OGDC no longer a high dividend yielding stock on bourse

OGDCs stock has attracted renewed interest of late, following the news of two small discoveries in Sanghar and Nashpa areas. These discoveries have helped bring confidence in the firm after it disappointed investors with a lower-than-expected payout of 64 percent for the fiscal year 2009 - its lowest payout in five years.
The oil and gas exploration giant performed poorly last year, as the company managed only two discoveries despite a record Seismic survey spudding of 30 wells - resulting in a 5-year low success ratio of 0.06:1. Therefore two, small but early, discoveries in FY10 give an encouraging sign and reflect the firms investment effort in exploratory activities.
The countrys largest producer has rather aggressive plans for capital expenditure of up to $750 million in FY10, with more focus on exploratory efforts and less seismic surveys to take advantage of high investment in surveys carried out during FY09. OGDC plans to increase its gas production in Balochistan to meet the increasing requirement of power plants. The company has committed 160 mmfcd of gas for next 25 years to Uch power plant, for which the bidding process is underway.
The firm realises the importance of investing in its high yielding fields among which Qadirpur is the most important. The field is expected to deplete in the near future, therefore in order to maintain a sizeable gas production from the field; OGDC has decided to install compressors, which will ensure 650 mmcfd supply of gas till 2013. With operations likely to start by May 2010, the project is expected to cost around $30 million.
However, OGDCs performance is hindered by issues pending in courts which restrain the company from engaging in exploration and development of fields. Currently, two blocks in Sindh are on hold because of litigation in court. These coupled with ageing fields are likely to have a negative impact on firms oil production which could come down by 1000 bpd to 40000 bpd this year. And if these go on for a longer period, as feared; growth in production would seem an unlikely scenario in the near future with the firms gas output expected to remain at current level.
But with oil prices strengthening and rupee getting battered, the firms future looks healthy. However, any top line growth would largely be driven from increase in international oil price and a subsequent rise in wellhead gas prices, as the firms oil production is all set to decline during next couple of years. Besides oil price, top line growth, going forward, would largely depend upon discovery success ratio.
The companys high capex of around Rs 62 billion hints at a possible reduction in dividend payout during FY10, implying that the governments rather ambitions target of Rs 40 billion in dividend from OGDC would be missed by a long mile, as the firm will be striving to working replete its ageing reserves by exploring new fields.
To conclude, OGDCs near term future is closely dependent on movements in global oil prices and success in discovering new fields. Ageing fields are a concern but the firms huge investment in development plans is rightly timed. The security situation in Balochistan has not been a big issue so far, but with every passing day, the risk of operating in that region is increasing. Hence, OGDC might not be viewed as a high dividend yielding stock on the bourse as the shift in focus is evident.