E&P sector:-OIL AND GAS DEVELOPMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2002 - 2003 Q 2008
OGDCL is the largest company of E&P sector in Pakistan, holding 32% natural gas and 37% of oil reserves. The Government of Pakistan signed an agreement with the then USSR on 4th March 1961 to revive exploration in the country's energy sector.
The agreement entitled Pakistan to 27 million rubles to finance equipment and services of Soviet experts for exploration. Subsequently, the OGDCL was created under an ordinance dated 20th September 1961 with prime responsibility to undertake an organised and systematic exploratory programme and to plan and promote Pakistan's oil and gas prospects.
At initial stages, the financial resources arranged by the GOP as the OGDC lacked the ways and means to raise the capital risk. In July 1989, the company developed as a result of major oil and gas discoveries, the government offloaded the company from budgetary allocations and allowed it to manage its operations with self generated funds. The 1989-90 was the company's first year of self-financing.
OGDCL is the local market leader in terms of reserves, production and acreage. It is listed on all the three stock exchanges of the country and started from December 2006 on London Stock Exchange.
It is a state-owned company, as the GoP holding its majority stakes. However, in the first half of FY07, the government divested 10% shares of the company by listing the company's Global Depository Shares in London Stock Exchange. In January 2007, 0.5% shares were divested again, bringing down the government's holdings to 85.02% of the total paid up share capital.
It is the largest company in Pakistan in terms of exploration area, operating 44 exploration blocks and accounting for 33% of country's exploration acreage. 29 of them are 100% OGDCL owned. The company is following an aggressive growth and exploration strategy to increase its oil and gas production to 136,830bpd and 2,963mmcfd respectively by FY10-11. The company's exploration acreage consists of 40 exploration licences covering an area of 75,905 sqkms, constitutes 37% of the total area granted to all E&P companies in the country. Out of these 40 exploration licences, 16 were acquired during FY06.
OGDCL has 67 oil and gas fields, 41 are company operated and 26 are non-operated. Out of these, 31 are currently in production. Uch and Qadirpur are the two major gas fields of OGDCL, contributing more than 75% of the company's total balance recoverable reserves. The major oil fields are Bobi, Chanda, Dakhni, Dhodak, Pasakhi and Tando Allam, accounting for almost 45% of the company's total balance recoverable reserves. Among non-operated fields, Adhi, Pindori, Miano, Loti, Manzalai and Makori are the major oil and gas fields.
During FY07, the company was market leader in terms of discoveries, being responsible for the majority of discoveries made in the sector during FY07. Ten oil and gas discoveries were made during the period, bringing the success ratio to 1:0.24 in FY07 from 1:0.16 in FY06. The major oil discovery made by OGDCL was in the Nashpa block and that of gas was in the Tando Allah Yar block. Other significant discoveries during FY07 and the last quarter of FY06 include Chanda-2, Kunnar-1 and Mela-1, Nim West-1 etc. once developed these discoveries, it is expected to enhance production by 5,895 barrels of crude oil and 150 barrels of condensate. Various exploration projects are still under implementation. Besides this, a gas and condensate discovery has been made from the exploratory well Thora Deep No 1, and OGDCL holds 100% stake in the field. 100 bpd of condensate and 9.90 mmcfd of gas were discovered from the well. This is the third discovery by the company in district Hyderabad of Sindh. The other two discoveries were, Kunnar well-1A and Dachrapur Well-1.
Currently, the 80% of OGDCL production consists of gas and 18% derived from oil. The remaining 2%, comes from the LPG, sulphur and white oil products. However, because of the better margins available for crude oil, 42.3% of the company's revenues for FY07 were generated from sales of crude oil whereas gas sales contributed 46.8% to the company's total revenue.
During the last ten years, the oil production of OGDCL has grown at a CAGR of 5.2% while gas production grew at a CAGR of 11.58% during the same period. This resulted in an increase in gas contributions to the total volumetric sales of the company from 69% in 1996-97 to 80% in 2005-06. The share of crude oil, on the other hand, registered a decline from 26% to 18%. OGDC's share in country's oil and gas production stood at 54% and 22% respectively for FY07 compared to FY06, when it accounted for 27.2% of total oil and gas production, producing 48% of the total crude oil and 22% of total gas in the country.
RECENT RESULTS OF 3Q'08
During the first nine months of FY08 OGDCL maintained its growth and recorded further improvement in its operating results. During the period of nine months its crude oil and gas production grew by 7.5% and 5.6% respectively from the corresponding period of last year to show an increase of 3035 BPD and 52 mmcfd respectively. Production growth along with continuing high realised prices of crude oil, LPG and other refined petroleum products contributed 18% increase in company's sales revenue resulting into 4.7% increase in profit after tax over the same period in 2006-07. The company's exploratory efforts continued during the period and yielded two gas/condensate discoveries namely Moolan-1 and Pasakhi East-1 during the reported nine months. Also, two more oil and gas/condensate discoveries at Moolan North-1 and Pakhro-1 were made by the company. These newly discovered wells are located in Hyderabad, Sindh and have been tested to produce 1,150 bpd of crude oil, 393 bpd of condensate and 29 mmcfd of gas. Reserves assessment of these fields is in the process of evaluation.
During the nine months of FY08 the sales revenue of the company grew by 18% to Rs 88.512 billion due to combination of increased sales volume of crude oil and gas and higher realised prices of crude oil, LPG, sulphur and naphtha. Sales volume of crude oil and gas increased by 11% and 5.7% respectively, which contributed towards Rs 5.712 billion in sales revenue. Increased net realised prices of crude oil, LPG, naphtha and sulphur contributed Rs 10.236 billion towards the sales revenue. During the period, net realised prices of crude oil and gas averaged at US $64.79/bbl and Rs 139.23/mcf respectively as compared to US $53.10/bbl and Rs 145.34/mcf during the corresponding period last year.
High sales volume contributed towards higher profitability of the company, as profit before tax increased by 18% to Rs 56.702 billion as compared to Rs 47.932 billion during the first nine months of last year. Profit after tax was Rs 36.246 billion as compared to Rs 34.627 billion during the same period last year. Earning per share (EPS) rose to Rs 8.43 compared to Rs 8.05 per share.
The sales revenue grew by 3.6% during FY07, reaching Rs 100.261 billion. This was the result of a combination of higher sales volume of crude oil, gas and LPG and higher realized prices of crude oil, naphtha and LPG. Sales of crude oil and LPG grew at 7.5% and 8.4% respectively. However net sales revenue from gas sales declined slightly during the same period due to unfavourable price change. OGDCL's average oil production improved by 4.6% and stood at 41,503bpd in FY07 (39,659bpd in FY06) whereas gas production improved by a mere 1.1% to 947mmcfd (937mmcfd in FY06).
However, despite the growth in the top line, net profit declined slightly in FY07 by 0.74%. OGDCL was the only company among the three leading companies, which account for 98.8% of total market capitalisation to experience a decline in profits. Consequently, the profitability of the company suffered for FY07, but the company managed to remain above the industry average.
The drop in profitability was largely a result of a 101.2% increase in exploration and prospecting expense, an outcome of the aggressive exploration activities undertaken by OGDCL during FY07. Besides this, operating expenses have also registered an increase of 22.9% in FY07 on account of charges relating to minimum supply of gas, ie, liquidated damages pertaining to Uch gas field and second, on account of provision made in respect of sales revenue of crude oil for prices in excess of US $50/bbl for which discount table is yet to be finalised with the Ministry of Petroleum and Natural Resources. Moreover, additions to property, plant and equipment, capitalisation of new wells, enhanced production and major overhauls led to further additions to the expenses.
Last, the bottom line also suffered a setback as other income fell by 14.9% during the last fiscal year. This decline is attributed to a decline in interest income and dividend income from the company's wholly owned subsidiary.
Sales revenue increased by 31% in FY06. Higher oil and gas prices and a slight increase in production contributed to this change. The net profit increased by 39% during FY06. An 86% increase in other income because of an increase in interest rates on short term investments played its part in raising the profits.
The efficiency of OGDCL in asset management has been declining for the last few years. The company's operating cycle (days) is longer than that of the average industry because of a longer inventory turnover (days) even though OGDCL is more efficient in recovering receivables.
The total assets turnover and sales to equity figures improved during the FY06 but suffered during FY07. These trends indicate a decline in the company's ability to efficiently manage its assets. Thus the company may be able to generate higher profits and improve its profitability as well as financial position by more appropriately managing its assets.
The below average debt ratios of OGDCL suggest a slightly lower level of leverage for the company, compared to the average industry. The company currently has no long term loans on its balance Sheet. Thus there exists no interest element in financial charges. The unwinding of discount on provision for decommissioning cost took up the major chunk of finance costs and was responsible for the plunge in TIE for FY07.
The low gearing ratio of the company suggests that OGDCL does not rely on loans of other debt instruments to finance its accelerating exploration activities. This reflects the financial strength of the company.
OGDCL has a strong base in terms of liquidity management. The current ratio fell sharply during FY05 when trade and other payables increased by more than 200%. The FY07 saw a nominal decline in the current ratio attributable again to an increase in trade and other payables. The declines notwithstanding, the company has fared better than its competitors in all years under consideration
However, the liquidity of the company may decline in future it the management opts for liquidating its short term investments to finance future exploration and drilling activities.
The decline in profitability has resulted in a 0.7% drop in the EPS of OGDCL, from Rs 10.69 in FY06 to Rs 10.61 in FY07. The EPS is the lowest among the leading E&P companies. This year, the decline in EPS was largely due to the heightened exploration and development activities of the company. It is hoped that the EPS will improve in future as the exploration and development activities start bearing fruit in the form of enhanced production.
Despite the decline in earnings, OGDCL has maintained the DPS for FY07 at FY06 level. This is again the lowest compared to its major competitors. The book value has continued to climb during the period, rising on the back of higher assets of the company.
Since the beginning, the stock of OGDCL has been trading in a PE band of 10x-12x. On 15th March 2005, the stock traded at an all time high prospective PE multiple of 24.74x. At the end of FY07, the stock was trading at a PE multiple of 11.29.
OGDCL currently accounts for 17.63% of the KSE-100 market capitalisation, making it the largest listed company at domestic bourses. The company's stock performance has significant influence on the fluctuations of KSE-100 index, hence any drop in the stock prices of the company strongly affect the index performance.
FUTURE OUTLOOK
During the period under review, OGDCL continued to pursue its strategy of organic growth through extensive exploration activities. The company spudded 15 wells, out of which 5 were exploratory and made 2 hydrocarbon discoveries; namely Moolan 1 and Pasakhi East 1 during 9mths'08. In Apr'08 the company has made 2 more discoveries at Moolan North-1 (Lashari), which has already been connected and is contributing 1,150bpd and Pakhro-1 (Nim Block). OGDCL is also operating in five offshore blocks.
A cross assignment agreement was executed between OGDCL and BP on February 8, 2008 whereby OGDCL agreed to transfer 50% of its working interest along with the operatorship to BP in offshore Block-S and an entry right of 25% working interest to BP in OGDCL's offshore Block-G. In consideration, BP agreed to transfer 27.5% of its working interests in Blocks U and V each along with a 20% working interest in Block-W to OGDCL. OGDCL is regularly evaluating the opportunities for overseas exploration. In this regard after technical evaluation, OGDCL participated in the 4th bidding round of Libya and is also planning to participate in the forthcoming bidding round of countries in West Africa. The company has also completed technical evaluation and exploration potential review of various other countries like Mauritania, Mali, Turkey and Algeria.
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OIL AND GAS DEVELOPMENT CORPORATION LIMITED
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BALANCE SHEET (Rs in '000) FY04 FY05 FY06 FY07
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Equity 76,047,654 83,209,982 94,770,277 100,616,652
Total Non Current Liabilities 15,580,018 17,835,717 15,652,992 17,598,855
Total Current Liabilities 4,361,060 13,533,234 10,891,441 11,122,655
Total Liabilities 19,941,078 31,368,951 26,544,433 28,721,510
Fixed Capital Expenditure 39,716,082 43,250,579 44,457,959 56,715,900
Total Non Current Assets 42,899,033 47,467,795 48,637,339 60,819,414
Current Assets 53,089,699 67,111,138 72,677,371 68,518,758
Total Assets 95,988,732 114,578,933 121,314,710 129,338,172
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INCOME STATEMENT(Rs in '000) FY04 FY05 FY06 FY07
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Sales Less Govt. Levies 51,326,273 73,710,101 96,755,382 100,261,191
Royalty 5,570,218 8,109,632 10,872,443 10,877,443
Gross Profit 45,756,055 65,600,469 85,882,939 89,383,748
Operating Expenses 10,124,678 12,023,734 15,045,654 18,497,388
Transportation Charges 548,919 760,092 942,163 1,087,931
General And Administration Expenses 838,818 823,305 1,071,979 1285,476
Exploration and dev. Expenditure 3,680,707 7,406,280
Operating Profit 30,845,733 49,322,078 65,142,436 61,106,673
Other Income 1,314,156 2,284,104 4,247,881 3,615,231
Financial Charges 38,468 5,955 9,963 449,561
Profit Before Taxation 30,515,350 49,020,216 65,911,337 61,058,726
Provision For Taxation 8,100,889 16,052,316 19,943,604 15,428,762
Profit After Taxation 22,414,461 32,967,900 45,967,733 45,629,964
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PROFITABILITY FY04 FY05 FY06 FY07
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Gross Profit Margin 89.15% 89.00% 88.76% 89.15%
Profit Margin 43.67% 44.73% 47.51% 45.51%
Return On Asset 23.35% 28.77% 37.89% 35.28%
Return On Common Equity 29.47% 39.62% 48.50% 45.35%
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LIQUIDITY RATIO FY04 FY05 FY06 FY07
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Current Ratio 12.17 4.96 6.67 6.16
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ASSET MANAGEMENT FY04 FY05 FY06 FY07
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Inventory Turnover 56.71 37.17 47.98 47.66
Day Sales Outstanding* 92.51 90.49 91.15 100.08
Operating Cycle 149.23 127.66 139.13 147.74
Total Asset Turnover 0.53 0.64 0.80 0.78
Sales/Equity 0.67 0.89 1.02 1.00
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DEBT MANAGEMENT FY04 FY05 FY06 FY07
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Debt To Asset (%) 20.77% 27.38% 21.88% 22.21%
Debt/Equity (%) 26.22% 37.70% 28.01% 28.55%
Times Interest Earned 836.02 8666.03 6964.80 143.97
Long Term Debt To Equity (%) 20.49% 21.43% 16.52% 17.49%
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MARKET VALUE FY04 FY05 FY06 FY07
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Earning Per Share 5.21 7.67 10.69 10.61
Price Earning Ratio 12.38 13.73 12.79 11.29
Dividend Per Share 4.00 7.50 9.00 9
Book Value 17.68 19.35 22.03 23.39
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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