OGDCL: OIL AND GAS DEVELOPMENT COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003-1H'10
The government of Pakistan signed an agreement with USSR on 4th March 1961 to revive exploration in the country's energy sector. The agreement entitled Pakistan to 27 million rubles to finance equipment and services of Soviet experts for exploration.
Subsequently, OGDCL was created under an ordinance dated 20th September 1961 with the prime responsibility to undertake an organized and systematic exploratory program and to plan and promote Pakistan's oil and gas prospects.
Initially stages the financial resources were arranged by the GOP as the OGDC lacked the ways and means to raise the risk capital. Later, in July 1989, as the company progressed as a result of major oil and gas discoveries, the Government off-loaded the company from the Federal budget and allowed it to manage its activities with self-generated funds. The year 1989-90 was the company's first year of self-financing. Today, OGDCL is the largest E&P Company in Pakistan. It is listed on all the three stock exchanges of the country as well as the London Stock Exchange.
Over the years OGDCL has grown to become the company that owning the largest oil and gas shares in the country. Presently, the company's oil and gas production stands at 63% and 24% respectively as on January 2009. It holds the largest portfolio of the recoverable hydrocarbon reserves of Pakistan, at 35% of gas and 45% of oil, respectively, as at 31 December 2008. The company, with a portfolio of 35 operated exploration licences, has the largest exploration acreage in Pakistan, covering 30% of the total awarded acreage as of 30 June 2009.
OGDCL has 75 oil and gas fields. Out of these, Uch and Qadirpur are the two major gas fields of OGDCL, contributing more than 75% of company's total balance recoverable reserves. The major oil fields are Bobi, Chanda, Dakhni, Dhodak, Pasakhi and Tando Allam, accounting for almost 45% of the company's total balance recoverable reserves. Among non-operated fields, Adhi, Pindori, Miano, Loti, Manzalai and Makori are the major oil and gas fields. The company has been following a aggressive growth strategy for the past years, with positive results like the discovery of 10 fields in 2007, 5 fields in FY08 and 2 fields in FY09, bringing the total to 75 fields till FY09 end.
During the year, Company's exploratory efforts resulted into discovery of two gas/condensate fields at Kunnar South-1 and Pasahki West Deep-1. Both the discovered fields are located in Sindh. Subsequently, on August 12, 2009 another gas discovery was made by the company at Reti-1A in Guddu Exploration Licence, district Ghotki, Sindh.
Recent results 1H10:
Sales revenue was slightly higher at Rs 72.633 billion (1H09: 71.940 billion) despite a decline in production of crude oil and LPG. Increased revenues include Rs 8.684 billion on account of revision in Qadirpur wellhead gas price, with effect from January 1 2008. Discounting for this mentioned amount, the sales actually went down due to decline in prices of crude oil and gas from the non-operated JV fields. Net realized prices of crude, gas and LPG averaged at $59.72/bbl (1H09: $69/bbl), Rs 177.09/Mcf (1H09: 169.57/Mcf), and Rs 49,288/M.Ton (1H09: 39,724/M.Ton) during the aforementioned period.
Net crude oil production of 38,787 barrels per day, net gas production was 960 MMcf per day, net LPG production was 199 tons per day and net Sulphur production was 64 tons per day. The company spudded eight wells and made four discoveries during the year, (Reti-1A, Baloch-1, Nashpa-1 and Dakhni N-1). It is expected that in the future production would increase due to better production from the newly spud wells, especially Nashpa.
PBT declined by 6.2% to be Rs 45.421 billion due to lower other income and higher exploration and prospecting charges for the time period under consideration. PAT was recorded at Rs 28.493 billion compared to Rs 31.781 billion in 1H09 with an EPS of Rs 6.62. Operating profit margin and net profit margin for the year was 61% and 39% respectively.
In 2009, the net crude oil production was of 41,019 barrels per day, net gas production was 1,001 MMcf per day, net LPG production 218 tons per day and net sulphur production was 64 tons per day. The net crude oil production from company's 100% owned fields and share in operated JV fields decreased by 5.6% when compared to the same period last year while the gas production improved slightly. The drop in oil production was caused primarily due to decline in production from Dhodak, Thora, Lashari, Bobi, Sono, Tando Alam and Chanda fields. During the year under review, 17 new wells namely Dakhni Deep-2, Dhodak Deep-1, Nandpur-10, Kal-3, Pasahki-5, Pasahki-6, Thora-7, Kunnar-8, Qadirpur-33, Qadirpur-35, Qadirpur-36, Qadirpur-37, Qadirpur-38, Qadirpur/HRL-2, Qadirpur/HRL-3, Qadirpur/HRL-4, and Qadirpur/HRL-5 were brought into production.
Financial performance (Jun 03-Jun 09)
During the year FY09, OGDC registered high growth in sales, resulting in net dales of the year to be Rs 130.830 billion from Rs 125.908 billion in FY08, showing an increase of 3.9% from last year. This increase was mainly due to the increased revenue gained from the sale of gas. The sale of gas rose due to the combination of increased realized prices and enhanced sales volume, which enabled the gain in revenue from sale of gas to go up to Rs 13.070 billion. Though the increase in revenue from sale of gas was exceptional, it was hampered by the decline of Rs 8.124 billion due to decline realized prices and sale volume of crude oil, LPG, naphtha, sulphur and other petroleum products, resulted into a net increase of Rs 4.946 billion in product sales revenue. Net realized prices of crude oil, gas and LPG averaged at US $55.53/bbl, Rs 174.78/Mcf and Rs 36,935/M.Ton respectively compared to US $71.29/bbl, Rs 140.88/Mcf and Rs 36,567/M.Ton respectively during last year.
In FY09, the profit before taxation for the year under review was Rs 80.928 billion compared to Rs 78.307 billion during last year. Compared with increase in profit before tax by 3.3%, profit after tax increased by 25.3% to Rs 55.540 billion compared to Rs 44.338 billion in FY08. Increase in profit after taxation is mainly due to decrease in provision for taxation by Rs 8.581 billion and decrease in royalty by Rs 2.165 billion. Increase in profit after taxation resulted into earnings per Share (EPS) of Rs 12.91 compared to Rs 10.31 in FY08.
In FY09, both the gross profit margin and the profit margin registered increase, as after many years the annual growth in gross profit and net income was higher than the annual growth in sales. This is also attributed to the gain in realized prices of products affecting profits more than the gain in sales affecting profits, which has been the case in previous years. The gross profit margin has been in a slightly declining trend since FY05. Although the decline has not been sharp in any year, but it has led to a steady effect over the time. The primary reason for this decline is that the increase in sales has been much higher than the increase in gross profits, particularly due to the increasing royalty expenses paid by the company. This trend is also reflected somewhat in the profit margin, which only rose during FY06.
Return on assets and return on equity also showed an increase in FY09, as compared to their previous values. This was also primarily due to the low increase in sales as compared to the increase in assets and equity. In the past years ROA and ROE has also show a similarly slightly steady but downward trend. There was an increase in ROA and ROE during FY05 till FY06. In FY07 and FY08 it again started to drop slightly as the net profit did not rise as much as the assets and equity, due to low increase in sales in FY07 and due to high taxes in FY08.
In terms of asset management, OGDC has done well in past years. Inventory turnover days have been increasing since FY06 till date. This as particularly caused by the heavy increases observed in stocks and spares since FY06. Since FY06, the company has worked hard to maintain the level of inventory turnover time under control. It has been successful in the sense that the level of inventory turnover has remained quite steady since FY06. Similarly Day Sales Outstanding has also been on a slightly increasing trend since FY06, due to rises in trade debts. As a result, we see that the operating cycle of the company has been increasing since the end of 2005, caused by the increases in DSO and ITO. This has led the company to a negative image in terms of stock and debt management and the company needs to turn this around as soon as possible, as the effects are getting bigger every passing year.
The company has been seen to make some measures regarding this issue, and they have also been successful in the sense that inventory turnover has been maintained at same level in FY09, but the current culture of companies and government to keep the OGDCL bills long due has affected its DSO a lot.
In FY9, both asset turnover and sales over equity ratio decreased, caused by the low growth in sales compared to previous years. This was unseen in past years as in terms of asset turnover, we see a positive trend steadily increasing over the years. As the company's sales have been on the increase, so have the assets but the increase in sales have been much higher than the sales of assets. Similarly for sales over equity ratio, a similar trend is observed showing that the company is able to achieve much higher sales on relatively low increase in equity. This shows that although the company's inventory days and operating cycle is high, yet the company is able to achieve higher sales each year, except for FY09.
The current ratio in FY09 increased to 4.08 from its FY08 value of 3.72. The rationale behind it was the increase in current assets, primarily caused by increased in trade debts, while the current liabilities remained nearly the same as that of last year. Current liabilities in FY08 has shown a heavy increase due to the royalty payables the company incurred in the year, which rose from Rs 2.397 billion to Rs 6.606 billion, as well as from accrued liabilities. Also the tax payable at the end of the year amount also was high, as it included advance tax from last year as well, taking total current liabilities to all time high value. Current assets also rose in the year, primarily due to the massive increase in trade debts, from Rs 27,873.515 billion from last year to Rs 40626.931 billion this year. Still as the increase in liabilities was much higher compared to previous years, the ratio fell from FY07. Yet the major liabilities, like royalties, were a part of the company's expansion plan, which will yield greater returns in the future. The declines notwithstanding, the company has fared better than its competitors in all years under consideration. However, the liquidity of the company may decline in future it the management continues to opt for liquidating its short-term investments to finance future exploration and drilling activities.
OGDCL has been facing increasing debts over the past years, especially in the sector of current liabilities in the form of royalties and as in the case of last year in the form of taxes provision incurred as well. The rises have been high in the royalties section as a part of the company's strategy to expand and acquire new fields. This is leading the debt to assets and the debt to equity ratios to rise since FY06 till FY09. Both, debt to assets and debt to equity ratio show similar trends over the past years. But in FY09 the key feature was the fact that the increase in debts was not primarily those of current liabilities, but those of provision of decommissioning costs and deferred tax, both long-term debts. As a result, the long-term debt to equity ratio of FY09 is much higher than that of past years.
The increase in debts, ie from FY06 to FY08, which have been primarily of current liabilities could also be seen from the long-term debt to equity ratio, which showed a slight increasing trend since FY06, implying that although overall debt is rising, yet long-term debts are steady, reflecting company's policy to avoid the performing of investment and other activities through long-term debt. But still, the below average debt ratios of OGDCL suggest a slightly lower level of leverage for the company, compared to the average industry.
The times interest earned ratio (TIE) plunged in FY07 on account of the unwinding of discount on provision for decommissioning cost, which took up the major chunk of finance costs. This process was again repeated in FY08 and similarly in FY09 when the ratio was able to rise only slightly due to the high unwinding of discount on provision for decommissioning cost. In FY09 the finance costs rose slightly but as the level of operating income showed low increase, the TIE went further down than FY08. Otherwise if we observe the balance sheet we see that the company currently has no long-term loans. Thus there exists no interest element in financial charges.
The earning per share of OGDC rose this year from 10.31 to 12.91, having an increase of 25.26%. This year the rise was large due to gain in overall profit, although the sales were not that high. In FY08 and FY07, the decline in EPS was again largely a result of the heightened exploration and development activities of the company.
Along with the increase in EPS, OGDC managed to decrease its DPS by mere Rs 0.25 per share, taking it to Rs 9.25 per share. This is low as compared to its competitors. The book value of the company has been increasing in the years on the base of its increasing assets. The dividend announced has been Rs 1.5 taking the interim dividend payable for the year 2010 to be Rs 2.5.
: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder
: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Copyright Business Recorder, 2010