Oil & Gas Development Company

The E&P giant, OGDC announced its first quarter FY11 results and was largely in line with the consensus estimates. A 38 percent growth in profitability would normally pump great confidence amongst the investors, but this certainly is not the case with the OGDC. The continuation of dismal dividend payout (Rs1.5/share during 1QFY11) is what created enough doubts amongst the shareholders.
The top line growth is commendable, but it owes a lot to the prior upward revisions in Qadirpur well-head prices and the onetime gain from the Bobi field. The retrospective gain from Bobi filed was booked during the quarter, as Ogra revised the field price ranging from December 2007 till present, which is likely to have contributed around Rs4 billion of the revenues.
The overall net realised gas prices improved by a considerable 27 percent over the corresponding period of FY10, aided by rupees depreciation against the greenback. The performance on the hydrocarbon production front, though, remained depressed, which is a cause of concern going forward. The oil and gas production is expected to have slid by 6~7 percent during the quarter as the floods and delays in compressor installation at Qadirpur slowed the flow of production.
The first quarter may well have been all about the floods, but it certainly did not stop OGDC declaring at least four wells dry during the quarter. Worse still, the company has a 100 percent stake in all four exploratory wells that were declared dry, as a consequence of which the exploration expenditure more-than-doubled to over Rs2.5 billion during the period. Extensive 2D and 3D seismic activity also played its part in augmenting the field exploration expenditure.
The E&P firms are not normally associated that highly with the circular debt, but the fact of the matter is that OGDCs receivables have mounted to PSO-like levels - reportedly nearing Rs100 billion by the end of September. No surprise, that the dividend did not exceed a paltry Rs1.5/share, something which the investors will not cherish.
The chances of dividend payout to be as high as that in the golden days of the post circular debt world anytime soon, are slim. The company has to sort out is falling production levels, as the one-off gains would not come to the rescue every other time, nor will the circular debt let the company achieve its highly optimistic and unrealistic exploration programme for FY11. The stock price, the market believes, is too high at the moment to jump on.

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OGDC P&L

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Rs mn                    1QFY11  1QFY10     chg

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Sales                         3       3     24%

Operating expenses                          21%

Gross profit                  2       2     25%

Gross margins               71%     71%      1%

Other income                               -24%

Exploration expenditure                    106%

PAT                           1       1     38%

EPS (Rs)                                    38%

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Source: KSE notice