Equity Analysis /

Oil & Gas Development: FY19 preview: Expect highest ever quarterly profits despite Kekra expense

    Intermarket Securities
    16 September 2019

    We expect Oil & Gas Development Co (OGDC) to post 4QFY19 NPAT of PKR31.8bn (EPS PKR7.4) which will be up 11% qoq and 45% yoy. Full-year FY19 earnings will thus turn out to PKR117.0bn (EPS PKR27.23), up an impressive 49% yoy. This could be the highest ever quarterly profit for OGDC. Alongside the result, we expect a final dividend announcement of PKR3.0/sh, taking full-year payout to PKR11.50/sh.

    Key expectations for 4QFY19:

    • OGDC is expected to post the highest ever quarterly revenues of PKR71.7bn, up 10% qoq and 24% yoy. The sequential jump is majorly attributed to the 12% PKR devaluation during the quarter, while average Arab light prices rose 8% (OGDC's sensitivity is low and well-head gas prices adjust on a half-yearly basis). Based on PPIS data, overall production is expected to remain flattish at 21.5mmboe, where gas production rose 2.5% qoq to 1,090mmcfd (marginal improvement in Kadanwari and Tal) and oil output fell 2% qoq to 40,000bpd. 
    • The company will book dry-well expense related to the unsuccessful off-shore well Kekra and Qadirpur Deep. We estimate an after-tax expense of PKR0.77/sh. For Kekra, we have estimated PKR3.5bn before-tax, based on well cost of US$100mn and 25% stake.
    • This will, however, be offset by expected exchange gains of PKR4.8bn (PKR depreciated 12% in 4Q) and higher other income amid rising interest rates.  
    • Effective tax rate in 4Q expected at 34%, the same as in the previous quarter.  
    • Note we have not incorporated any IFRS-9 provision, as it was absent in the results of POL and HUBC. SECP has reportedly granted an exemption to energy companies until Jun'21.

    We have a Buy stance on OGDC with a revised TP of PKR180/share (based on long term oil prices of US$65/bbl). Despite a major foreign shareholder having completely divested its holding in the company (a major overhang since 2014), OGDC has corrected 8% in the past 3mths, on anticipated new supply pressure (GoP aiming stake sale of up to 7% of its holding in OGDC). We highlight that the stock is trading at the bottom of historical valuations of FY20f EV/EBITDA of 1.5x and P/E of 4.5x. The present rally in global oil prices is a key trigger.