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Morning Call about Oil and Gas Development Company Limited

Karachi: At current price level of PKR 132.14/share OGDC implies a TR of 22.1%…

According to Arif Habib Limited, the Stock of Oil and Gas Development Company Limited (OGDC) has lost its vigour by 14% since the start of current fiscal year, underperforming the Benchmark KSE-100 Index by 8%. Apprehension regarding a potential selling by the foreign investors was the major price dampener for the stock. This fear appeared to be strong enough to elude the positives like production growth due to ongoing development projects; healthy exploration stance and strong oil price outlook. Arif Habib Limited is of the view that this recent plunge in the stock price provides an attractive buying opportunity. The stock is providing an upside potential of 17.6% from Arif Habib Limited’s reserved based target price of PKR 155.4/share. Furthermore the stock is trading at FY12E dividend yield of 4.5%, implying a total return of 22.1%.

Stock price is yet to incorporate the impact of development projects
OGDC has taken on several development projects on its existing and new fields in order to arrest the declining trend in total oil and gas production of the company. The total production addition, from these projects will be 492mmcfd gas and 7,795bopd oil to OGDC. Annualized productions of these projects are estimated to add PKR 35bn to OGDC’s topline translating into EPS of PKR 3.68/share. Although it is imperative to highlight that any further delays from the mentioned timeline by the company would trim down Arif Habib Limited’s FY12/FY13 earnings estimates.

Aggressive exploration outlook
The company is either an operator or has a stake in 7 exploratory wells that are in various stages of drilling. Among all Zin X-01 and Jabbi-01 are high value projects. Zin is located in Baluchistan where the drilling status is currently 54%. The reservoir size of Zin Block is estimated at ~4 TCF. It would be premature to estimate the drilling outcome of these high value projects. However, any positive development on this front would act as a major price trigger going forward.

Circular debt will still limit the dividend payout
The company’s trade debts have fallen to PKR 78bn as of June 30th, 2011 from PKR 127bn on March 31st, 2011. Moreover, trade and other payables have also been abated considerably to PKR 17bn from PKR 35bn for the same period under review. This reduction in receivables and payables is just due to injection of money by the GoP earlier this May intended to improve liquidity and higher recoveries from the power units – filtering down to the upstream companies.

With these efforts in place Arif Habib Limited still remains cautious over the pace inter-corporate debt accumulation in the country vis-a-vis liquidity situation and payouts from energy companies. Amongst E&Ps OGDC being the major local supplier has been most affected due to cash lacking refineries. As a result of which the company subsequently limited its payout in the medium term to manage its cash flows declining to 37.5% in FY11 compared to 85% in FY05. Arif Habib Limited expects the company to payout PKR 6.0 per share in FY12, based on its assumption of a capital expenditure of PKR 24bn, which is likely to generate a free cash flow worth PKR 42bn.

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