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


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



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



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.



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.



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%.



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.



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.



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



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.



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



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:



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.



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



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



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



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.



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.



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.



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.



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



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



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



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



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.



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.



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.



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.

afs ogdc term report

Documents

favorable

strong balance

huge hydrocarbon

issue exchangeable

gas resource

operated jv

ensure smooth

growing energy