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.
In FY23, the company’s earnings increased dramatically by68 percent year-on-year. The growth in earnings for the E&P company came from the rise in its toplinein FY23 that witnessed a growth of 23 percent year-on-year given PKR depreciation against USD by 28 percent year-on-year. Whereas, oil prices depicted a fall of two percent year-on-year. The exploration cost was up by 22 percent year-on-year in FY23 owed to ascend dry well expenses. Other income in FY23 jumped by over two times YoY, due to hefty exchange gain during the period.
OGDC in 1QFY24
The profitability of OGDC slipped by 8 percent year-on-year during 1QFY24 primarily due to the inflationary pressures despite the growth incurred in the topline. OGDC’s revenues grew by 13 percent year-on-year on the back of higher gas prices and favourable exchange rates. These were partially offset by weaker oil prices during the quarter as well as weaker production of hydrocarbons. The average realized price of gas was up by gas prices were up by a 26 percent, while the average exchange rate recorded was Rs291.58 per USD in 1QFY24 versus Rs224.57 per USD in 1QFY23. The crude oil net realized prices were down by 17 percent year-on-year during the quarter. Oil and gas production was also lower during the quarter by around two and one percent year-on-year, respectively.
The growth in OGDC’s topline during 1QFY24 resulted in 3.7 percent growth in the gross profits; however, gross margins tumbled from 71 percent in 1QFY23 to 65 percent in 1QFY24 due to higher than proportionate increase in operating expense. The rise in operating expenses was due to higher rent, fee and taxes on renewal of leases combined with salaries, wages and benefits and amortization of development and production assets.
The company also witnessed a 70 percent rise in exploration and prospecting expenditure during the quarter. Higher E&P expense coupled with decline in finance and other income due to lower exchange gains during the period impacted the company’s earning for 1QFY24.
The E&P sector has been facing falling volumes due to the natural decline in the fields. Moreover, the torrential rains and floods also affected the production volumes during FY23. OGDC’s topline benefitted from higher gas prices, which would further support the financials in the coming quarters due to the recent increase announced. The company has set CAPEX of around $80-100 million for FY24, largely spurring from projects in pipeline. It is also currently preparing for rigs and contracts for its offshore Block-5 (Adnoc) where the commencement of drilling is expected by the beginning of FY26.