Afs Ogdc Term Report
Transcript of Afs Ogdc Term Report
Analysis of Financial Statements
Spring Semester
2011
Submitted By:
Muhammad Ali Yasir
Zain ul Abiddin
Syed Kazim Hussain
Syed Umair Ali
OIL & GAS DEVELOPMENT COMPANY LIMITED
A Financial Insight
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 2
TTaabbllee ooff CCoonntteennttss
Introduction ............................................................................................................................................ 4
Industry Profile ........................................................................................................................................ 5
Crude Oil Production Scenario ............................................................................................................ 5
Gas Production Scenario ..................................................................................................................... 7
Demand Analysis ................................................................................................................................. 8
Exploration Potential .......................................................................................................................... 8
Company Profile ...................................................................................................................................... 9
Vision ................................................................................................................................................. 10
Mission .............................................................................................................................................. 10
Business Strategy .............................................................................................................................. 10
Financial Goals .................................................................................................................................. 11
Oil & Gas Reserves ............................................................................................................................ 11
Production ......................................................................................................................................... 11
Exploration and Development .......................................................................................................... 13
Financial Performance .......................................................................................................................... 14
Dividends Paid ................................................................................................................................... 15
Risk Management ................................................................................................................................. 15
Business Risks and Challenges .......................................................................................................... 16
Crude Oil Price .............................................................................................................................. 16
Exchange Rate Risk ....................................................................................................................... 16
Exploration and Drilling Risks........................................................................................................ 16
Reserves Depletion and Under Performance of Oil & Gas Fields ................................................. 17
Legislation ..................................................................................................................................... 17
Environmental Risks ...................................................................................................................... 18
Law and Order ............................................................................................................................... 18
Hedging against Risks ........................................................................................................................ 18
Oil Price Risk .................................................................................................................................. 18
Exchange Rate Risk ....................................................................................................................... 19
Circular Trade Debt ........................................................................................................................... 20
Oil & Gas Development Company Limited
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Impact on OGDCL .......................................................................................................................... 21
Government to Issue Exchangeable Bonds .................................................................................. 21
Financial Ratio Analysis ......................................................................................................................... 22
Financial Ratios ................................................................................................................................. 22
DuPont Analysis ................................................................................................................................ 22
Growth Rate ...................................................................................................................................... 23
Trend Analysis ................................................................................................................................... 23
Liquidity ......................................................................................................................................... 23
Profitability .................................................................................................................................... 23
Asset Management ....................................................................................................................... 24
Debt Management ........................................................................................................................ 25
Market Value................................................................................................................................. 26
Cross Sectional Analysis .................................................................................................................... 26
Future Outlook ...................................................................................................................................... 28
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 4
IInnttrroodduuccttiioonn
Oil & Gas Development Corporation (OGDC) is the national oil and gas company of Pakistan and the
flagship of the country’s E&P sector. The Company is the local market leader in terms of reserves,
production and acreage, and is listed on all three stock exchanges in Pakistan and also on the
London Stock Exchange since December 2006.
The Company was initially created as a Public Sector Corporation under an Ordinance in 1961 and
was subsequently, in pursuance of the Petroleum Policy 1994, converted from a statutory
Corporation into a Public Limited Company effective 23 October 1997.
Government of Pakistan (GoP) divested 4.98% of its shareholding in the Company in October 2003
through an Initial Public Offering (IPO). GoP further divested 9.5% of its shareholding through
Secondary Offering in the form of Global Depository Shares (1 GDS = 10 ordinary shares of the
Company) to international institutional investors in December 2006 and 0.5% to the general public
in February 2007. GoP now owns 85.02% of the shares of the Company.
On 14 August 2009, the Government of Pakistan (GoP) launched Benazir Employees Stock Option
Scheme (BESOS) whereby the GoP transferred 438,815,774 shares to OGDCL Employees
Empowerment Trust without any payment by the eligible employees subject to transfer back of
these shares to the GoP as provided in the Trust Deed. Accordingly, the GoP’s shareholding in the
Company is reduced to 74.82% from 85.02% with effect from 14 August 2009.
During the year under review, the Company has witnessed improved financial results despite
decline in crude oil, gas and LPG production, issue of inter-corporate debt, and law & order situation
in some of the Company’s operational areas. Company’s sales revenue and profit after taxation
increased by 9.0% and 6.5% to Rs 142.572 billion and Rs 59.177 billion respectively resulting in
Earnings per Share (EPS) of Rs 13.76 compared to Rs 12.91 during the preceding year. Company’s
exploratory efforts resulted in six new oil and gas / condensate discoveries leading to addition of
14.07 million barrels of oil and 161.10 billion cubic feet of gas to the Company’s reserves base.
Subsequently, in July 2010, another gas discovery has also been made by the Company at Sheikhan-
1 (Kohat E.L.). In addition, three new wells namely Nashpa-1, Pakhro-1 and Baloch-1 were brought
into production. The Company during the year was able to acquire 2,493 L. Kms of 2-D and 290 Sq.
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Kms of 3-D seismic survey in various concessions operated by OGDCL and spudded twenty six new
wells including fifteen exploratory / appraisal and eleven (11) development wells. Work over jobs on
another eleven wells has also been carried out during the year.
OGDCL’s production on working interest basis averaged 38,075 barrels of oil per day (bopd), 976
MMcfd of gas, 202 Million Tons/day of LPG and 70 Million Tons/day of sulphur. However, crude oil
net production as on 30 June 2010 reached 41,385 bopd after commencement of production from
Nashpa-1 in May 2010.
OGDCL's strategic direction has recently been revisited by its top management and Company's
Vision & Mission statements have been redefined in the light of Company's present standing and
future outlook. Going forward, Company is following strategy of sustainable growth with the
primary objective to enhance its reserves and production profile and ultimately maximize value for
shareholders and ensure energy security of the country.
IInndduussttrryy PPrrooffiillee
Pakistan is still in the initial stage of exploration with one of the lowest drilling density of 2.09
wells/1,000 sq km and a higher success ratio of 30%. As of Dec’09, E&P activities in the country have
resulted in original recoverable reserves of 947 mn barrels of oil and 54 tcf of gas. Out of which, 303
mn barrels of oil and 28 tcf of gas are balance recoverable reserves.
Crude Oil Production Scenario
Oil production after recording a rise of 3% YoY and 4% YoY in FY07 and FY08, respectively; has
witnessed a slide of 6.7% YoY and 6.9% YoY in FY09 and FY10, respectively. This is on account of
natural depletion from major fields like Chanda, Kunar and Pindori, which contribute approximately
35% to 40% of the total oil production in Pakistan. Average oil production for FY10 was recorded at
65,123 bopd.
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On a company wise basis, OGDC produced 35,004 bopd in FY10, which is below its 4 year average of
39,971 bopd. This is primarily due to decline in production from Chanda, Sono, Dakhni, Kunar and
Mela fields, which contribute almost 60% to OGDC’s total oil production. However, Adhi and Thora
(contribution 9%) recorded an improvement in oil production of 4% YoY and 16% YoY, respectively.
During FY10, PPL produced 4,533 bopd compared to 4,130 bopd in the corresponding period last
year, marking an improvement of 10% YoY. Increase in oil production from Adhi field by 4% and
commencement of Manzalai field in Nov’09 were the main contributor towards rise in PPL’s
production.
POL remained the major beneficiary in terms of crude oil production growth in FY10. Its production
showed a healthy growth of 8% to 4,103 bopd from 3,792 bopd exhibited in the same period last
year. The reason for this growth was commencement of Manzalai field, which is currently yielding
4,000 bopd where POL’s stake is 21%.
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It is expected that the average crude oil production to post a growth of 8%-9% YoY to 71,233 bopd
in FY11 mainly on account of production enhancement from Mela, Sinjhoro, Maramzai and
Mamikhel fields. The production enhancement from these fields would be 3,500, 3,000, 600 and
1,500 bopd, respectively.
Gas Production Scenario
Over the past five years (FY06-FY10) gas production has grown at an average rate of 1.45% per
annum to 4,060 mmcfd. This modest increase is a result of sluggish growth witnessed in major
producing fields such as Mari and Kandkhot, which contribute 16% to the total gas production of the
country. However, during the same period some other fields such as Miano, Sawan and Sui (25%
contribution to total gas production of the country) have recorded a decline. The average gas
production stood at 4,060 mmcfd during FY10 compared to 4,000 mmcfd in FY09, showing a modest
increase of 1.6% YoY. The contribution of gas production by PPL, OGDC and POL remained at 23%,
22% and 1%, respectively in FY10.
OGDC gas production in FY10 stood at 898 mmcfd compared to 932 mmcfd in FY09, recording a
decline of 4% YoY. This decline mainly emanated from Qadirpur and Uch gas fields, which
cumulatively contribute 62% towards the total gas production of OGDC.
PPL gas production stood at 943 mmcfd in FY10 compared to 965 mmcfd recorded in FY09,
registering a decline of 2% YoY. The attribute for this decline is a 6% YoY production drop from Sui
gas field, which contributes around 60% (562mmcfd) of the company’s gas production.
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FY10 was a year of turnaround for POL as its gas production exhibited an unprecedented rise of 60%
YoY to 60mmcfd. The cause for this phenomenal rise was Manzalai field, which came online in
Nov’09. Currently, this is contributing two – third of total gas production of the company.
It is expected that the gas production to post a growth of 6% YoY 4,300 mmcfd in FY11. The
production enhancement of 215 mmcfd would come from Maramzai, Mamikhel, Sinjhoro and
Qadirpur fields. The production additions from these fields would be 20, 20, 25 and 150 mmcfd,
respectively.
Demand Analysis
Pakistan energy demand has grown at a CAGR of 8.4% during FY2006-10, outpacing the GDP growth
rate of 6.4% for the same period. Owing to the strong correlation between energy consumption and
economic growth, coupled with huge supply demand deficit, we expect that the energy demand to
grow at a CAGR of 6% during FY2011-2015.
Currently, Pakistan satisfies 81% of its primary energy needs through oil and gas. Total demand of oil
and gas in Pakistan stands at 51mn tonnes of oil equivalent (Toe) whereas, current production is
34mn toe and the rest is met through imports.
E&P companies are well positioned to reap the benefits of growing energy demand and huge
hydrocarbon potential. Strong balance sheets and favorable regulatory framework may help the
local E&P companies to enhance their exploration/development activities.
Exploration Potential
Pakistan has onshore and offshore sedimentary area of 827.3 Km2. The recoverable oil and gas
resource potential of Pakistan has been estimated by Pakistan Petroleum Information Service (PPIS)
at 27 bn barrels of oil and 282 tcf of gas. Only 3% of the estimated oil and 19% of the natural gas
potential resources have been discovered so far in Pakistan from 743 exploratory wells over the past
63 years. This suggests only minor portion of the hydrocarbon reserves have been discovered so far
and a gigantic portion has yet to be discovered. Therefore, E&P sector would benefit if any
hydrocarbons are discovered from these zones.
Oil & Gas Development Company Limited
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To date, 743 exploratory wells and 990 development/appraisal wells have been drilled in Pakistan. A
total of 68 and 150 oil and gas discoveries respectively, have been made till now. This translates into
an overall exploratory success ratio of 1:3.4 wells. A 5 year average comparison shows that during
FY06-10, 64 wells were drilled compared to 47 well during FY01-05. A total of 57 discoveries (mainly
gas/ condensate) were made during FY05-FY10. This is indicative of a rise in drilling activity over the
last 5 years on the back of higher FDI investment and rising gap between demand and supply. On
account of oil deficit, investor friendly petroleum policies and high success ratio, it can be foreseen
that exploration and development activities will pace up going forward.
Recoverable oil and gas resource potential of Pakistan has been estimated at 27bn bbls of oil and
282 trillion cubic feet (tcf) of gas. As per the estimates, only 3% and 19% of respective oil and gas
reserves have been discovered so far in Pakistan.
We believe that the E&P companies are well positioned to reap the benefits of growing energy
demand and huge hydrocarbon potential. Strong balance sheets and favorable regulatory
framework may help the local E&P companies to enhance their exploration/development activities.
CCoommppaannyy PPrrooffiillee
Guided by its vision & mission and equipped with its strategic plan, a robust debt free balance sheet
and a dedicated workforce, OGDCL is well positioned to take the lead in riding the wave of
enhanced E&P activity. Its portfolio includes varying blend of exploration, appraisal, development
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and production assets. The company is pursuing an aggressive exploration and development
strategy to evaluate and exploit its asset potential with a view to enhance its oil and gas reserves
and production base, thus creating significant value for its shareholders.
Vision
To be a leading multinational Exploration and Production Company.
Mission
To become the leading provider of oil and gas to the country by increasing exploration and
production both domestically and internationally, utilizing all options including strategic alliances.
To continuously realign ourselves to meet the expectations of our stakeholders through best
management practices, the use of latest technology, and innovation for sustainable growth, while
being socially responsible.
Business Strategy
As the leading E&P company in Pakistan, OGDCL’s primary objective is to enhance its reserves and
production profile and ultimately maximize value for shareholders. In order to achieve this goal, the
Company seeks to execute the following strategies:
Accelerate Production Growth – by continuing to accelerate production growth through utilizing
cutting edge technologies, allowing the Company to utilize its significant reserves base and
capitalize on the strong economic growth and accelerating energy demand in Pakistan.
Exploit Exploration Opportunities – by building the Company’s future reserves portfolio through
its large onshore exploration acreage. During the fiscal year 2008-09 target of drilling is 52 wells.
Maintain Low Cost Operations – OGDCL’s operating environment, namely the geographic
concentration of its reserves base within Pakistan, will be a major factor in allowing it to control
its low cost structure. Within Pakistan, the Company’s leading position also enables it to access
economies of scale across its significant reserves base and operations.
Pursue Selective International Expansion – while domestic expansion remains OGDCL’s core
focus, the Company intends to grow and diversify its portfolio through selective international
expansion in the medium to long-term.
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Implementing International Best Practice – by ensuring an efficient organizational structure and
business processes that are focused on core production. As part of our restructuring plan,
OGDCL has established an in-house technical services division, the Petroserv Directorate, which
separates technical support services from core E&P activities.
Financial Goals
Build strategic reserves for future growth and expansion
Growth and superior returns to all stockholders
Double the value of the company in the next five years
Make the investment decisions by ranking projects on the bases of best economic indicators
Maximize profit by investing surplus funds in profitable avenues
Reduce cost and time overrun to improve performance results
Oil & Gas Reserves
During the year, the estimate for gas reserves of Nandpur gas field was revised upward from 107 Bcf
to 175 Bcf to cater its production profile for the remaining years. The reserves are reassessed
upward for Sari gas field and Dhamraki gas/condensate field due to better production performance
of these fields during the year under review. The probable reserves of Mithrao (Chak 5 Dim), Chak 5
Dim South, Kunnar, Pasahki NE & Pasahki fields are shifted to the proved reserves category. There is
no downward revision in the reserves during the period. However, revision/certification of total
OGDCL reserves is presently underway by reputable independent third party International
Consultant. OGDCL’s remaining recoverable reserves as of 30 June 2010 stood at 142.669 million
barrels of oil and 9,967.594 billion cubic feet of gas.
Production
Company’s production activities are focused towards acceleration of oil and gas enhancement by
implementing innovative techniques. In addition, OGDCL is fully committed for seamless
development of new discoveries to ensure sale of oil and gas within shortest possible time frame.
OGDCL has been successful in keeping the natural decline to a minimum through rigless and with rig
workovers, stimulation, and other innovative techniques as most of the wells in Southern region are
on artificial lift. On the development front, OGDCL has been successful in developing some of newly
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discovered fields at its own. In this regard, Nashpa and Pakhro fields have been developed utilizing
seamless development strategy and the Company is also in the process of developing Bahu, Nim
West and Sheikhan (Extended Well Testing) fields using indigenous resources.
OGDCL during the year has added 10 MMcfd gas from its Dakhni field and 4 MMcfd from Nandpur
gas field. Moreover, 350 barrels per day of condensate has been added from Dakhni field. After the
discovery at Nashpa, OGDCL using indigenous resources, put the field on Extended Well Testing
(EWT) before one month of the target date producing 4,500 bopd and 15 MMcfd gas. The gas is
being supplied to SNGPL and crude oil is being transported to Attock Refinery Limited (ARL). Rajian-
5A, a development well, was successfully completed and brought on production in a record time of
five days. The well is producing 1,000 bopd of crude oil and 0.8 MMcfd gas.
As part of improving operational efficiencies of the producing fields, gas compression has been
installed at Chanda oil field to meet the pressure requirement of SNGPL and the Company carried
out ATA of plants at Bobi, Dakhni, Uch, and Kunnar. In order to dispose off the produced water,
forced evaporation system has been installed at Fimkassar and Tando Alam oil fields.
Sale of gas at wellhead for four dormant gas fields namely Nur, Bagla, Jandran and Sara West has
been finalized and Letter of Intent (LOI) has been issued to successful bidders. Upon completion of
these projects, about 80 MMcfd of gas would be supplied for power generation. In addition,
substantial enhancement in crude oil production is expected from newly discovered
fields/development wells like Nashpa-1, Mela-3 and Baloch-1. Similarly, around 147 MMcfd of
additional gas production is expected from Qadirpur (Compression), Dakhni, Mela, Nim West,
Sinjhoro, Nur, Bagla and Bahu projects.
During the year, OGDCL’s average daily production on working interest basis was as follows:
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Compared with preceding year, crude oil production from the Company’s 100% owned fields and
share in operated JV fields decreased by 11.3% mainly due to natural decline in Southern region
fields like Kunnar, Pasahki, Bobi, Lashari, Moolan North and Sono, partially offset by increase in
production from Thora, Dakhni and start of production from Nashpa and Baloch fields. Share of
crude oil production from non-operated JV fields (Badin-II, Adhi, Pindori & Manzalai fields) increased
by 23.3% which resulted in net decrease of crude oil production by 7.2%. Company’s gas production
from 100% owned fields and share in operated JV fields decreased by 7.6% mainly due to decrease
in production from Uch, Pirkoh, Dhodak, Nandpur and Qadirpur fields. This decrease in production
was partially offset by increase in share of gas production from non-operated JV fields resulted in
net decrease of gas production by 2.6%. LPG production during the year decreased by 7.4% mainly
due to water break-through at Dhodak field and operational problems at Bobi Plant. However, share
of LPG production from non-operated JV fields was higher than last year.
Exploration and Development
The year 2009-10 was another year of successful operations for the Company by making efforts to
explore old areas with new ideas & innovations and new areas with well established concepts to
maintain acceptable success ratio for reserves addition. OGDCL, during the year, has continued its
aggressive exploration programme and strategies of exploiting exploration opportunities by building
the Company’s reserves portfolio through its large onshore exploration acreage. It has further
enhanced its portfolio and during the year 2009-10 acquired four new exploration blocks namely
Channi Pull, Mari East, Jandran West and Lakhi Rud covering an area of 4,795.70 Sq. Kms. However,
three exploration licenses namely Thatta, Thatta East and Khiranwala were relinquished and
operatorship of Offshore Indus-S was transferred to M/s BP Alpha.
Presently, OGDCL is operating in thirty five (35) exploration blocks (twenty two (22) blocks with
100% share and thirteen (13) blocks as operated Joint Ventures (JV) including three (3) offshore
blocks) covering an area of 63,581.12 Sq. Kms. In addition, OGDCL also holds working interest in
another eight (8) exploration licenses operated by JV partners. Being the largest E & P Company of
the Country, OGDCL has its own geological survey crew which carried out 380 L. Kms in Channi Pul
E.L. and working along regional traverses in Potohar area during the year and collected 310 samples
for reservoir/source studies.
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OGDCL is running five (5) seismic crews having latest acquisition technologies with the capability of
2-D and 3-D seismic surveys, equipped with on-site data processing facilities and latest quality
control software. These capabilities have played a major role in enhancing the exploration activities
of the Company. During the year under review, OGDCL acquired 2,493 L. Kms of 2-D seismic data in
Bagh South, Guddu, Mari East, Bitrism, Thal, Mianwali, Dakhni, Tando Allah Yar, Thano Beg, Nim,
and Nashpa concessions and 290 Sq. Kms of 3-D seismic data in Soghri concession and Toot Mining
Lease (M.L.).
FFiinnaanncciiaall PPeerrffoorrmmaannccee
During the year, Company witnessed 9.0% growth in its sales revenue over the last year mainly due
to higher realized prices of crude oil, gas and LPG. However, financial performance was negatively
impacted by decline in production of crude oil, gas & LPG and price adjustment of crude oil & gas
from Bobi and Kadanwari fields. Products sales revenue during the period under review of Rs
142.534 billion (2008-09: Rs 130.794 billion) is inclusive of favourable financial impact of Rs 5.461
billion pertaining to the prior periods on account of price revision of Qadirpur gas w.e.f. 01 January
2008 and unfavourable financial impact of Rs 1.663 billion due to price adjustment of crude oil and
gas from Bobi and Kadanwari fields.
Net realized prices of crude oil, gas and LPG averaged at US$ 61.37/bbl, Rs 186.47/Mcf and Rs
51,415/M.Ton respectively compared to US$ 55.53/bbl, Rs 174.78/Mcf and Rs 36,935/M.Ton
respectively during the last year.
Profit before taxation for the year was Rs 88.553 billion compared to Rs 80.928 billion during the
previous year, reflecting 9.4% increase in the Company’s earnings performance. However, OGDCL
recorded profit after taxation of Rs 59.177 billion compared to Rs 55.540 billion in the last year
resulting in increase in Earnings per Share (EPS) by 6.5% to Rs 13.76 (2008-09: Rs 12.91).
Cash flow from operations for the period was Rs 61.506 billion (2008-09: Rs 52.979 billion). After
investing and financing activities of Rs 53.292 billion (cash outflows) and Rs 1.683 billion (cash
inflows) respectively, the Company’s cash and cash equivalent increased by Rs 9.897 billion with
ending balance of Rs 18.837 billion as on 30 June 2010. The prevailing inter-corporate debt issue in
the industry is negatively impacting OGDCL as its trade debts on 30 June 2010 include overdue
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receivable of Rs 58.159 billion from refineries and gas companies. The Management of the Company
has already taken up this issue with the Government of Pakistan and position of receivables is being
reported to the Government on daily basis. Early resolution of this issue is critical to ensure smooth
running of Company’s operations, maintaining adequate liquidity position, carrying out Company’s
exploration and development program and timely discharge of statutory obligations including
payment of royalty, duties/taxes and dividends etc. Nevertheless, if the existing trend persists, the
Company may face liquidity concerns triggering borrowing requirements which in turn, will affect
the Company’s financial risk profile.
Financial results for the year ended 30 June 2010 are summarized below:
Dividends Paid
The Board of Directors has recommended a final cash dividend @ 15% (Rs 1.50 per share). This is in
addition to three interim cash dividends @ 40% (Rs 4.00 per share) already declared and paid during
the year. This makes a total of 55% (Rs 5.50 per share) for the year ended 30 June 2010.
RRiisskk MMaannaaggeemmeenntt
Being an exploration and production company, OGDCL is exposed to operational and non-
operational risks associated with E & P business which may unfavorably affect its operations and
financial performance. The Management and the Board of Directors are well aware of their
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responsibilities in this regard and ensure that an appropriate system exists in the Company for the
identification and management of the business risks.
Business Risks and Challenges
Key operational and non-operational risks which can influence the operations of the Company are as
follows:
Crude Oil Price
Crude oil pricing in Pakistan is based on a basket of Arabian crude oil prices adjusted for yield
differential and freight adjustment. Change in international oil prices is largely uncontrollable and
OGDCL is vulnerable to increase/decrease in such prices. Decline in prices of crude oil has a negative
impact on the Company’s earnings performance. However, the gas sales which amount around 50%
of the Company’s revenue are less prone to this risk. In addition, gas prices of certain fields are
capped at fixed crude oil/HSFO prices and are affected only in case the international crude oil price
falls below the capped price.
Exchange Rate Risk
USD/PKR parity decline has a positive impact on OGDCL’s earnings, as crude revenue is tied to US$
based pricing mechanism derived from international crude prices with suitable yield differential and
number of gas fields have wellhead pricing in US$ terms. Rs/US$ parity decline has a negative
impact on the Company’s earnings since most of the material including drilling material, plant &
equipment used in oil and gas industry are imported to meet operational requirements.
Exploration and Drilling Risks
The different sedimentary basins in Pakistan represent very complex tectonics and deformation
styles. The in-depth knowledge of petroleum systems present in these basins is imperative. The
selection of potential exploration blocks, acquisition of geological and geophysical data, delineation
of drillable prospects and their drilling are all important aspects in hydrocarbon exploration. To
maintain a good success ratio is also a vital element which can only be achieved with efficient
professional teams and systematic working. As easy-to-drill structures are vanishing, the drilling
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operations are also facing many challenges such as deep wells, lateral wells and drilling in complex
geological settings.
Exploration risks include selection of incorrect exploration acreage, inaccuracies in acquisition,
processing, interpretation of seismic data and selection of exploratory well site. The Company is also
exposed to variety of hazards during the drilling process including well blow out, fishing, fire and
other safety hazards. There is always a risk of success/failure in drilling exploratory wells. Risk of un-
successful drilling has an adverse affect on Company’s earnings and growth. Though this risk is
reduced in case of development fields, expertise in reservoir engineering is in place to manage
pertinent risks. The Management is well aware of these risks and is taking into consideration these
facts while planning and executing the exploration and drilling plans. The Company is also utilizing
experienced professionals and latest technologies in selection of acreage, acquisition and processing
of seismic data etc.
Reserves Depletion and Under Performance of Oil & Gas Fields
Oil & gas production usually reflects a decline after reaching its peak production. Oil and gas
reserves are assumed to produce 3/4th in case of gas with compression and around 1/4th of oil of
the original reserves in place which can be further improved through Enhanced Oil Recovery (EOR)
to around 1/3rd of total recoverable reserves over the reserve life. Some of the major oil and gas
assets of OGDCL are mature fields which bear the risk of depletion at a faster than a predicted rate.
In addition, OGDCL’s investment decisions on development of newly discovered fields are made
after extensive technical studies and assessment of reservoir. Reserve estimates of these fields are
worked out in-house as well as are certified by reputable international consultants.
Legislation
OGDCL’s revenues are subject to change in Petroleum Policies, which are usually issued for a period
of 5 years. These generally offer incentives to local and foreign E & P companies to increase
exploration efforts. Petroleum Policy in effect at the time of a particular discovery determines the
underlying revenues from such field. Changes in legislation, taxation, regulations, royalty and pricing
mechanism may affect the Company’s operational and financial performance.
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Environmental Risks
OGDCL is vulnerable to environmental changes including earth quakes, heavy rains, floods etc. that
may materially impact production at various fields resulting into adverse impact on Company’s
revenues and profitability. These risks are being addressed by the Management while making
investment decisions, planning and executing Company’s exploration and development plans. As the
Company is committed to adhere to the best Health, Safety and Environment (HSE) practices, the
compliance to changes in environmental regulations relating to HSE could result into higher cost to
the Company.
Law and Order
Overall law and order situation in the country is not supportive to smooth running of the Company’s
operations particularly in the provinces of KPK and Balochistan. This is potentially detrimental to
OGDCL’s exploration, drilling and development activities causing hurdle to the Company’s
sustainable growth. The Management of the Company is well aware of these issues and a complete
set-up for handling security situation is working in the Company. A strategy has been developed by
the Company to avoid disruptions at all places of the Company’s operations. In this regard, close
contacts are being maintained with all the stakeholders at the existing work places as well as in the
new areas of exploration, development and production activities.
Hedging against Risks
Oil Price Risk
OGDC revenue mix is expected to further tilt towards natural gas with revenue contribution from
gas to surge to 71% in FY15 from 53% in FY10. This is on account of rise in production from
development fields such as Dakhni, Jhal Magsi and Uch. Subsequently share of oil revenues is expect
to decline to 25% by FY15 from current standing of 43%. This drop is expected on account of
depletion of major fields like Bobi and Chanda. Increased gas revenues are expected to provide
further stability to OGDC, which are less sensitive to oil price movement. Reason is presence of floor
and cap in gas pricing formula and using average price following last six months as a benchmark.
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 19
Exchange Rate Risk
E&P returns are hedged against PKR depreciation, so we believe that investing in these stocks is
ideal for those who want to hedge their return against PKR depreciation. Pricing of crude oil
produced in Pakistan is pegged with Arab Light crude prices quoted in US Dollar terms. Similarly,
wellhead gas prices of discoveries of post 1994 are also linked with Arab Light crude prices, whereas
for older fields (Pre 1994 discovered) gas prices are linked to international High Sulphur Furnace Oil
(HSFO) prices, which are also in US dollar terms.
With devaluation in PKR against the US Dollar, E&P sector stands out as the major beneficiary.
Sector’s earnings and the target prices of the companies in the AHL E&P universe are expected to
surge by 3%-4%, for every 1% of depreciation in PKR against the US dollar. In FY11 we expect that
the Greenback may appreciate by 3% against the PKR.
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 20
Circular Trade Debt
Pakistan E&P sector is deleveraged at the moment. Historically all E&P companies have generated
sufficient funds to cater their capital expenditures and working capital requirements. However, the
inter-corporate debt issue in the energy chain has severely impacted the E&P’s dividend paying
capacity. Average dividend payout of E&P companies in AHL universe stood at 53% in FY10
compared to 70% over the past three years (FY07-FY09). The total trade debts of OGDC, PPL and
POL have aggregated to PKR 116bn as at June’10, depicting a surge of 35% YoY.
So far the government has not been able to resolve the issue, despite the floating of TFCs worth PKR
162.4bn in two phases, gradually increasing power tariff and eliminating oil subsidies. Recent
actions like dissolution of PEPCO and plans for further power tariff hike are some measures to ease
the intensity of circular debt. Besides, interest from the foreign donor’s institutions (IMF and World
Bank) in resolution of circular debt is painting a rosy picture on the energy canvas of the country.
We do not see a complete resolution of circular debt, however above mentioned remedies may
reduce circular debt to a sustainable level.
Going forward if the issue is not dealt timely, we see a medium term probability of OGDC and PPL
seeking external sources to meet their capital expenditure requirements. However, POL seems
comfortably placed and will most likely stay unleveraged as most of POL’s oil is supplied to Attock
refinery, a group company which has historically paid its dues promptly.
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 21
Impact on OGDCL
Over the past few years, company’s cash rich position has been severely affected due to circular
debt issue. As per FY10 accounts, the company have cash and cash equivalents of PKR 19bn
compared to PKR 42bn recorded in FY05. This is due to higher trade debt, which has ballooned to
PKR 83bn compared to PKR 24bn witnessed in FY05.
In an attempt to manage its cash flows, the company has trimmed down dividend payout ratio from
85% in FY05 to 40% in FY10. Furthermore, the company has withheld royalty payments of
Government of Pakistan, which have risen to PKR 16bn, an increase of 3.72x YoY.
In order to reduce the intensity of circular debt the government had issued TFC’s worth PKR 162.4bn
in two tranches. However, these issued TFC’s did not reduce the receivable of the companies as
major chunk was consumed by IPPs and OMCs before it could reach the last recipients. If trade
debts perpetuate to move in the north direction and cash in the south direction then this may
become a big barrier for company’s vigorous exploration program and dividend payout. Dividend
payout has been reduced to 40% in FY10 compared to 85% witnessed in FY05. Dividend payout
expectations for FY11E and FY12F is 40% (PKR 6/share) and 43% (PKR 7/share) respectively.
Government to Issue Exchangeable Bonds
As part of the privatization program the Government of Pakistan (GoP) had planned to issue
exchangeable bonds of OGDC in the international market few months back but no progress has
been seen in this regard so far. The government is expected to fetch around US$500mn by
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Analysis of Financial Statements Page 22
monetizing 5%-7% of its 75% ownership in the company. News reports suggest that the GoP may
use these funds either to finance some portion of its fiscal deficit or to decrease the inter corporate
debt, which is afflicting the entire energy chain of the country. This will have no impact on the
valuation of OGDC’s stock.
FFiinnaanncciiaall RRaattiioo AAnnaallyyssiiss
Financial Ratios
DuPont Analysis
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 23
Growth Rate
Trend Analysis
Liquidity
Current ratio during FY10 declined to 3.46 from 4.08, a decline of 14%. This is mainly due to the
greater increase in current liabilities as compared to the increase in current assets. While the
current assets increased by 40%, the current liabilities witnessed a rise of 64%. Within the current
liabilities, trade and other payables rose from Rs 18.7 billion to Rs 28.6 billion at the end of FY10.
This increase is the direct result of the increase in the amount payable as royalty. Provision for tax
also rose sharply, from Rs 2.5 billion to Rs 6.2 billion. Current assets on the other hand rose
primarily due to the sharp increase in trade debts (receivables). Trade debts rose from Rs 56.1
billion at the end of FY09 to Rs 82.9 billion at the end of FY10. Despite the decline, the liquidity
position of OGDCL stands better than that of PPL, which witnessed a Current Ratio of 3.21 this year.
Along with the Current Ratio, the Quick Ratio of OGDCL also saw a decline, dropping from 3.25 at
the end of FY09 to 3.03 at the end of FY10. This decline is less than the decline in the Current Ratio,
possibly because Inventory saw a decline over the period.
Profitability
Profit before tax for FY10 was Rs 88. 6 billion, compared to Rs 80.9 billion the previous year. This
growth of 9.4% is directly proportional to the increase in sales. In comparison to the growth in
profit before tax, profit after tax increased by only 6.6% to Rs 59.2 billion from Rs 55.5 billion in
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 24
FY09. Tax for the year increased by 15.7% as compared to the previous year, mainly due to a decline
in deferred tax, which is charged at a reduced rate. However the overall increase in profit after
taxation resulted into Earnings per Share (EPS) of Rs 13.76 compared to Rs 12.91 in FY09.
During FY10, OGDCL s Gross Profit Margin remained relatively stable, while the Profit Margin
registered a marginal decline, due to the increased effect of taxation this year. Gross profit margin
dropped from 88.4% to 88.3%, while profit margin dropped from 42.5% to 41.5%. The Gross Profit
Margin has been in a slightly declining trend since FY05. Although the decline has not been sharp in
any year, it has led to a steady effect over time. The primary reason for this decline is that the
increase in sales has been much higher than the increase in gross profits, particularly due to the
increasing royalty expenses paid by the company.
Return on assets and return on equity both showed a decrease during FY10 as compared to the
previous year. This was primarily due to the low increase in sales as compared to the increase in
assets and equity. Assets showed an increase of 28.6%, while equity rose by 24.7% compared to a
9% increase in Sales. In the past years ROA and ROE have followed a similar trend, moving upwards
and downwards together. There was an increase in ROA and ROE during FY05 till FY06. In FY07 and
FY08 it again started to drop slightly as the net profit did not rise as much as the assets and equity,
due to low increase in sales in FY07 and due to high taxes in FY08.
Asset Management
In terms of Asset Management, OGDCL witnessed a moderate decline this financial year. While days
of Inventory Turnover dropped from 44. 6 days to 37.1 days, Days Sales Outstanding saw a sharp
rise from 154 days to 209 days. The Operating Cycle thus rose from 199 days to 247 days, a rise of
24%. While Inventory Turnover dropped due to the decline of almost 10% in inventory, Days Sales
Outstanding rose due to the 48% rise in receivables in the form of trade debts. Increasing levels of
receivables are negatively impacting the company s financial position and are the direct result of the
prevailing inter-corporate debt in the industry.
The company s trade debts at the end of the year include overdue receivable of Rs 58.159 billion
from refineries and gas companies. Early resolution of this issue is critical to ensure smooth running
of company s operations, maintaining adequate liquidity position, carrying out company s
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 25
exploration and development program and timely discharge of statutory obligations including
payment of royalty, duties/taxes and dividends etc.
During FY10, both Asset Turnover and Sales over Equity ratio decreased, caused by the low growth
in Sales compared to higher increases in Assets and Equity. Asset Turnover dropped from 0.74
during FY09 to 0.62 this year, a drop of 15%. Sales over Equity on the other hand decreased from
1.04 to 0.91 by the end of the year.
Debt Management
OGDCL has been facing increasing debts over the past years, especially in the sector of Current
Liabilities in the form of Royalties and Taxes Provision incurred as well. As part of the company’s
strategy to expand and acquire new fields, cost incurred as Royalties have been high and are
growing. This is leading the Debt to Assets and the Debt to Equity ratios to rise since FY06 till FY10.
Both, Debt to Assets and Debt to Equity ratio show similar trends over the past years. During FY10,
the Debt to Asset Ratio rose from 29.1% to 31.2%, while Debt to Equity rose from 41.1% to 45.4%.
The increase in debts, i.e. from FY06 to FY10, which have been primarily a result of rises in Current
Liabilities, could also be seen from the long-term Debt to Equity ratio, which showed a very slight
increasing trend since FY06. This implies that although overall debt is rising, Long-term Debts are
steady, reflecting company s policy to avoid the performing of investment and other activities
through Long-term Debt. Yet, the below average debt ratios of OGDCL suggest a slightly lower level
of leverage for the company, compared to the average industry. The Long-term Debt to Equity ratio
of the company dropped from 24.2% at the end of FY09, to 23% at the end of this year.
The Times Interest Earned ratio (TIE) plunged in FY07 on account of the unwinding of discount on
provision for decommissioning cost, which took up the major chunk of finance costs. This process
was again repeated in FY08 and similarly in FY09 when the ratio was able to rise only slightly due to
the high unwinding of discount on provision for decommissioning cost. In FY09 the finance costs
rose slightly but as the level of operating income showed low increase, the TIE went further down
than FY08. The ratio has again dropped during FY10, from 92.9 to 74.2. Upon observation of the
balance sheet we see that the company currently has no long-term loans, and thus there exists no
interest element in financial charges.
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 26
Market Value
Earnings per Share of OGDCL rose this year from Rs 12.91 at the end of FY09 to Rs 13.76, showing an
increase of 6.6%. This rise was seen despite the drop in production this year, and was the direct rise
of rising oil and gas prices. Along with the increase in EPS, the Price-earnings ratio of OGDCL saw a
considerable rise. After the drop in Market Price last year due to the crash of the stock exchange,
the company has regained its position this year, with the price per share rising from Rs 78.5 at the
end of FY09, to Rs 142 at the end of this period. The price earnings ratio was thus able to rise from
6.1 to 10.32 over the year.
Dividend per share dropped considerably during this financial year, falling from Rs 8. 25 per share
declared last year, to Rs 5.5 per share this year. This may be due to both the recent drop in
production as well as the current exploration and development projects being carried out by the
company. Book Value of OGDCL has been increasing steadily over the years on the base of its
increasing assets. During FY10, the Book Value rose from Rs 29.3 to Rs 36.6, a rise of almost 25%.
Cross Sectional Analysis
TTM = Trailing Twelve Months.
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 27
From the above table, it can be observed that OGDCL has performed very strongly on all the fronts
except on the P/E ratio. Despite having a high growth rate in both EPS and sales, the P/E ratio of the
company has been on the decline as compared to the industry. The decline is mainly because At the
current price level, OGDC is relatively less attractive as most of the positives are already priced in
and the scrip is trading at near its target price of PKR 130/share for Dec 31’10. Currently, OGDC is
facing major problems like delay in installation of compressors at Qadirpur gas field and prolonged
litigation problems at major projects (KPD – TAY and Sinjhoro development projects). On the other
hand, POL is the most attractive stock compared to other E&P stocks. Based on its strong reserves
profile and rising production trend, we have set our price objective at PKR 300/share for Dec’10. The
stock offers strong dividend yield of 7.6%, and 39% upside potential from its current level.
Oil & Gas Development Company Limited
Analysis of Financial Statements Page 28
A massive Rs 148 billion of OGDC and Pakistan Petroleum Limited (PPL) has been stuck up in circular
debt, creating liquidity problems for these two state-run mega oil and gas exploration companies.
Different departments and organizations owed around Rs 108 billion to the OGDC and Rs 38 billion
to the PPL by December, 2010. Both state-run mega companies are trying hard to recover their
receivable amount worth billions of rupees. However, the Pakistan Oilfields Limited (POL) remained
almost unaffected by the circular debt problem as its recoverable amount is as low as Rs 3.75 billion,
compared to total recoverable amount of about Rs 375 billion of all energy sector's entities in the
country.
FFuuttuurree OOuuttllooookk
OGDCL has a strong vision and passion to contribute to the E & P sector to help enhance energy
security of Pakistan. With a formidable presence in the length and breadth of the Country, OGDCL is
looking beyond geographical boundaries for E & P opportunity. It plans to actively pursue overseas
joint ventures.
With technical prowess in onshore exploration and production it has changed focus to a more
challenging area i.e. offshore exploration. OGDCL is actively participating in national bid rounds for
acquiring more acreages and gearing to participate in international bidding rounds to work towards
international presence in line with its Vision. OGDCL also intends to enhance its reserves and to
focus on and strengthen core business (E & P) functions by incorporating international best practices
and innovative thinking in Company culture.
The Company plans to optimize its concessions portfolio to support aggressive exploration activities,
which in turn will ensure continuous reserves additions. OGDCL is also looking at seamless
development of new discoveries in shortest possible time which will add substantially to the
production base of the Company. Efforts are continuing towards formulation of joint ventures with
leading E & P companies both within the country and abroad.
Review and improvement of internal policies and processes is also on the agenda in addition to
further enhancing corporate goodwill through focused CSR activities for the benefit of the
communities that OGDCL interacts with.