OGDC improves earnings: disappoints shareholders

The countrys E&P giant OGDC announced its first half FY11 results yesterday, the stock price moved up with the 11 percent increase in the companys profits. But confidence remains down as the analyst community maintains a sell call on the scrip, believing it to be overpriced at the current level.
Despite showing an improvement in both the top line and bottom line numbers, the result was a disappointment as much more was expected by the analysts. The Rs7.35/share earnings reported were nearly 10 percent off the consensus estimates owing to a variety of reasons. The biggest disappointment came in the form of no interim dividend announcement by the firm for the period.
There are no marks for guessing why the OGDC held back the interim dividend announcement - the firm is on the receiving end of the circular debt. OGDCs receivables mounted to Rs96 billion as of September 2010 and in the absence of any concrete measures to resolve the crisis since, it is believed to have stayed in the vicinity, if not increased.
Moreover, the higher capex requirement in the near future also seems to have influenced the decision. The company has been woefully off the mark towards achieving the full year exploration targets so far, which suggests that if OGDC is to stay optimistic in achieving its drilling and exploration targets, it will have to incur high capex in the remaining half.
Other than that, the growth in top line was mainly price based as the average net realised prices of oil and gas improved by 11 and 22 percent respectively. On the production front though, the performance remained lacklustre as oil production continued its declining trend falling by 5 percent on a year-on-year basis. Gas production improved a bit, but the top line growth was largely inorganic, certainly not a good sign.
The bottom line improvement has also a lot to do with over a billion rupee decline in exploration expenses, which is not necessarily a positive sign in the long run. The company engaged in only 575 sq km of 2D seismic activity, less than half of what it did during the same period last year. Moreover, there were two dry wells declared during the period, which also contributed in reducing the exploration costs.
The recent oil price rally on the back of Arab unrest is indeed good for the companys revenue in the remaining half, but the joy maybe short-lived as solely price-based growth cannot continue for long. The lower payout owing to circular debt may also be dampening to the shareholders confidence - no wonder OGDC is no more tipped as the op pick in the market.

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OGDC P&L

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Rs mn                     1HFY11    1HFY10    chg    2QFY11    2QFY10    chg

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Sales                    81,090    72,633     12%   41,639    40,808      2%

Operating expenses       12,792    10,793     19%    6,437     5,571     16%

Gross profits            58,022    52,601     10%   29,846    30,060     -1%

Gross margins                72%       72%    -1%       72%       74%    -3%

Other income                919     1,207    -24%      312       408    -23%

Exploration expenditure   3,536     4,722    -25%    1,004     3,495    -71%

PAT                      31,598    28,493     11%   14,889    16,428     -9%

EPS (Rs)                   7.35      6.62             3.46      3.82

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Source: KSE notice