LAHORE The exploration and development activities continued to remain sluggish on the back of ever-soaring circular debts and security challenges, haunting the rich hydrocarbon basins of KPK and Balochistan. Resultantly, the gas shortage has been intensifying in the country with every passing day. As per Pakistan Petroleum Information Services (PPIS) latest drilling update, sector has drilled 7 E&D wells achieving 9 percent of the full year target of 76 wells. In the same period last year, the sector accomplished 13 percent target by drilling 10 wells versus target of 80 wells. Experts said that due to slow drilling activities the gas crisis does not seem to come to an end in the near future. Therefore, they believe until gas shortages are eliminated, the government should allocate gas in the light of economic returns generated by them. Moreover, subsidy should be eliminated from all sectors so as to pave way for a level playing field and the company or sectors that are efficient should stay. They said that fertilizer sector has been the blue eyed industry in government view and has always received gas at subsidized rates. Under the IMF Program, the government has been asked several times to abolish the gas subsidy enjoyed by fertilizer sector, however, the recommendations have not been fulfilled. As per the governments gas allocation policy, power plants are to get gas supply after meeting requirements of domestic, commercial, fertilizer and industrial sectors. It has been noted that the production cost of electricity through gas is one third the cost of producing electricity through furnace oil. Historically, power sector has been the major consumer of gas in the country. Going back, we have seen the power sector consuming 43pc of the total gas production of the country in FY05 which has since declined to 28 percent in FY10. Consequently, the reliance on power production through furnace oil has resulted in mounting pressure on the government in form of higher subsidies resulting in swelling of the inter corporate debt. According to energy experts, During three months of the FY12, only 3 exploratory wells has been drilled as against 4 wells in the comparable period last year, while 4 development well has been spudded versus 6 last year. They said that amongst the listed companies, Pakistan Oilfields (POL) has initiate its 1st exploratory well of the year while Oil and Gas Development (OGDC) and Pakistan Petroleum (PPL) has yet to drill for new hydrocarbon reserve this year. Despite muted E&D activity, we maintain 'Over-weight stance on the sector on account of sectors attractive valuation and ability to yield the maximum from existing reservoirs. We recommend 'Buy on PPL and POL, which are trading at FY12 PE multiple of 6.9x and 5.9x, respectively. Further bifurcation of the numbers reveals that E&D activity continues to be tilted towards development activities, with 4 development well (full year target 45 well) and 3 exploratory well (target 31 well). Major reasons behind the muted E&D activity continue to remain the unending circular debt and high risk environment in KPK and Balochistan, says Nauman Khan, an energy expert in his note. He pointed out that noteworthy is the conviction of operator (MOL) in countrys one of the most promising, hydrocarbon basin -Tal block. In addition to development plan of Manzalai, the operator has initiated appraisal well in its latest discovery Makori-east. Experts said that amongst the last year wells, Chak Naurang South, supped by OGDC, is in production testing phase and we anticipate the news of 1st discovery this year. However, the progress on the highly anticipate, Zin Block, continue to progress on slow pace as the operator (OGDC) encountered with hard and difficult formation and it is expected the news flow from the field by mid-to-end December, 2011.