KARACHI – The Oil and Gas Development Company (OGDC) has so far drilled eight wells in FY11 against a total target of 26 wells. Among the drilled wells, only one is exploratory against a target of 10 exploratory wells in FY11. Similarly, the company has drilled a meager seven development and appraisal wells against a target of 16 wells.
The ongoing circular debt crisis, along with restricted security clearance, would continue to keep the exploration programme muted, said Nauman Khan at Topline. After posting an above average return of 60 percent in 2010, the heavy weight OGDC, with a negative return of 17 percent, has underperformed in CY11. Besides, local and international geo-political events lead to foreign selling at the local bourse. In addition, circular debt crisis, stagnant hydro carbon production and a delay in few major projects have triggered sharp erosion in its share price.
Thus, with the share price dwindling to a 7-month low, the scrip is trading at an implied oil price of $95 per barrel compared to the long-term oil price assumption of an average $85 per barrel. However, further rise in oil prices, positive development from Zin block and other blocks in litigation could be price triggers for the company in the short and medium term.
Though, 1HFY11 results showed an impressive net earnings growth of 11 percent to stand at Rs 7.4 per share, the company skipped the quarterly dividend for the first ever time since its listing in 2004. This is primarily due to the swelling circular debt, as over due receivables stand at Rs 73 billion as at December 31, 2010. It is to be noted that the company’s dividend payout ratio, above 80 percent on average during FY05-08, has sharply reduced in the past two years (FY09-10) to an average 52 percent (1st half payout ratio was 20 percent).
Furthermore, the payout ratio would remain low for at least the next two years until the circular debt fully resolves, Nauman added. However, a positive development in the exploration programme could be a better prospect from Zin Block. As per discussions with the company’s management, the government has issued a security clearance in the Zin Block and drilling is expected to start in the next two to three months.
“Though, it is pre-mature to access any sort of earning or reserve impact of Zin block on the company, we believe that the drilling start-up would be a positive trigger for the company.” he said.
In addition to the circular debt, other issues that have marred company’s performance in the last few years are litigation issues including KPD-TAY and Sinjhoro Block development projects. The litigation has trapped an additional production of 7000bpd and 300mmcfd of oil and gas production, respectively, which would have been sufficient to arrest the company’s oil and gas production decline of the last two years.
As per our discussion with the management, Sinjhoro block is expected to come online by the beginning of FY12. The development would add an additional 3000bpd and 25mmcfd of oil and gas to company’s hydrocarbon production.
