Equity Analysis /
Pakistan

Oil & Gas Development: Q1 20 preview: Sequential decline in earnings on lower revenue, lack of FX gains

    Saad Ali
    Saad Ali

    Head of Research

    Intermarket Securities
    24 October 2019

    We expect Oil & Gas Development Co. (OGDC) to post Q1 FY 20 NPAT of PKR26.9bn (EPS PKR6.27), flat yoy but down 19% qoq. Without the exchange gains in the previous quarter, the result will be up 8% qoq by our estimate. We also expect the company to announce the first interim dividend of PKR2.5/sh (same as last year).

    Key expectations for Q1 FY 20: 

    • The expected 3% qoq decline in net sales to PKR67.5bn is largely due to gas revenue because of lower well-head gas prices (effective oil prices were 7% lower than in the previous 6-month period). OGDC produced an estimated 37,700bpd of oil (down 6% qoq) during Q1, where Nashpa was on an annual turn around in the last two weeks of Sep’19. Lower oil production is also due to lower oil offtake by refineries amid furnace oil stock buildup. 
    • There were two dry wells during the quarter: Shawa (Nashpa) and Pirani (Khewari). We estimate exploration expenses of PKR5.7bn (3.0x yoy); without the dry wells, our EPS estimate would have been higher by PKR0.63/sh. Note that OGDC booked dry well cost related to offshore-well Kekra in the previous quarter. There was about 11% jump in 2D/3D seismic data acquisition during the period, which also contributed to the expected jump.
    • Other income is expected to decline 74% qoq majorly due to lack of exchange gains. 

    We have a Buy stance on OGDC with a TP of PKR180/sh (43% potential upside). OGDC is trading at very undemanding valuations (EV/EBITDA of 1.4x) with a forward dividend yield of 10%. Key catalysts for the stock are (i) large discovery given aggressive exploration program and (ii) success at the pilot shale gas project.

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