Foundation Research
Equities
Mari Gas Company Ltd
PAKISTAN
30 October 2015
MARI PA
Outperform
Stock price as of 29 Oct
Jun 16 target
Upside/dow nside
Valuation
Rs
Rs
%
Rs
425.5
697.0
63.8
697.0
- Reserve based DCF
Oil and gas exploration
Market cap
30-day avg turnover
Market cap
Shares on issue
Rs bn
US$m
US$m
m
47
0.7
45
110
Investment fundamentals
Year end 30 Jun
2015
2016E
To tal revenue mn
EB IT
mn
EB IT Gro wth
%
Recurring pro fitm n
Repo rted pro fitmn
19,376
8,266
(29.4)
5,674
5,674
19,943
8,110
(1.9)
5,256
5,256
28,197
13,637
68.2
8,217
8,217
40,328
20,586
51.0
12,603
12,603
EP S rep
Rs
EP S rep growth %
EP S rec
Rs
EP S rec growth %
51.25
43.3
51.25
43.3
47.67
(7.0)
47.67
(7.0)
74.52
56.3
74.52
56.3
114.30
53.4
114.30
53.4
P E rep
P E rec
2017E
2018E
x
x
8.3
8.3
8.9
8.9
5.7
5.7
3.7
3.7
To tal DP S
Rs
To tal div yield %
5.52
1.30
5.03
1.18
5.27
1.24
5.51
1.29
8.6
49.4
3.1
-21.37
4.1
7.6
32.2
3.0
52.38
2.9
10.4
34.2
2.0
37.11
2.0
18.4
34.9
1.4
20.37
1.3
ROA
ROE
EV/EB ITDA
Net debt/equity
P rice/bo ok
%
%
x
%
x
MARI PA rel KSE100 performance
2.0
MARI
KSE
Event
 Where cap on the dividend has created investors’ discomfort for Mari Petroleum
(Mari), we term this as an opportunity for the company to reduce its concentration
risk. Retained cash flows would be optimally used to enhance exploration acreage
and thus, improve company’s long term growth prospectus, in our view.
Moreover, sequential reduction in discount on Mari field wellhead gas prices would
significantly dilute the impact of lower oil prices on company’s earnings.
 Though the stock does not form part of our regular E&P space, we have liking
for this stock. The company would deliver 3-year earnings CAGR of 32% driven by
(1) reduced Mari field wellhead price discount, (2) improved hydrocarbon
production and (3) oil prices moving to our long term price assumption of
US$74/bbl. The stock is currently trading at FY16/17 PE of 8.9/5.7x and implied oil
price of US$37bbl.
Impact
 Improved dynamics ignored behind oil price slump and dividend cap: To
recall, the previous cost plus wellhead gas pricing formula (dated December 22,
1985) was replaced by crude oil price linked formula which provides a discounted
wellhead gas price to be gradually achieved in 5 years from July 01, 2014.
However, the revised formula retains the cap on the dividend distribution (30%
minimum return to investors) for the next 10 years. Where improved pricing
mechanism was well received, the cap on the dividend has roped in the
excitement for the stock, in our view.
 Oil price slump has also compounded fears, we believe the investors have
completely ignored the improving earning profile and recent positive newsflows (2
discoveries in last 3mths). Our back of the paper calculation suggests a
cumulative earning impact of ~Rs14/sh on an annualized basis.
 Will increase its focus on expanding exploration: Rather than a hindrance,
we see the cap on dividends as a potential catalyst to increase its exploration
acreage and thus, allowing it to reduce its dependency on the Mari fields (currently
contributing ~80% to company’s topline). We see the company to dedicate ~50%
of its topline for the new reservoirs during the cap period. The company is
currently drilling 1 exploration and 2 development wells.
 Earnings growth still impressive with oil at US$50/bbl: We expect the
1.0
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
0.0
Upcoming star for the E&P space
company to deliver an impressive 32% 3-year earnings CAGR based on (1) 4%
volumetric growth (29%/4% oil/gas), (2) reduced wellhead gas discount of Mari
fields, and (3) recovery in the international oil prices to our long term oil price
assumption of US$75/bbl. Factoring in current oil prices, our TP is lowered to
Rs534/sh with 3years earnings growth of 22%.
Earnings Revision
So urce: B loo mberg, Fo undatio n Research, October 2015
(all figures in Rs unless noted)
Price Catalyst
Analyst
Nauman Khan
92 21 35612290- 94
Ext 338
No change
nauman.khan@fs.c om.pk
 Jun-16 Price target: Rs697.0/sh, based on Reserve base DCF methodology.
 Catalyst: New hydrocarbon discoveries and recovery in the international oil prices.
Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such
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Mari Gas Company Limited
October 30, 2015
Action and Recommendation
 Though we do not formally cover this stock, we believe the stock is worth a closer look based on its enhanced earnings
profile. We see lower dividend yield a temporary pediment that is to be well compensated by sustained growth in
company’s hydrocarbon production. We advise accumulation at current level with stock trading at FY16/17 PE of 8.9x/5.7x
respectively.
2
Foundation Securities (Pvt) Limited
Mari Gas Company Limited
October 30, 2015
About The Company
Mari Gas Company Limited is one of the largest gas production company, having approximately 16.2% of gas
reserves of Pakistan. MGCL was incorporated on December 04, 1984 as an unlisted public limited company with its
IPO taking place in 1994. Fauji Foundation, Oil & Gas Development Company Limited and Government of Pakistan
are its major shareholders with 40%, 20% and 18.2% shareholding respectively. The Company is the owner of the
production lease and operator of Pakistan’s second largest natural gas reservoir, Mari Gas Field in Sindh, which has
been earmarked for provision of natural gas to the fertilizer and power sectors. Recoverable reserves of Mari field
including Goru-B reservoir stands at 8.2TCF out of which cumulative production has been 3.82TCF till June 2010.
The distributable dividend of MGCL is determined by the GPA made with GoP that guarantees a minimum return of
30% on its shareholder’s fund, plus an additional return of 1% for every additional 20MMCFD over and above
425MMCFD of gas in any period. The company is an associate of FSL.
Important disclosures:
Target price risk disclosures: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors
which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially
affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in
interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative
instruments, to manage certain of these exposures.
Analyst certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers
and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this
research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Foundation
Securities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
Recommendations definitions
If
Expected return >+10%
Expected return from -10% to +10%
Expected return <-10%
3
Outperform.
Neutral.
Underperform.
Foundation Securities (Pvt) Limited