
5. Stakeholders: The focus in this area is on meeting the expectations of Company’s stakeholders including shareholders, JV partners, customers, employees and more importantly the local communities in areas of the Company’s operations.
The objectives and targets in each focus area are also classified into short term (<2 years), medium term (2-7 years) and long term (7-12 years).
MANAGEMENT STRATEGIES TO MEET THE OBJECTIVES
Actual plans and strategies implemented by the Management to achieve the objectives and targets for FY 2016-17 are detailed in Risks and Opportunities Report. For effective monitoring, following measures are adopted by the Management:
- To ensure achievement of corporate goals within the stipulated time period, a Management Control System (MCS) has been instituted for close monitoring and reporting of the progress and for mid-course corrections in case of slippages from the planned course.
- Monthly review meetings of the senior management are held to make adjustments or alterations in course of actions, to achieve the targets within specified time.
- Besides monitoring corporate performance under each COT, a set of Key Performance Indicators (KPIs) are calculated bi-annually, to monitor and compare the overall performance of the Company.
SIGNIFICANT CHANGES IN OBJECTIVES AND STRATEGIES FROM THE PREVIOUS YEAR
There has been no significant change in the Company’s objectives and targets in each focus area from those in the previous year. However, actual measureable targets are revised each year taking into consideration different internal and external factors.
RELATIONSHIP BETWEEN THE COMPANY’S RESULTS AND MANAGEMENT’S OBJECTIVES
The actual financial and operational results during FY 2016-17 are directly linked with the Management’s objectives for the year. The actions defined in Business Plan 2016-17 have resulted in corporate efficiency, prudent investment choices and stricter financial discipline, leading to improved growth in the Company’s core business and creation of strong fundamentals for robust financial performance in a globally challenging business environment.
Business Overview & Key Performance Indicators
MACRO LEVEL OVERVIEW
The global oil and gas industry has gone through a tectonic shift during the last three years. Global oil price showed some recovery in 2016-17, after plunging to the lows of US$ 25/ bbl in January 2016. During the last year, the global oil prices remained in the range of US$ 45-55, despite persistent efforts by the OPEC countries to stabilise the price at a higher level through production cuts. OPEC’s efforts were undermined by increased production from shale producers, who continued increasing their rig count. Although oil price has a history of volatility, but the magnitude of the current turmoil was severe enough to shake up the global petroleum industry. It has initiated a wave of cost reduction among the upstream businesses and the industry adopted portfolio rationalization by focusing on high potential areas around the globe.
The overall performance of the E&P sector remained sluggish in Pakistan over the year. Domestic oil and condensate production which touched 100,000 bpd mark in first quarter of 2014, was at 82,806 bpd for the month of June 2017. Although, there have been small scale oil and gas discoveries, there has been no significant discovery to arrest the downward trend. Similarly, the forecast trajectory of natural gas volumes, although more than 6 times larger than oil, is not optimistic in the short term.
The Country’s gas production peaked at 4.3 BCF per day (654 KBOE per day) in 2012 and has since been in a declining phase, falling to around 4.0 BCF per day by the end of 2014 and remains stagnated at that level as of today. The remaining recoverable gas reserves have also been sliding since peaking at 32.8 TCF in 2005. As of June 30, 2015, the remaining recoverable gas reserves were 20.6 TCF. The downward trajectory of the Country’s recoverable gas reserves amid declining production volumes from maturing fields, projects a weaker outlook for indigenous gas production.
Despite all these challenges, MPCL maintained a well-paced growth and outperformed its competition in key performance indices, due to its strategic decision making and timely completion of projects. The Company’s Strategic Business Planning Process, which was initiated in 2015 and matured through time has been the underpinning factor of its sustained growth in challenging external business environments.
NATURE OF BUSINESS
MPCL is an integrated exploration and production company in upstream sector with exploration and production assets in all four provinces of Pakistan. In addition, MPCL also owns and operates a 3D seismic data acquisition unit, a 2D/3D seismic data processing centre and three land drilling rigs.
PRODUCTS AND SERVICES PORTFOLIO
1. Gas [mostly from Mari, Sujawal and Zarghun]
2. Crude Oil [from Halini, Kalabagh and Ghauri]
3. Condensate [from Sujawal, Mari, Zarghun and Hala (non-operated)]
4. LPG [Hala]
1. 2D/3D seismic data acquisition [Mari Seismic Services Unit]
2. 2D/3D seismic data processing [Mari Seismic Processing Centre)
3. On shore drilling [Mari Drilling Services Unit]
Total equity increased by 51% from Rs. 16.97 billion in FY 2015-16, to Rs. 25.54 billion in FY 2016-17. The equity comprised of issued, subscribed and paid-up capital, undistributed percentage return reserve, Profit & Loss account and other reserves. Fauji Foundation remains the major shareholder of the Company with an equity stake of 40%. Long term financing of the Company increased from Rs. 1.0 billion to Rs. 4.2 billion during the year. Resultantly, the debt to equity ratio increased to 16% from the last year’s 6%.
The financial projections indicate adequacy of the capital structure for foreseeable future.
ANALYSIS OF THE COMPANY’S CURRENT PERFORMANCE VIS-A-VIS TARGETS
The momentum from previous years was carried in FY 2016-17, which was yet another good year of strong financial and operational performance, with all major performance parameters following a positive trajectory.
Core Activities: During FY 2016-17, the Company produced a total of 17,999 MMSCFD incremental volume of gas. TPS Guddu was unable to draw their full gas allocation of 110 MMSCFD (from incremental volume) due to non-installation of compressors at their end. With extensive support from MPCL, TPS Guddu was able to commission their long delayed compressors on May 27, 2017. Resultantly, average gas supply to TPS Guddu from May 27-June 30, 2017 (34 days) increased to 89 MMSCFD. However, increase in incremental production was less than the target, due to the customer’s inability to draw more.
A record 09 wells were planned for FY 2016-17, out of which 08 wells were drilled. Only 01 non-operated well was deferred to next year, that too, due to land acquisition issues and not on technical grounds. 100% execution of planned work was achieved in operated blocks.
The Company made three new hydrocarbons discoveries in its operated blocks, while one discovery was made in non-operated block. These discoveries resulted in reserves addition of 123 BCF. In addition, the Company also drilled two appraisal and one development well. The upside potential of appraisal wells is under evaluation and it is expected that these wells will add a further 54 BCF to the reserves. Hence, total expected reserves addition during FY 2016-17 was 177 BCF against a target of 170 BCF.
Financial: During the year, Gross Sales reached the highest ever level of Rs. 96.78 billion from 94.99 billion in the last year. Similarly, Net Sales reached unprecedented level of Rs. 28.18 billion from Rs. 21.71 billion in the last year. The impact of increase in Net Sales was reflected in Net Profit, which jumped by 51% to reach a whopping Rs. 9.14 billion compared with Rs. 6.05 billion of the last year. Earnings Per Share also increased from Rs. 54.89 to Rs. 82.87 and after payment of final dividend, total dividend to the shareholders will amount to 52% (Rs. 5.3 per share) for the year. As a result of prudent strategies stemming from cost consciousness, MPCL has emerged as the most cost effective E&P company in the Country with operating expenses at only 7.7% of the gross sales.
Internal Processes: The Company continuously improved its internal business processes and was able to successfully implement Schlumberger’s MERAK PEEP (Petroleum Economic Evaluation Programme) in Business Development Department, to enhance its project economics evaluation capacity. Moreover, 61 Management System Procedures (MSPs) pertaining to different departments were revised and updated. The Company was also able to successfully implement Phase I & II of Corporate E&P Data Management System.
Stakeholders: The Company also managed to bring down Total Recordable Case Frequency (TRCF), to 0.13 against the target of 0.50. It was the lowest-ever TRCF in the history of the Company.
ANALYSIS OF THE PROSPECTS OF THE COMPANY
The prospects of the Company are very bright. The mainstay of the Company’s strategy to enhance revenues in depressed oil price regime, is its incremental production project. Revenue from incremental production is expected to jump up during the current year as TPS Guddu is expected to start drawing closer to its full allocation of 110 MMSCFD, after commissioning and testing of compressors at their end. ATA adjustment will also help the Company earn the revenue, which was previously lost due to the customer’s inability to draw gas during plants’ shut down.
The Company’s exploration efforts are now focused on enhancing its reserves base, through reserve-led growth strategy. The exploration budget has been enhanced to US$ 249 million for 2017-18. The drilling activity has been beefed-up and rate of drilling of wells per year, has leapt up to 8-9 wells per year compared with 2-3 wells per year in the past. In the long run, the Company is set to benefit from its reinvigorated exploration and drilling activities. More drilling will result in more discoveries which, on one hand will enhance the Company’s reserve replenishment ratio to ensure its long term viability and on the other hand, will allow it to produce more and thereby, earn more revenues.
In the long run, setting up a gas fired combined cycle power generation unit, based on low BTU gas from Mari Lower Goru-B reservoir and its successful operations, will provide the much needed synergy to MPCL’s upstream business. The Company will not only generate additional revenues from the incremental production from Goru-B reservoir, it will also earn return on its investment in power plant at an expected rate of 15-20%.
FORWARD LOOKING STATEMENTS
Analysis of prior period forward looking disclosures
In the last year’s Annual Report, it was stated that the Company will enhance its incremental production from around 60 MMSCD to around 105-110 MMSCFD, which will positively impact the Company’s financial performance. As stated above, increase in incremental production was less than the target, due to the customer’s inability to draw more. Despite that, the Company produced a total of 17,999 MMSCFD incremental volume of gas during the year. Sales revenue (net of Govt. levies) from incremental production was Rs. 5.5 billion (at normal price revenue would have been only Rs. 1.26 million). Revenue generated from incremental volume was pivotal in enhancing the net profit of the Company by 51%.
Forward Looking Statement
The Company is cognisant of the volatility and low oil price projected for the short to medium term period. Accordingly, the Company has restrategised its business plan for pursuing an aggressive exploration programme in its existing asset portfolio to discover, develop and bring on stream new production sources. This will help the Company to not only maintain its revenue and return levels but also, achieve target growth and expansion of the Company’s footprint as a major Pakistani E&P Company. Accordingly, with the Company’s additional production volumes targeted to come on stream next year, it would consolidate its position as the 2nd largest gas producer of the Country.
The Company is also in an advance stage of acquiring new exploration acreages, as well as additional working interests in different blocks. Other high reward exploration acreages, both locally and internationally, are also being evaluated to expand the existing exploration portfolio, to pursue aggressive exploration and drilling for arresting depletion trend and consequently sustaining production revenues and returns in the long-term.
Key Performance Indicators
1. Finding and Development Cost per BOE of New Reserves Added
2. Reserves Replacement Ratio (%)
3. Exploration Success Rate
4. Drilling Cost per Metre
5. Production Cost per BOE Produced
6. Production Growth (%)
7. EBITDA per BOE Production
8. EBITDA per employee
9. Petro-Technical Professionals per MMBOE Production
10. Reserve Growth Rate (%)
11. Reserve to Production Rate