Karachi, December 08, 2017 (PPI-OT): OGDC: Project delays impacting price performance
Despite its peers rallying by~ 9.8% since May and intl. oil prices rising 23.5% during the period, OGDC has lost 17.1% on account of potential delays in the upcoming projects. In this regard, phase II of KPD-TAY has completed as per our sources, while work is underway at Nashpa-Mela and Soghri’s timeline has been extended. The incremental flows of ~3,500bpd of oil, ~100MMCFD gas and ~300MTD of LPG, while significant in absolute nature, will only be able to off-set the declining production from various old fields, hence contributing little towards the bottom-line.
However, the company is in the process of drilling more wells taking leads from the result of seismic surveys with its success ratio rising to 40/57% for FY16/17. Having said this, we believe the company should be able to grow its earnings by an avg. 19.4% during FY18-20F on account of: 1) augmented production from its working interest in TAL block fields and 2) higher oil prices. Trading at a forward P/E of 8.3x (vs. 3yr historical avg. of 9.3x), our NAV based TP of PkR190/sh offers 23.7% upside from current levels.
Update on the projects: Going through the financial statements, PPIS data and our channel checks, the developmental works on phase II of KPD-TAY stands completed and the field should be able to start producing 4,000bpd oil and ~250MMCFD of gas in the next few weeks as announced by the company. This production will offset the declining trend of output from various old fields including Rajian, Dakhni, Pasakhi etc. Additionally, the flow rates suggest work at Nashpa-Mela is underway (potential delay cannot be ruled out), while timeline for Soghri project (for 20MMCFD gas) has been extended again to Jun’18.Moreover, ECC has given approval of Uch’s well-head gas price as agreed under the original gas sales agreement (previously being priced at US$3.9/mmbtu).
Success ratio on the rise: Success ratio of the company has started to rise steadily, recorded at 40/57% for FY16/17 versus 38/35% in FY06/07. Significant leads were unearthed due to aggressive seismic data collection in FY16, following which the company has spudded a number of wells (11 wells FY16TD). So far in FY18, the company has discovered 2 prospects at Bhambaro and TAY South West with a cumulative production of 16MMCFD gas and 72bpd of oil. Also, Ranipur has been declared a dry hole which will be accounted for in 2QFY18 results (bottom-line impact of ~PkR0.20/sh), potentially nullifying the one-time positive impact from the revision of TAL block fields.
Investment Perspective: The scrip has lost 17.1% since May’17, despite higher intl. oil prices (up by 23.5%). While new discoveries are being made and further developmental wells are being drilled, we believe investors remain wary of the company’s inability to tap a sizable discovery and potential delays in developmental works. That said, healthy earnings growth (avg. 18.8% during FY18-20F), positive sector triggers (possible devaluation and stable oil prices resulting in better gas prices) along with discounted valuations can make room for price performance. Our NAV based TP of PkR190/sh, warrants a BUY stance.