Pearl Securities Limited – Brief Report

Karachi, February 16, 2016 (PPI-OT): Oil and Gas Development Company Ltd.

Key Features

Oil and Gas Development Company Ltd. (OGDC) is scheduled to unveil financial results for 1H FY16 today.

Cumulative HY16 EPS is expected in the vicinity of PKR 8.21, a 26% YoY decline against EPS of PKR 11.12 in SPLY.

Further decline in oil prices will contract revenue from oil operations; however, stable gas rates will act as a buffer.

Overall Net sales are expected to decline by 26% YoY. Pearl Securities Limited expects oil revenue to decline to ~32% of sales against 43% of sales in SPLY.

Due to maintained core operating expenditures, GPM is expected to decline by massive ~7ppts, resulting in gross earnings decline of 34% YoY.

Pearl Securities Limited believes management may reduce admin and exploration expenses in a bid to ease pressure of bottom-line. Pearl Securities Limited expects notable declines of 34% YoY and 39% YoY respectively.

2Q FY16 EPS is expected at PKR 3.95, a 13% YoY decline against EPS of PKR 4.54 recorded in SPLY.

Pearl Securities Limited expects an interim cash dividend of PKR 1.25-1.5/share.

Revenue to plummet on oil price downtrend

Oil prices declined further to average rate of US$41.8/bbl in 2Q FY16, a decline of 11% QoQ and 37% YoY. This will directly impact OGDC’s revenue through reduced value of crude sale. Oil revenue is expected to decline to PKR 15.2bn, declining in sales mix to ~30%, notably lower against ~33% in the previous quarter and ~42% in SPLY.

Revenue from gas will likely stay constant, Pearl Securities Limited expects gross sales of PKR 34.9bn in this segment. This will buffer Top-Line against declining oil revenue. Net sales in 2Q FY16 will likely clock in the vicinity of PKR 42.9bn, lower by 3% QoQ and 21% YoY.

Moving forward, oil prices have declined further to average of US$37/bbl in Jan-Feb’16. In the near term, in absence of any resolution in international oil production dynamics, Pearl Securities Limited expects Top-Line pressure to prevail in coming terms.

Price reduction on constant operating expense; GPM dives

Core operating expenses will likely remain relatively unchanged in the face of declining Top-Line. This will result in notable GPM deterioration to ~58% in 2Q FY16, lower by ~6ppt against 64% in SPLY. Overall, HY16 GPM will likely contract by ~7ppt to ~59% (Vs. ~66% in SPLY). Resultantly, 2Q gross earnings will likely decline by 28% YoY while HY gross profits stand to decline by 34% YoY.

Reduced expenses to reduce pressure

Management is expected to reduce noncore expense to reduce burden off bottom-line. Pearl Securities Limited expects a 34% YoY reduction in administration expenses while exploration costs are likely to decline by 39% YoY. Pearl Securities Limited expects a slight elevation in exploration expenses on basis on efforts to complete work at KPD-TAY, among others, as well as booking of drywell ‘Bachani 01’. 2Q FY16 exploration expense is likely to stand at PKR ~2.05bn, lower by 19% YoY, however, greater by 13% QoQ.

About the Company

OGDC is Pakistan’s largest E and P company with the largest exploration acreage, 31% of all awarded acreage. The firm has the largest hydrocarbon reserves in the country, with market share of 58% for Oil and 41% for Gas. The company contributes 45% of total oil production and 30% of total gas production. The head office is located in the Blue Area of Islamabad, Pakistan.

Outlook

Top-Line is expected to remain under pressure on oil price volatility, until resolution in global supply dynamics. However, as Pearl Securities Limited believes oil prices may remain at low levels for the near to medium term, eventual increase in prices will bolster profitability and strong investor attention to the company. Currently, the scrip is trading at P/E(x) 6.1 multiple with 6% D/Y. OGDC has 34% potential to touch its target value of PKR141. Buy