Earnings Report /

Oil & Gas Development: 4Q sees heavy opex and exploration cost; more to come on PIOL and other ventures

  • OGDC’s earnings rose substantially to PKR31/sh in FY22, gaining from higher oil prices

  • A higher than expected payout was seen despite heavy investment required by Reko Diq

  • High 4Q opex but mild rise for full-year keeps future profitability intact

Intermarket Securities
23 September 2022

OGDC announced earnings of PKR 134bn (EPS: PKR 31.11), higher by 46% YoY, where higher oil prices and other income compensated for the spike in operating expenses, exploration cost and one-off high super-tax charge. Earnings for 4Q clocked in at PKR21.7bn (EPS: PKR 5.05) against our estimate of PKR 27.6bn (EPS:PKR 6.44). A higher final payout of PKR 2.50/share (IMS expectation: PKR1.00/share) was also declared. We also present key takeaways from management call that was held later during the day.

Key highlights

  • Net sales continued to increase to PKR95bn in the quarter mainly taking gains from higher realized oil and gas prices. This took full year revenue to PKR336bn (+40% YoY) as the realized oil and gas prices jumped to USD75.69/bbl and Rs 436.06/mmcf against USD 46.67/bbl and PKR383.88/mmcf last year. The company suffered from natural decline in production and reserve replacement remains a key agenda, going forward.

  • Operating costs rose substantially in 4Q to PKR28bn. A recurring high cost is the increase in salary caps undertaken by the management to overcome the current inflationary pressures. On the other hand, extensive workover activity was held to arrest the natural decline and translate into sustainable production from mature wells. Some of non-recurring operating expenses were linked to higher sales tax in respect of capacity invoices from Uch gas field; the matter which is currently being contested in Islamabad High Court.

  • The 4Q also saw a high exploration expense of PKR5.9bn, taking total exploration expenses to PKR15.6bn for FY22 (-10% YoY). The rate of dry well cost stands higher this year with 5 wells being abandoned during the year as compared to 8 dry wells booked last year. OGDC spud 13 wells during FY22, including 7 exploratory/appraisal wells and 6 development wells. Moreover, drilling and testing of 16 wells from last year was also completed.

  • The company has completed Qadirpur compression while that of Reti-Maru is yet to be commissioned. The remaining big development projects are currently attracting bids for technical and financial evaluation at this stage. Wali field was discovered during the year and it is expected to add 2,850bpd oil and 37mmcfd gas. The development work on Wali is going on as planned and the tie-in is expected in Jan’23.

  • Other income spiked to PKR17.0bn in 4Q, most of which belongs to the FCY deposit gains other than the Fx gains from gas sale agreements with Uch power plants. Regarding investment in PIOL, in the ongoing quarter, the company has subscribed to another 1mn shares under an outlay of USD10mn.

  • OGDC has deposited USD187.5mn in a bid to obtain 8.33% stake in RekoDiq. The participation of the company is subjudice to regulatory and judicial approvals in an attempt to achieve definitive agreements.

  • Effective tax rate for the year clocked in at 42% (4Q: 65%; IMS 4Qest: 63%) owing to one-off high super tax.

OGDC is the largest E&P in Pakistan with highest acreage and production. The company boasts 33% of oil reserves and 44% of gas reserves currently available in the country. Despite being embroiled in circular debt, we like the emphasis on Frontier areas, which maintains the potential of a large discovery in the near future. We currently have a BUY stance based on our TP of 162 per share. The scrip trades at an FY23E PE of 2.4x and EV/EBITDA of less than 1.5x. Such low valuations can sharply rebound on circular debt resolution.