Oil and Gas Development Company Limited

Oil and Gas Development Company Limited (PSX: OGDC) is the largest E&P company in the country with operations including exploration, drilling operation services, production, reservoir management, and engineering support. It has the most extensive exploration acreage in Pakistan, covering over 40 percent of the country's total acreage awarded with net hydrocarbons of oil and gas.

With over 67 percent, the Government of Pakistan is the largest shareholder in OGDC, followed by the OGDC Employee Empowerment Trust and Privatization Commission of Pakistan. A breakup of the shareholding pattern as on June 30, 2022 is given in the illustration.

OGDC historical performance

Being the largest oil and gas exploration and production company, OGDC has seen a steady rise in production flows amid depleting country reserves show the company's strength. In FY18, OGDC's oil volumes continued to rise, while the company faced a decline in gas volumes sold – which can be taken as a decline in production. On the other hand, profitability continued to improve primarily due to the modest recovery price of crude oil. Plus, higher LPG production complemented by a favorable exchange rate and planned capital spending contributed positively to the financial growth in FY18. Also, OGDC made four new oil and gas discoveries during the year. However, an increase in operating expenses, depreciation and higher cost of dry and abandoned wells owing to 11 wells declared dry and abandoned in FY18 against four wells in FY17 were inhibiting factors for earnings.

In FY19, OGDC's revenues increased by 27 percent year-on-year, and botomline expanded by 57 percent year-on-year. The rise in revenues came from the higher average realized crude oil prices and higher average realized gas prices. On the production side, crude oil and gas production remained flat, while LPG production increased. The company spud 16 wells in FY19, and it made three new oil and gas discoveries. Also, a rise in the average exchange rate and increase in other income and share of profit from associates accompanied the decline in exploration and prospecting expenditures, strengthening the bottomline. However, profitability in FY19 was partially impacted by the increase in operating expenses, mainly due to amortization expenses.

FY20 was a slow year in general and for the E&P sector, where crashing oil prices and COVID-19 had a critical impact on the sector's financial performance. OGDC's bottomline slipped by 15 percent year-on-year, where most of the decline came from 2HFY20. The squeeze in earnings started from the top as revenues decreased by 6 percent year-on-year. The decline was both due to falling crude oil prices and production levels. Realized crude oil prices witnessed a drop of around 20 percent, whereas LPG realized prices also fell by 11 percent in FY20. In addition, production numbers were down as COVID-19 left many fields in partial shutdown mode. Oil and gas production thus witnessed a decline of around 12 percent each in FY20, while LPG production fell by approximately 11 percent. The company also incurred an increase in operating expenses, which aided the decline in gross profits. The absence of exchange gains restricted other income growth and increased expenses, including exploration, general administration, and finance costs, also impacted the bottomline. Growth in exploration expenses was due significant cost of dry and abandoned wells during the year, as eight wells were declared dry and abandoned in FY20 versus only 2 in FY19.

FY21 was a year of recovery for the E&P sector. The trend of falling average gas production continued in FY21, and for OGDC, it was lower by 2.6 percent year-on-year. However, OGDC's crude oil production recovered by 2.3 percent year-on-year. Along with the increase in crude oil and LPG production volumes, average realized prices for natural gas, up by 8 percent year-on-year were the driving factors for revenue growth for OGDC in FY21. However, a decline in gas production and flat crude oil realized prices offset the gains, and OGDC's topline grew marginally by 2.65 percent in FY21. Earnings for the E&P Company grew by 9.3 percent year-on-year, which was supported by a 5 percent year-on-year decline in the exploration and prospecting expenditure as fewer dry wells were incurred in FY21 versus FY20. However, the profitability during the year was affected by the reduction in other income due to exchange loss and decline in interest income, and higher operating expenses primarily due to higher amortization, development, and repair cost.

In FY22, the company’s revenues increased by 40 percent year-on-year in FY22 which was due to 71 percent year-on-year surge in oil prices with the resumption of oil demand internationally, and domestic currency depreciation of 10 percent year-on-year. Average realized prices of crude oil and natural gas increased by 62 percent and 14 percent year-on-year, respectively. However on the production side, OGDC’s crude oil and gas production dipped by 4 and 5 percent year-on-year respectively in FY22. OGDC witnessed a 10 percent year-on-year decline in exploration and prospecting expenditure and the company’s announcement at the PSX highlights that this was due to five dry wells incurred during the year compared to eight dry wells reported in FY21. During FY22 the company spud 7 exploratory/appraisal and 6 development wells. Meanwhile, the company’s exploratory efforts resulted in 7 new oil and gas discoveries. Also, OGDC injected 10 wells into the production system in FY22. Apart from the rise in topline, the growth in OGDC’s bottomline was also due to increase in other income coming from hefty exchange gains from currency depreciation. The company’s earnings before tax jumped by 80 percent year-on-year in FY22; however, PAT stood at a gain of 46 percent for the year due to imposition of Super Tax in FY22.

FY23 and Future Outlook

During 9MFY23, the profitability of the Oil and Gas Development Company Limited increased by 43 percent year-on-year, and by 50 percent year-on-year in 3QFY23. The growth in earnings for the E&P Company came from the rise in its topline, rise in other income and a moderate growth in exploration and prospecting expenditure. OGDC’s revenues increased by 29 percent year-on-year during the nine-month period. The growth in revenues was driven by 9 percent year-on-year higher average selling price of crude oil. Due to global recession, international crude oil prices were higher primarily on the back of ongoing geopolitical unrest and continued oil supply discipline by OPEC+ coalition during the ongoing year. Average basket price of crude oil was up by 11 percent year-on-year in 9MFY23. What also supported the topline in 9MFY23 was the 26 percent rupee depreciation. While the production volumes continued to remain weak. Similarly, the topline growth in 3QFY23 was 20 percent year-on-year which was driven continued weakening of the domestic currency against the greenback by 32 percent year-on-year. However, during the 3QFY23, the oil prices declined by 18 percent year-on-year along with continued production decline trend; oil and gas production depicted a fall of 5 and 13 percent year-on-year in 3QFY23.

OGDC witnessed a growth of 12 percent in exploration and prospecting expenditure during 9MFY23 due to the higher cost of dry well. The same increased by 52 percent year-on-year during 3QFY23 due to one dry well and higher seismic activity. Meanwhile, other income in 9MFY23 surged by 120 percent year-on-year due and by over 300 percent in 3QFY23 due to massive exchange gains and higher interest income on cash and cash equivalent.

The oil and gas exploration and production companies had good earnings growth in FY22 due to the depreciation currency and rising crude oil prices. Depreciation of currency has been driving the profitability in FY23 as well. And the concerns for weaker production are relatively less for OGDC as the company’s new discoveries are likely to keep production flows stead in at least the immediate term.