Orient Petroleum Inc. (Pakistan Branch)

CREDIT RATING REPORT | Dec-24

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
20-Dec-24 A- A2 Stable Maintain -
21-Dec-23 A- A2 Stable Maintain -
21-Dec-22 A- A2 Stable Maintain -
22-Dec-21 A- A2 Stable Maintain -
22-Dec-20 A- A2 Stable Initial -
About the Entity

Orient Petroleum Inc. (Pakistan Branch) ('Orient Petroleum') is incorporated in Cayman Islands and is operating in Pakistan through its branch office. Orient Petroleum is engaged in the exploration, development, and production of oil and natural gas reserves.
Ownership of Orient Petroleum lies with with Zaver Petroleum International Inc. (~55%) and First Global Investment Holdings Ltd. (~45%). The Board comprises four members with Mr. Hasan Ali Hashwani chairing the Board. Mr. Kamran Ahmed heads as the CEO. He is assisted by a team of seasoned professionals.

Rating Rationale

Orient Petroleum Inc. (Pakistan Branch) ('Orient Petroleum') drives strength from a considerably strong backing from its sponsors holding interests across oil and gas exploration, through Orient Petroleum Pty Limited, Zaver Petroleum Corporation, & in LPG distribution network, through OPI Gas (Pvt.) Limited, and in the hospitality segment, through Hashwani Hotels Limited which owns and operates a chain of Marriott Hotels across Pakistan. Orient Petroleum, engaged in the exploration, development, and production of oil and natural gas reserves, currently holds a working interest in six production leases and seven exploration licenses.
During 6MCY24, Orient Petroleum has achieved growth of ~11.7% in the topline, mainly attributable to stable oil prices, and production. On the operational front, Orient Petroleum's reports identified crude oil, gas & LPG sales of ~121,241bbl, ~1,388mmscf, and ~4,530MT, respectively during 6MCY24. Overall, the business margins posted substantial growth. Orient Petroleum drives strength from risk-adjusted recoverable reserves both from its production, development, and exploration stage assets. On the financial risk front, Orient Petroleum is adequately leveraged with stable coverages. The working capital remains strong. As Orient Petroleum plans to expand its wells in development blocks, going forward, this may enhance Orient Petroleum's working capital requirement. A substantially strong financial discipline along with a better governance framework remains pivotal to the ratings.

Key Rating Drivers

The ratings are dependent on the sustained relative positioning of Orient Petroleum in the oil and gas exploration segment. Volatility in the topline and profitability remains a key concern. The ratings would take positive benefit from the increase in volumes handled by Orient Petroleum. Strict financial discipline along with the Sponsor's support are imperative to ratings while improving the coverage ratios.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

Orient Petroleum Inc. (Pakistan Branch)

rating analysis

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Profile
Legal Structure

Orient Petroleum Inc. (Pakistan Branch) ('Orient Petroleum') is incorporated in the Cayman Islands and operates in Pakistan through its branch office in Islamabad.

Background

Occidental Pakistan Inc., a USA-based organization, has worked in Pakistan's oil and gas exploration segment since 1979 and made Pakistan’s largest oil discovery from its Dhurnal field in Potwar Basin, Punjab. In 1995, the company was acquired through Zaver Petroleum, and was renamed as Orient Petroleum Inc. Besides Orient Petroleum, other group companies include Orient Petroleum Pty Ltd. (OPPL), Zaver Petroleum Corporation (Pvt.) Ltd (ZPCL), OPI Gas (Private) Limited, and Hashwani Hotels Limited.

Operations

Orient Petroleum is engaged in the exploration, development, production, and sale of crude oil, natural gas, and liquefied petroleum gas (LPG). Orient Petroleum is producing from six blocks and production is assigned to gas companies and refineries being the nominee of Govt. of Pakistan. In addition, the Company holds working interests in seven exploration licenses located all across Pakistan.

Ownership
Ownership Structure

The ownership of Orient Petroleum lies with Zaver Petroleum International Inc. (~55%) and First Global Investment Holdings Ltd. (~45%).

Stability

Orient Petroleum's ownership has remained stable and Hasan Ali Hashwani is the ultimate beneficial owner.

Business Acumen

The Group, with over 40 years of experience in oil & gas exploration and production, demonstrates strong business acumen. The Group also operates a chain of Marriott hotels in Pakistan.

Financial Strength

The Group holds considerable financial footing to support Orient Petroleum in destress, if needs be.

Governance
Board Structure

Overall control of Orient Petroleum vests with a four-member Board (BoD), comprising three Executive Directors and one Non-Executive Director.

Members’ Profile

Mr. Hasan Ali Hashwani currently chairs the Board and brings an overall experience of more than two decades. He has been associated with Orient Petroleum since 1998. Mr. Kamran Ahmed, an Executive Director, has more than four decades of experience in investment banking and the oil & gas industry. Other board members include Mr. Ludovic De Labrusse and Mr. Alex Bloch Jorgensen each having over 20 years of international experience.

Board Effectiveness

The Board plays an active role in supervising and overseeing management to make informed decisions, thereby contributing to achieving Orient Petroleum's objectives as one of the active players in Pakistan’s E&P sector. The Board meetings are convened as per the requirement.

Financial Transparency

The External Auditors of Orient Petroleum, M/s Grant Thornton Anjum Rahman, have expressed an unqualified opinion on financial statements for CY 2023. The firm is QCR-rated and listed on SBPs panel.

Management
Organizational Structure

Orient Petroleum operates through 13 departments - Reservoir Engineering, Exploration, Surface Operations, Drilling, Petroleum Engineering, HSE, Commercial, Finance, Admin, MIS, HR, Internal Audit, and Procurement & Supply Chain. All departmental heads report to the CEO, who then reports to the Board.

Management Team

Mr. Kamran Ahmed, the CEO, has more than four decades of experience in investment banking and the oil & gas industry. He has been a part of Shell Pakistan and Islamic Investment Bank Ltd and an integral part of the Group for more than two decades. The management team comprises seasoned professionals, each bringing a range of expertise in their respective fields.

Effectiveness

The management at Orient Petroleum plays a vital role in empowering the operational team to achieve targeted outcomes and ensuring a structured decision-making process. However, there are no committees established at the management level.

MIS

Oracle ERP has been implemented at Orient Petroleum, which provides real-time end-to-end integrated solutions for all operations including financial, purchasing, inventory, HRMS, allocation, payroll, and approval management systems. Orient Petroleum has a dedicated team of professionals for in-house development, customization, and maintenance of Oracle applications for Oil & Gas specific requirements.

Control Environment

Orient Petroleum has placed an effective internal audit department forming SOPs and ensuring their compliance. The department directly reports to the Board.

Business Risk
Industry Dynamics

Pakistan relies significantly on imports to meet its demand for crude oil with recoverable crude oil reserves estimated at ~72.5mln MT as of Jun-24. During 2MFY25, total crude oil imports in terms of value were recorded at USD~945mln (2MFY24: USD~456mln). Whereas, in volumetric terms crude oil imports stood at ~1.7mln MT (2MFY24: ~0.8mln MT). The crude prices displayed mixed trends due to factors like low demand from China, excess supply, the Israel-Gaza conflict, loose FED monetary policy, etc. However, going forward, prices of crude oil are expected to rise due to ongoing tension between Israel and Iran. Subdued demand in tandem with structural deficiencies, in terms of technology obsolesce and low storage capacities is expected to keep capacity utilization under check. Therefore, utilizing the services of entities providing seismic acquisition services is going to improve the efficiency of oil exploration companies. While improved pricing is reasonably expected to support financial performance, it is subject to crude and POL product price movements in the international market.

Relative Position

At present, there are 14 foreign and 10 local companies operating in Pakistan. Market share is dominated by state-owned Oil and Gas Development Company Limited (OGDCL). The other large-tier companies comprise Pakistan Petroleum Limited, Mari Petroleum Limited, and Pakistan Oil Field etc. Mid-tier companies include MOL Pakistan and Orient Petroleum.

Revenues

Orient Petroleum's revenue mix comprises Gas ~36% followed by Condensate ~35.6%, LPG ~18.7% and Crude oil ~9.7%. During CY23, Orient Petroleum reported an uptick of ~25.56% in revenue due to volumetric growth. During 6MCY24, Orient Petroleum reported an uptick of ~11.6%, where volumes remain the main supporting factor.

Margins

During CY23, the gross margin of Orient Petroleum is stable at ~76% (CY22: ~76.5%). Production expenses are increased by ~37.8%. However, the operating profit margin improved significantly to ~49% during CY23 (CY22: ~39.1%) due to a decline in admin and general expenses. The effect trickled down to the net profit margin which was reported at ~49.8% (CY22: ~ -14.2%). During 6MCY24, Orient Petroleum's gross profit margin was reported at ~78.3% (6MCY23: ~74.5%) due to a decrease in production expenses, whereas operating margin and net margin were reported at ~45.1% (6MCY23: ~39.5%) and ~18.5% (6MCY23: ~40%) respectively. The decline in net profit margin is due to an increase in finance cost by ~62.5%.

Sustainability

The management is expanding its network of wells in current development blocks to further strengthen its operations.

Financial Risk
Working capital

As of CY23, Orient Petroleum's net working capital increased to ~152 days (CY22: ~84 days) due to a significant increase in trade receivable days standing at ~206 days (CY22: ~146 days) as the trade receivables have increased by ~59%. Inventory days remained stable at ~1 day (CY22: ~1 day) whereas trade payable days have decreased to ~56 days (CY22: ~63 days). As of 6MCY24, the net working capital stands at ~142 days (6MCY23: 123 days). Orient Petroleum holds a stable borrowing cushion on its balance sheet.

Coverages

As of CY23, the free cash flow from operations (FCFO) experienced a notable increase, marking a growth of about ~87% primarily because of increased PBT. This uptick in FCFO contributed to an improved interest coverage ratio, reaching ~3.7x in CY23 (CY22: ~2.9x). As of 6MCY24, Orient Petroleum reported an uptick of ~35% in FCFO which resulted in an interest coverage ratio of ~2.2x (6MCY23: ~2.7x), a deterioration attributed to increase in finance cost.

Capitalization

Orient Petroleum's capital structure exhibited fluctuating patterns, with the debt-to-equity ratio at ~49.8% as of CY23 (CY22: ~50.8%). The decrease in the debt-to-equity ratio is primarily attributed to the elimination of short-term borrowings along with an increase in equity. The shareholders' equity reported an uptick of ~36% during CY23 due to an increase in unappropriated profit. As of 6MCY24, Orient Petroleum reported a debt-to-equity ratio of ~56.9%.

 
 

Dec-24

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Orient Petroleum Inc. (Pakistan Branch)

financial summary

(PKR mln)

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Jun-24
6M		 Dec-23
12M		 Dec-22
12M		 Dec-21
12M
C. RATIO ANALYSIS
1. Performance
a. Sales Growth (for the period) 6.1% 25.6% 77.9% 23.1%
b. Gross Profit Margin 78.3% 76.0% 76.5% 74.2%
c. Net Profit Margin 18.5% 49.8% -14.2% 9.4%
d. Cash Conversion Efficiency (FCFO adjusted for Working Capital/Sales) 63.2% 37.5% 64.4% 63.5%
e. Return on Equity [ Net Profit Margin * Asset Turnover * (Total Assets/Shareholders' Equity )] 18.2% 52.4% -12.5% 5.1%
2. Working Capital Management
a. Gross Working Capital (Average Days) 202 208 147 136
b. Net Working Capital (Average Days) 142 152 84 52
c. Current Ratio (Current Assets / Current Liabilities) 1.8 1.5 1.1 1.2
3. Coverages
a. EBITDA / Finance Cost 1.8 2.7 2.9 2.4
b. FCFO / Finance Cost+CMLTB+Excess STB 1.6 1.5 1.4 1.2
c. Debt Payback (Total Borrowings+Excess STB) / (FCFO-Finance Cost) 3.0 1.5 2.2 3.4
4. Capital Structure
a. Total Borrowings / (Total Borrowings+Shareholders' Equity) 56.9% 49.8% 50.8% 36.7%
b. Interest or Markup Payable (Days) 0.0 0.0 0.0 0.0
c. Entity Average Borrowing Rate 32.1% 26.4% 25.2% 19.3%

Dec-24

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Orient Petroleum Inc. (Pakistan Branch)

rating scale

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Dec-24

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Orient Petroleum Inc. (Pakistan Branch)

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
    1. No director, officer, or employee of PACRA communicates the information acquired by him for use for rating purposes to any other person, except where required under law to do so. (Chapter III; 10-(5))
    2. PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during a business relationship with the customer. (Chapter III; 10-7-(d))
    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
    1. PACRA fulfills its obligations in a fair, efficient, transparent, and ethical manner and renders high standards of services in performing its functions and obligations. (Chapter III; 11-A-(a))
    2. PACRA uses due care in the preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verify or validate information received in the rating process or in preparing this Rating Report. (Clause 11-(A)(p))
    3. PACRA prohibits its employees and analysts from soliciting money, gifts, or favors from anyone with whom PACRA conducts business. (Chapter III; 11-A-(q))
    4. PACRA ensures before the commencement of the rating process that an analyst or employee has not had a recent employment or other significant business or personal relationship with the rated entity that may cause or may be perceived as causing a conflict of interest. (Chapter III; 11-A-(r))
    5. PACRA maintains the principle of integrity in seeking rating business. (Chapter III; 11-A-(u))
    6. PACRA promptly investigates in the event of misconduct or a breach of the policies, procedures, and controls, and takes appropriate steps to rectify any weaknesses to prevent any recurrence, along with suitable punitive action against the responsible employee(s). (Chapter III; 11-B-(m))
  4. Independence & Conflict of Interest
    1. PACRA receives compensation from the entity being rated or any third party for the rating services it offers. The receipt of this compensation has no influence on PACRA’s opinions or other analytical processes. In all instances, PACRA is committed to preserving the objectivity, integrity, and independence of its ratings. Our relationship is governed by two distinct mandates: i) rating mandate - signed with the entity being rated or issuer of the debt instrument, and ii) fee mandate - signed with the payer, which can be different from the entity.
    2. PACRA does not provide consultancy/advisory services or other services to any of its customers or their associated companies and associated undertakings that are being rated or have been rated by it during the preceding three years, unless it has an adequate mechanism in place ensuring that the provision of such services does not lead to a conflict of interest situation with its rating activities. (Chapter III; 12-2-(d))
    3. PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA. (Chapter III; 12-2-(f))
    4. PACRA ensures that the rating assigned to an entity or instrument is not affected by the existence of a business relationship between PACRA and the entity or any other party, or the non-existence of such a relationship. (Chapter III; 12-2-(i))
    5. PACRA ensures that the analysts or any of their family members shall not buy, sell, or engage in any transaction in any security which falls in the analyst’s area of primary analytical responsibility. This clause, however, does not apply to investments in securities through collective investment schemes. (Chapter III; 12-2-(l))
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  5. Monitoring and Review
    1. PACRA monitors all the outstanding ratings continuously, and any potential change therein due to any event associated with the issuer, the security arrangement, the industry, etc., is disseminated to the market immediately and in an effective manner after appropriate consultation with the entity/issuer. (Chapter III; 17-(a))
    2. PACRA reviews all the outstanding ratings periodically on an annual basis. Provided that public dissemination of annual review and in an instance of change in rating will be made. (Chapter III; 17-(b))
    3. PACRA initiates an immediate review of the outstanding rating upon becoming aware of any information that may reasonably be expected to result in downgrading of the rating. (Chapter III; 17-(c))
    4. PACRA engages with the issuer and the debt securities trustee to remain updated on all information pertaining to the rating of the entity/instrument. (Chapter III; 17-(d))
  6. Probability of Default
    1. PACRA’s Rating Scale reflects the expectation of credit risk. The highest rating has the lowest relative likelihood of default (i.e., probability). PACRA’s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA’s Transition Study available at our website. (www.pacra.com) However, the actual transition of rating may not follow the pattern observed in the past. (Chapter III; 14-3(f)(vii))
  7. Proprietary Information
    1. All information contained herein is considered proprietary by PACRA. Hence, none of the information in this document can be copied or otherwise reproduced, stored, or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s prior written consent.

Dec-24

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