Oil and Gas Development Company Limited – BR Research

Oil and Gas Develop-ment Company Limi-ted (PSX: OGDC) is the largest E&P company in the country with operations including exploration, drilling operation services, production, reservoir management, and engineering support.

It has the most extensive exploration acreage in Pakistan, covering around 43 percent of the country’s total acreage awarded with net hydrocarbons of oil and gas, standing at 43 percent and 36 percent, respectively, as of FY21. As a result, the company contributed to 29 percent of Pakistan’s total natural gas production, 48 percent of its oil production, and 37 percent of its LPG production in FY21.

With over 67 percent, the Government of Pakistan is the largest shareholder in OGDCL, followed by the OGDCL Employee Empowerment Trust and Privatization Commission of Pakistan. A breakup of the shareholding pattern is given in the illustration.

OGDC historical performance

Being the largest oil and gas exploration and production company, OGDCL has seen a steady rise in production flows amid depleting country reserves show the company’s strength. In FY18, OGDCL’s oil volumes continued to rise, while the company faced a decline in gas volumes sold – which can be taken as a decline in production. On the other hand, profitability continued to improve primarily due to the modest recovery price of crude oil. Plus, higher LPG production complemented by a favorable exchange rate and planned capital spending contributed positively to the financial growth in FY18. Also, OGDC made four new oil and gas discoveries during the year. However, an increase in operating expenses, depreciation and higher cost of dry and abandoned wells owing to 11 wells declared dry and abandoned in FY18 against four wells in FY17 were inhibiting factors for earnings.

In FY19, OGDCL’s revenues increased by 27 percent year-on-year, and botomline expanded by 57 percent year-on-year. The rise in revenues came from the higher average realized crude oil prices and higher average realized gas prices. On the production side, crude oil and gas production remained flat, while LPG production increased. The company spud 16 wells in FY19, and it made three new oil and gas discoveries.Also, a rise in the average exchange rate and increase in other income and share of profit from associates accompanied the decline in exploration and prospecting expenditures, strengthening the bottomline. However, profitability in FY19 was partially impacted by the increase in operating expenses, mainly due to amortization expenses.

FY20 was a slow year in general and for the E&P sector, where crashing oil prices and COVID-19 had a critical impact on the sector’s financial performance. OGC’s bottomline slipped by 15 percent year-on-year, where most of the decline came from 2HFY20. The squeeze in earnings started from the top as revenues decreased by 6 percent year-on-year. The decline was both due to falling crude oil prices and production levels. Realized crude oil prices witnessed a drop of around 20 percent, whereas LPG realized prices also fell by 11 percent in FY20. In addition, production numbers were down as COVID-19 left many fields in partial shutdown mode. Oil and gas production thus witnessed a decline of around 12 percent each in FY20, while LPG production fell by approximately 11 percent. The company also incurred an increase in operating expenses, which aided the decline in gross profits. The absence of exchange gains restricted other income growth and increased expenses, including exploration, general administration, and finance costs, also impacted the bottomline. Growth in exploration expenses was due significant cost of dry and abandoned wells during the year, as eight wells were declared dry and abandoned in FY20 versus only 2 in FY19.

FY21 was a year of recovery for the E&P sector. The trend of falling average gas production continued in FY21, and for OGDCL, it was lower by 2.6 percent year-on-year. However, OGDCL’s crude oil production recovered by 2.3 percent year-on-year. Along with the increase in crude oil and LPG production volumes, average realized prices for natural gas, up by 8 percent year-on-year were the driving factors for revenue growth for OGDCL in FY21. However, a decline in gas production and flat crude oil realized prices offset the gains, and OGDCL’s topline grew marginally by 2.65 percent in FY21. Earnings for the E&P company grew by 9.3 percent year-on-year, which was supported by a 5 percent year-on-year decline in the exploration and prospecting expenditure as fewer dry wells were incurred in FY21 versus FY20. However, the profitability during the year was affected by the reduction in other income due to exchange loss and decline in interest income, and higher operating expenses primarily due to higher amortization, development, and repair cost.

In FY22, the company’s revenues increased by 40 percent year-on-year in FY22 which was due to 71 percent year-on-year surge in oil prices with the resumption of oil demand internationally, and domestic currency depreciation of 10 percent year-on-year. Average realized prices of crude oil and natural gas increased by 62 percent and 14 percent year-on-year, respectively. However on the production side, OGDCL’s crude oil and gas production dipped by 4 and 5 percent year-on-year respectively in FY22. OGDCL witnessed a 10 percent year-on-year decline in exploration and prospecting expenditure and the company’s announcement at the PSX highlights that this was due to five dry wells incurred during the year compared to eight dry wells reported in FY21. During FY22 the company spud 7 exploratory/appraisal and 6 development wells. Mean-while, the company’s exp-loratory efforts resulted in 7 new oil and gas discoveries. Also, OGDCL injected 10 wells into the production system in FY22. Apart from the rise in topline, the growth in OGDCL’s bottomline was also due to increase in other income coming from hefty exchange gains from currency depreciation. The company’s earnings before tax jumped by 80 percent year-on-year in FY22; however, PAT stood at a gain of 46 percent for the year due to imposition of Super Tax in FY22.

OGDCL in FY23 and beyond

OGDC’s revenues increas-ed by 48 percent year-on-year in 1QFY23 which was due to 43 percent year-on-year surge in oil prices, and domestic currency depreciation of 26 percent year-on-year. Average realized prices of crude oil and natural gas increased by 62 percent and 14 percent year-on-year, respectively. On the production front the company continued to see dip in oil and gas production, which stood at around 10 percent and 9 percent for 1QFY23.

OGDCL witnessed a 32 percent year-on-year decline in exploration and prospecting expenditure due to the absence of a dry well during the quarter versus 1QFY22. Apart from the rise in topline, the growth in OGDC’s bottomline was also due to increase in other income coming from hefty exchange gains from currency depreciation. For OGDC, other income in 1QFY23 was up significantly by 70 percent year-on-year, due to exchange gain on foreign currency coupled with higher income from cash and cash balances.

In 1QFY23, the country’s E&P companies listed on the stock exchange registered a cumulative revenue growth of over 54 percent year-on-year This was despite the fact that almost all the E&P companies incurred a decline in production volumes especially that of crude oil in 1QFY23. The sector also reported highest earnings in the history for 1QFY23, which was due to higher topline as well as other factors such as the depreciating currency and weakening exchange rate. During the quarter, the sector also incurred relatively lower expense with regards to exploration and prospecting which lifted the bottomline. Exploration expenses in 1QFY23 stood lower, and growth in profits remained elevated; however, much of it came from higher rupee depreciation, and little from the core business operations.