A billion dollar capital expenditure for a year by a local company is a rarity in Pakistan. A capex of this magnitude surely deserves to create big news in the local media, but here was something about OGDCs billion dollar capex plan announced by the CEO, Shah Mehboob Alam, that failed to make breaking news in the economic circles of Pakistan.
"We are following a very aggressive exploration policy.....we are targeting a number of discoveries", told the OGDC CEO to international media a few days back. What his ambitious plan lacks is a sense of realism though.
The countrys largest oil and gas developer of late has been found short of meeting its yearly targets of drilling and exploration, reasons for which are manifold, ranging from financial constraints to legal bindings and even the security situation.
Never before in the past six years at least, has OGDCs annual capital expenditure gone beyond Rs18.6 billion, back in FY09. The five-year average capital expenditure is even lower at Rs8.7 billion a year. A sudden jump to $1 billion (Rs85 billion approx) for FY11 is nearly five times the capex that the company is likely to have incurred in FY10.
Shah Mehboob Alam has hinted on spudding and exploring 48 new wells in FY11, which according to analysts following the industry seems a highly optimistic and unrealistic target. What is also interesting is that OGDC has an average of drilling 31 wells per annum in the last five years - which makes an amount as huge as $1 billion a disproportionate one.
Another observation of note is that the CEO aims to target Balochistan as the major destination for exploration and drilling. It should help to recall that worsening security situation in Balochistan has been a major hurdle in OGDCs way of achieving its annual drilling targets. Given that the companys CEO actually has a security background, perhaps he knows something others don .
The biggest of the problems which makes this plan look horribly unrealistic is the financing of such a huge amount by a company which finds itself entangled at the wrong end of the inter-corporate circular debt.
How will the OGDC arrange for the planned capex when it cannot even meet the governments dividend target as evident by the contentiously sliding payout ratio ever since the circular debt has mounted, remains a mystery.
Surely, the CEO has got t it wrong and one just hopes that investors, here and abroad don incorporate this announcement in the future earnings increasing the exposure to the script in the capital market and end up making losses. But rest assured that OGDC is not going to incur a billion dollar capex - it certainly needs no octopus to tell that.
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OGDC TRACK RECORD
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FY05 FY06 FY07 FY08 FY09 9MFY10
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Wells spudded 18 30 41 31 30 26
Discoveries 3 5 10 5 2 6
Capex (Rs bn) 2.99 2.04 9.72 10.22 18.61 11.577
Cash (Rs bn) 42.38 37.39 23.74 18.28 8.94 17.99
Dividend payout 98% 85% 86% 92% 64% 40%
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Source: Company accounts
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