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Intermarket Intel - PPL 2QFY18 Result Review: Earnings miss as hefty exploration expenses drag earnings

• PPL has announced 2QFY18 NPAT of PRs9.2bn (EPS: PRs4.68), which is down 30% QoQ but up 65% YoY. This takes 1HFY18 EPS to PRs11.34, down 103% YoY. The 2Q result is well below our expectation of EPS of PRs6.00 for 2Q. PPL also announced interim dividend of PRs4.0/sh.
• The major miss in our estimate was higher exploration expenses. PPL had three exploratory wells drilled during the quarter, which were not deemed as dry wells as per PPIS data. Most of them were in the frontier areas which entail higher than usual costs. We need more clarity on the source of these expenses. Importantly, unlike POL and like OGDC, PPL did not reverse Tal block revenues based on converted gas prices. Other misses include (i) higher than expected tax rate of 35% in 2Q, and (ii) high other income.
• The result was lower sequentially also because of one-off in 1Q results – related to retrospective impact of higher well-head gas prices of converted Tal block fields. Operating expenses were also higher during the period, even when excluding the exploration expenses. This is largely due to well workovers at many mature fields like Adhi and Sui.
• A YoY comparison is again disrupted by one-offs booked in the first quarter.
• We have a Buy stance on the scrip with a TP of PRs236/sh (upside 21%).