Pearl Securities Limited – OIL and GAS IN FOCUS

Karachi, February 10, 2015 (PPI-OT): OIL and GAS DEVELOPMENT COMPANY LIMITED – Post-Result Analysis

Synopsis

Oil and Gas giant, OGDC, has announced financial results for 1H FY15 where the firm records NPAT decline of 29% YoY. Revenue decline was anticipated on account of significant drop in international oil rates; however, further stresses forced actual bottomline to overshoot Pearl Securities Limited’s and market projections.

1H FY15 results announced on the 4th of Feb’15 shows NPAT recorded at PKR 47.8bn (EPS: PKR 11.12), decreasing by 29% YoY against net income of PKR 67.2bn (EPS: PKR 15.63) in the same period last year. The firm has maintained second interim cash reward of PKR 2/share which takes total half year payout to PKR 4.5/share.

In 2Q FY15, where most of the impact of oil rate decline is experienced, the firm shows NPAT of PKR 19.5bn (EPS: PKR 4.54), down substantially by 42% YoY against net income of PKR 33.6bn (EPS: PKR 7.82).

Revenue decline as expected

Computing massive 48% oil price decline during 2Q FY15, OGDC was expected to post notable reduction in Top-Line. Oil sales show net realized price of US$76.57/bbl during 1H FY15, lower by 12% YoY against price of US$87.45/bbl in the same period last year. Despite increased production, significant oil price decline forced a decline in net sales. Net Revenue for 1H FY15 is recorded at PKR 118.6bn, decreasing by 6% YoY against sales of PKR 126.2bn. In 2Q FY15, revenue is seen declining by as much as 15% YoY to reach PKR 52.2bn against PKR 63.8bn in the same term last year. Oil sales make up nearly 45% of the company’s revenue earnings.

Margins trimmed on rising expenses

Core expenses have grown year over year, primarily due to increased core operating expenses which are raised by 29% YoY in 1H FY15 and by 29% YoY in 2Q FY15. Overall core expenses have grown by 13% YoY in 1H FY15 and by 8% YoY in 2Q FY15. Due to rise in expense and declining revenue, gross profit margin for 2Q FY15 is seen at 64.2%, which is lower by 761bps YoY against margin of 71.8% in the same term last year. In 1H FY15, gross margin is seen at 65.7%, down by 574bps YoY.

Rising exploration and finance expenses an added burden

OPEX costs were raised significantly due to greater exploration and finance costs and added further stress to core operations. During 1H FY15, ten wells where four were exploratory and six were development. Exploratory efforts yielded three successful discoveries at Jand-1, Sogrhi-1 and Jarwar-1 wells. Greater exploration activities garnered greater costs which increased by 30% YoY in 1H FY15 to reach PKR 6.3bn against PKR 4.8bn (YoY).

Additionally, finance costs were raised by 14% YoY due to financial commitments to reach PKR 1.2bn in 1H FY15 against previous PKR 1.09bn (YoY). Rising in non-core expenses were an added burden to already stressed core operations and provided further strain on bottomline.

Better production on completed development

During the outgoing term despite macro negative of oil rate decline the firm has managed three successful discoveries while completion of development of 3 wells at KPD-TAY (Phase 1), Sinjhoro (Phase 1) and Uch-II (Phase 2) have improved production levels. Production of crude oil has improved by 3% YoY to reach 41,271 BPD while gas production has also improved by 3% to reach 1,173 MMCFD. Moving forward, KPD-TAY Phase II is reaching completion while development at Sinjhoro-II, Uch-II (Main) and Jhal Magsi are expected to come online soon.

With improving production, the firms Top-Line is expected to stabilize along with some recovery in international oil rates to provide better performance in comparison to 2Q FY15. Pearl Securities Limited expects the worst has already come to pass and some recovery can be expected, on quarterly basis, moving forward in 2H FY15, however, performance is expected to be poor in comparison to the previous year.

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.

Company Outlook

International oil prices have shown signs of stabilizing, however, will probably be maintained at lower levels in comparison to the previous year. This will continue to hamper the company’s revenue; however, as greater production is expected by Mar’15, some stability can be attained. Development projects at new discoveries will stand to keep operating charges at higher levels and burden core operations. Currently, the scrip is trading at P/E(x) 7.2 multiple with 4% D/Y. OGDC has 16% potential to touch its target value of PKR280. Buy

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