Oil and Gas Development Company Limited (PSX: OGDC) is the largest player in the E&P sector in the country with operations including exploration, drilling operation services, production, reservoir management, and engineering support. The E&P firm has been operating for more than 50 years in Pakistan. It also has the largest portfolio of net hydrocarbon reserves in Pakistan, which includes 55 percent of oil and 32 percent of gas as of June 2018. The company contributed to 29 percent of Pakistan's total natural gas production, and 47 percent of its oil production in FY18.
OGDC has a portfolio of 107 development and production leases (D&PLs) out of which 69 are 100 percent owned and operated by the firm, while 38 are non-operated having joint venture agreements with foreign as well as local E&P companies. As at June 30, 2018, OGDC operated in 48 exploration blocks including 2 offshore blocks, covering an area of 91,933 square kilometres.
Shareholding pattern
Government of Pakistan is the largest shareholder in OGDC. It disinvested part of its shareholding in the company back in 2003. Initially 2.5 percent of the equity with an additional green-shoe option up to 2.5 percent of equity was offered to the general public, which received an overwhelming response. In December 2006, the government divested a further 10 percent of its holding in the company. OGDC is also listed on London Stock Exchange since December 2006. A breakup of shareholding pattern is given in the illustration.
Crude oil prices
In 2017 and first half of FY18, the increase in crude oil prices was celebrated by the oil and gas E&P companies around the world that have been investing in the low price - and hence low cost - era as they started to reap the benefits. Similarly, domestic E&P companies had also invested in some key drilling and exploration in the past few years when the oil prices were sliding. The local giants invested in carrying geological survey, acquiring seismic data along with fast-track exploration plans due to lower costs. PPL and OGDC ramped up their efforts in Balochistan and KPK fields that were considered no-go areas previously.
However, recently, crude price forecasts have been described as a swinging pendulum, moving from high to low. Oil prices have started tanking once again due to increased production from US along with heightened tensions from global trade tussle between the US and China, which has affected demand outlook. The recent OPEC deal to cut production has brought back some of the bullish sentiments, but what is of key importance for the oil prices is the uncertainty that remains in the market on the supply front. Morgan Stanley has cut its forecast for oil prices; while it has acknowledged that the latest agreement to remove 1.2 million bpd from the global oil market beginning in January 2019 will have a positive effect, the upside for prices will be limited.
OGDC 6-Year Performance snapshot
On the operational side, OGDC has been leading the pack of E&P companies not only because of its size, but also its aggressive exploration and drilling activities. Exploratory/appraisal and development wells drilled by OGDC during FY18 were 20 against 24 wells during FY13, which shows continuation of drilling activities to replenish and augment reserves base. The oil and gas discoveries made during the last 6 fiscal years have been 24, which have significantly contributed to steady oil and gas production volumes.
In terms of quantity sold of crude oil, LPG and sulphur in FY18, the volumes were higher compared to FY13 due to continued exploration activities, completion of development projects and through new fields put on production. However, gas production over the comparative period has declined mainly due to natural depletion in the mature fields. This has also affected the firm's net revenues, which stood at Rs2.5 billion in FY18 versus Rs223 billion in FY13. Apart from that, the key factor in lower revenues and hence lower earnings in FY18 versus FY13 have been lower hydrocarbon prices.
However, FY18 has some great improvements on a year-on-year comparison. As per the company's annual report, OGDC's improved financial results in FY18 versus FY17, which has been primarily due modest recovery price of crude oil. Plus, higher LPG production complemented by favourable exchange rate and planned capital spending contributed positively to the financial growth in FY18. Also OGDC made 4 new oil and gas discoveries having expected cumulative daily production potential of 47 MMcf of gas and 749 barrels of oil. During the year under review however, increase in operating expenses, depreciation on account of capitalisation of assets and amortization of development and production assets on account of capitalisation of new wells and change in reserves estimates and higher cost of dry and abandoned wells owing to 11 wells declared dry and abandoned in FY18 against 4 wells in FY17 negatively affected the financial results.
In terms of market share, OGDC's exploration licenses represented 26 percent of total exploration acreage awarded in the country as on June 30, 2018. Its 3D seismic data acquisition is 75 percent of total 3D seismic data acquired in the country during the year. Its reserves were 55 percent of oil and 32 percent of natural gas reserves in FY18.
OGDC in FY19 and beyond
In FY18, OGDC has entered into strategic partnerships with Russian based Gazprom International, Hungary based MOL and Kuwait based KUFPEC to explore new oil and gas reserves and optimise production, efficiently and cost. During the same year, ExxonMobil joined OGDC's non-operated offshore Block-G as a working interest owner.
For FY19, the company has planned to drill 21 new wells including 15 exploratory/ appraisal/shale wells and 6 development wells. In its latest quarterly performance, earnings soared for OGDC. In 1QFY19, surprise came from the gas front where gas volumes depicted an up tick. The company's overall production stood at 4 percent higher, year-on-year. Despite natural decline in mature fields, OGDC's average daily net gas production portrayed an increase of 6 percent in comparison to 1QFY18, which came primarily from high gas production from Uch-II, KPD-TAY and Sinjhoro fields coupled with start-up of production at Chutto field, as highlighted by the company accounts. Similarly, the company witnessed a huge 31 percent surge in LPG production coming from the new Nashpa field along with increase in production from existing fields. On the other hand, OGDC's average daily net crude production in 1QFY19 fell by 4 percent, year-on-year largely on account of natural decline at key fields.
Along with increase in gas volumes, higher crude oil prices and depreciating rupee contributed significantly to higher sales revenue for 1QFY19. Revenues were up by 41 percent, year-on-year, and the average net realised price of crude oil and natural gas sold were up by 42 percent and 13 percent, year-on-year, respectively as well. This led to earnings growth of 57 percent year-on-year for OGDC in 1QFY19, which were also supported by higher exchange gains from rupee depreciation.
While OGDC has not outperformed the benchmark index for some time, it is touted to benefit largely in FY19 and beyond due to its fast track geological and geophysical activities in Balochistan and KPK based blocks, strong fundamentals and the possible conversions of other older fields to new petroleum policies.
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Oil and Gas Development Company-Ratio Analysis
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FY13 FY14 FY15 FY16 FY17 FY18
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Profitability
GP margin % 71 69 63 54 55 59
NP margin % 41 48 41 37 37 38
ROCE % 32 35 21 13 13 15
Liquidity
Current ratio times 2.30 4.04 3.55 4.32 6.39 7.35
Quick ratio times 2.30 3.65 3.27 4.01 6.04 7.02
Cash to current liabilities times 0.73 0.84 0.37 0.33 0.29 1.3
Cash Flow from Operations to Sales % 125 63 79 74 66 53
Activity/Turnover
Debtor Turnover Days 158 111 192 261 244 251
Total Assets Turnover % 59 56 40 28 28 32
Investment
EPS Rs 21.22 28.81 20.29 13.94 14.83 18.31
P/E ratio times 10.78 9.07 8.84 9.90 9.48 8.50
Dividend yield (RHS) % 4 4 4 4 4 6
Dividend payout % 39 32 38 37 40 55
Contribution to National Exchequer Rs(bn) 129.62 132.26 123.7 81.64 90.31 117.13
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Source: Company accounts
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OGDCL-Shareholding Pattern as on June 30, 2018
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Categories of Shareholders Percentage
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Government
Government of Pakistan 67.48%
OGDCL-Employees Empowerment Trust 10.05%
Privatisation Commission of Pakistan, 7.50%
Ministry of Privatisation & Investment
Mutual Funds 2.77%
Public Sector Companies and Corporations 0.42%
Banks, Development Finance 1.61%
Institutions, Non-Banking
Finance Companies, Insurance Companies,
Takaful Companies and Modarabas
General Public
LOCAL 1.14%
FOREIGN INVESTORS 8.03%
Others 1.00%
Total 100.00%
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Source: Company accounts
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OIL AND GAS DEVELOPMENT COMPANY LIMITED
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Rs (mn) 1QFY19 1QFY18 YoY
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Sales 61,799 43,962 41%
Royalty 6,876 4,432 55%
Operating expenses 14,862 13,954 7%
Transportation charges 383 416 -8%
Gross profit 39.678 25,161 58%
Other income 4,098 3,111 32%
Exploration & prospecting expense 1,961 1,524 29%
General administration expense 997 1,113 -10%
Worker profit participation fund 2,072 1,284 61%
Share of profit in associates 1,028 457 125%
PAT 26,735 17,010 57%
EPS [Rs) 6.22 3.95 57%
Gross margin 64.20% 57.23%
Net margin 43.26% 38.69%
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