Elixir Securities Limited – Elixir Insight

Karachi, February 20, 2018 (PPI-OT): Oil and Gas Dev. Company Limited – Management Shrugs Off Imposition of Windfall Levy on Oil

OGDC continued to book higher hydrocarbon prices for fields migrated to 2012 Petroleum Policy (particularly Tal Block) and also did not reverse retrospective gains with regards to the policy amendments raising liability of windfall levy on oil revenues as the Management is confident of winning its case.

OGDC’s development projects KPD-TAY and Uch-II were fully functional while Nashpa/Mela is expected to start production from Feb-18. Recent discoveries in Bhambara-1, Tanddo Allah Yar South West-1 and Dhok Sultan-1 were relatively small in size totalling 419bpd oil and 30mmcfd gas production.

OGDC announced its 2QFY18 financial result where it posted earnings of PKR19.66bn (EPS: PKR4.57) in 2QFY18. On cumulative basis, 1HFY18 earnings grew by 22%YoY to PKR36.67bn (EPS: PKR8.53) where the DPS in 1HFY18 was 90%YoY higher at PKR4.75.

The stock trades at an implied oil price of USD42/bbl, 34% discount to existing oil price of USD64/bbl where our Dec-18 PT of PKR193 offers capital upside of 15%, besides decent dividend yield of 4.8%. Buy.

Management’s Take on Amendments in Supplemental Agreements: Unlike Pakistan Oilfields Limited (POL), Oil and Gas Development Company (OGDC) continued to book higher hydrocarbon prices for fields migrated to 2012 Petroleum Policy and also did not reverse retrospective gains with regards to the policy amendments raising liability of windfall levy on oil revenues. The management was confident that their case was strong as the government can not 1) unilaterally pass amendments, 2) retrospectively reverse booked gains under incentive pricing, and 3) revert back supplemental agreements to previous policies. The company would soon contest its case in the court of law. However, there is a risk that the company may not book prospective incentive pricing for migrated fields (mainly TAL block) post Dec-17.

While POL also commented on similar lines, it opted to stay on the conservative side by reversing its retrospective gains via its 2QFY18 financial results. The strong policy stance from OGDC now raises confidence that the joint operators may likely win the legal battle, hinting towards the possibility of retrospective gains (~PKR16/share) to be booked by POL upon resolution of the matter.

Result Review: OGDC announced its 2QFY18 financial result where it posted PAT of PKR19.66bn (EPS: PKR4.57), up 28%YoY/16%QoQ. Beside the result, the company announced an interim DPS of PKR3 (payout: 66%) in 2QFY18 compared with PKR1/PKR1.75 (payout: 28%/44%) in 2QFY17/1QFY18. Earnings growth was mainly led by 25%YoY/18%QoQ growth in revenues led by 25%YoY/12%QoQ increase in realized hydrocarbon prices to USD27.23/boe.

On operational front, hydrocarbon production declined by 3%YoY to 17.71mmboe (where oil/gas production declined by 12%YoY/2%YoY to 40,091bpd/1,031mmcfd and LPG production grew by massive 68%YoY to 694tpd in 2QFY18) and rose by 2%QoQ (where gas/LPG production grew by 4%QoQ/18%QoQ and oil production declined by 6%QoQ) in 2QFY18.

On costs front, major increase was seen in exploration, jumping by 51%YoY/283%QoQ due to higher dry well expense despite lower seismic activity (2D: down 54%YoY but up 1208%QoQ 641km; 3D: down 50%YoY/30%QoQ to 124km2) during the period.

On cumulative basis, 1HFY18 earnings grew by 22%YoY to PKR36.67bn (EPS: PKR8.53) where the DPS in 1HFY18 was 90%YoY higher at PKR4.75 owing to improved earnings and better cash position post maturity of government bonds (payout: 56% in 1HFY18 vs. 36% in 1HFY17). Earnings growth was mainly led by 18%YoY growth in revenues driven by 19%YoY increase in realized hydrocarbon prices to USD25.76/boe (17%YoY/9%YoY/42%YoY increase in realized oil/gas/LPG prices to USD48.69/PKR253.83/PKR53,591).

On operational front, hydrocarbon production declined by 3%YoY to 34.99mmboe (where oil/gas production both declined by 4%YoY to 41,310bpd/1,009mmcfd and LPG production grew by massive 70%YoY to 642tpd). Other Income fell by 28%YoY owing to maturity of high yielding PIBs in Jul-17. Share of profit jumped 57%YoY owing to higher earnings from Mari Petroleum. Note that OGDC booked its share of MARI’s actual earnings for 1QFY18 for both the quarters as the latter has not yet announced its result for 2QFY18; where the balance would be adjusted with subsequent results, just like OGDC booked average quarterly earnings of FY17 for 1QFY18.

Update on Exploration and Development Front: In its 1HFY18 Analyst Briefing, OGDC apprised that it drilled total 9 wells (four exploratory and five development wells). Exploratory efforts yielded three hydrocarbon discoveries during the period namely Bhambara-1 (5.73mmcfd gas), Tanddo Allah Yar South West-1 (72bpd oil and 10mmcfd gas) and Dhok Hussain-1 (360bpd oil and 15.4mmcfd gas). The management stated that KPD-TAY (Kunnar Pasakhi Deep and Tando Allah Yar) development project was fully functional producing 4,000bpd of oil and 195mmcfd of gas which will likely remain stable over the next few years. Similarly Uch-II development project also completed producing 130mmcfd of gas.

On the other hand, Nashpa/Mela Development Project’s completion was delayed to Feb-18 from Sep-17 previously, and it is expected to raise oil/gas/LPG production by 1,120bpd/10mmcfd/340tpd. The company plans to hold its funds received after PIBs maturity for investment opportunities locally and abroad. Besides, it is also evaluating vertical diversification of business in downstream chain.

Investment Perspective: The stock trades at an implied oil price of USD42/bbl, 34% discount to existing oil price of USD64/bbl. The stock trades at a FY18F/FY19F PE of 8.9x/8.5x, where our Dec-18 PT of PKR193 offers capital upside of 15%, besides decent dividend yield of 4.8%. Buy.

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