Equity Analysis /
Pakistan

Oil & Gas Development: Uch-II project – OGRA determines well-head gas price; key positive for earnings

    Intermarket Securities
    6 January 2020

    According to a material notice by the Oil & Gas Development Co. (OGDC), OGRA has determined the well-head gas price for the Uch-II project to be US$5.40-5.60/mmbtu, which is higher than the provisional price of US$5.01/mmbtu that OGDC was booking until now. The Uch-II project – undertaken in FY 12 and completed in February 2014 – entailed drilling of 15 wells in a deeper reservoir of the Uch block along with a processing plant at a total cost of US$188mn. The project was targeted to produce 160mmcfd gas as dedicated supply to the Uch II power plant. Since production commenced, OGDC has been supplying about 130mmcfd gas to the plant at a provisionally determined price.

    Uch-I – producing about 210mmcfd in the block – is governed by a different gas formula, which comes out about US$3.92/mmbtu. The entire Uch field produces close to 340mmcfd of gas; it is the largest gas field of OGDC, which has 100% stake in the asset.

    The new price has been effective since December 2013, and OGDC has disclosed the retrospective impact of the revised gas price since then to be PKR5.88bn (one-time after-tax earnings impact of PKR1.0/sh).

    In our estimates, however, we were assuming Uch-II price to be the same as Uch-I (US$3.92/mmbtu). We will thus revise our estimates with the new price, which will have an incremental impact of about PKR1.8/sh.

    This is material positive news for OGDC, which had few or modest production catalysts up till now. We reiterate our Buy rating on the stock, where our target price (without incorporating this event) is PKR184/sh. Key reason for our liking is undemanding valuations – EV/EBITDA of 2.0x and forward P/E of 5.5x – despite it having the largest exploration acreage (thus the ability to tap into any new promising asset in Pakistan), relatively better cash-flows and payouts than PPL and a less concentrated field mix. 

    Risks: (i) Slow down in production in major assets, (ii) unfavourable GoP decision on terms of converted Tal block fields, and (iii) decline in oil prices.