Pakistan’s largest exploration and production entity, Oil & Gas Development Company (OGDC) posted 2QFY19 earnings growth of 55%YoY, mainly on the back of 25% increase in revenues and 2.2x increase in other income, thanks to higher oil prices, PKR depreciation against US$ and uptick in policy rate. The company also announced cash dividend of Rs3, taking 1HFY19 dividend to Rs5.75/share.
The company’s net sales were up due to: 1) 16%YoY higher Arab Light oil prices (average US$69/bbl) and 26%YoY gain in dollar against PKR. The company’s other income grew by 2.2x YoY to Rs7.8 billion during the outgoing quarter. This was due to higher interest income of Rs3.8 billion owing to increase in policy rate (450bps increase in CY18) and exchange gain of Rs3.6 billion on the back of PKR losing value against greenback. To note, the company holds US$230 million in Term Deposit Receipts (TDRs) as of December 2018.
Exploration charges were down 57% YoY during the outgoing quarter which also supported bottom-line growth. OGDC booked profits from associates of Rs1.2 billion, up 20%YoY due to strong earnings growth posted by its associate Mari Petroleum (MARI), up 85%YoY to Rs48.8 in 2QFY19.
OGDC reported 1HFY19 profit after tax of Rs56.8 billion (EPS: Rs13.2) rising 55%YoY on the back of solid growth in sales, up 32%YoY as a high global crude price environment and PkR depreciation pushed realized prices. Realized oil price for the period rose to US$62.2/bbl as compared to US$48.69/bbl during 1HFY18, while oil production declined 1.1%YoY to 40,846 bpd, there was 2%YoY slip in natural gas production as fields underwent gradual depletions. While depreciation increased to R1.3 billion work-over expenses also increased to Rs0.5 billion hike, (11 work over as against 6 work-over in last year), with only one well was declared dry as against 3 in last year.
46/29% of total crude and natural gas produced domestically during the period was by OGDC. Pile up of furnace oil stock has reduced lifting of crude by refineries. This break in lifting of crude reduced actual production by 1,000bbls.
Extended stop in UCH power plant generation has reduced gas production (closure for one month and 24 days) where 34mmcfd reduction was due to this break in generation. Resolution of refinery offatke and UCH power plant generation would alleviate these concerns, with Dhok Hussain (20mmcf, 400bbl), Bitrisim (28mmcf, 750bbl) amongst others totaling 157mmcf, to be connected to the grid, where SNGP’s delays in interconnectivity is the major stumbling block for realizing revenues. Export of fuel oil, ban on import of RFO and generation on efficient IPPs are options available to the GoP for removing bottlenecks.
Developments in Baluchistan have led to drastic increase in exploratory activity, with exploratory wells in the region to be expected in the medium term. Kekra-1 drilling activity has achieved 70% completion, with about 3 weeks left in the activity. Being a high risk well any indication of size is difficult to ascertain with management broadly estimating 5-8tcf of gas. Even so, the reservoir size is yet to be determined, with a big structure, permeability and completion activity yet to be confirmed.
With regards to the stake sale of MARI, OGDC has first right of refusal, where the sale price by the GoP is yet to be determined. Circular debt settlement is not finalized; with the amount falling into OGDC’s coffers is yet to be determined. Management estimates that some amount to be paid to SNGPL which will be paying off a share to PSO for RLNG, while the improved cash flow situation for the SUIs is likely to improve recurring payments.
Oil services cost has fallen significantly with oil price movements which is expected to remain at current levels. Bids on five blocks submitted with three acquired as operator and one as non-operator. Focus on in-house resources for seismic surveys remains in place, while exploratory efforts have remained subdued. Signs of bootstrapped exploration activity during the period and subdued development activity are evident in below the line expenses, while exploration activity is on track to hit the annual target of 51 wells.
The key risks to OGDC profitability remain: 1) volatility in international oil prices, 2) lower than expected hydrocarbon production and 3) significant exploration and development cost.