OGDC: High exploration costs restrict earnings

The latest financial result of the largest exploration and production (E&P) company in the country is out, and the performance of Oil and Gas Development Company (OGDC) during 9MFY13 comes as no surprise. However, the figure that catches attention is the staggering Rs8.95 billion in exploration and prospecting expenditure.
Not only it is the highest nine-month expense incurred by the E&P Company but it also surpassed all annual exploration and prospecting expenditures.
Recollect that exploration and prospecting expenditure for OGDC breaks down into (a) all prospecting costs (b) cost of dry and abandoned wells during a certain time period.
The said expenditure peaked during FY07-FY11 period where the annual average hovered around Rs7.2 billion; cost related to abandonment of dry wells remained slightly more than half of the total during all these years. However, after FY12 where the figure was exceptionally lower with negligible cost of dry well write-offs, the 9MFY13 figure leaves one baffled.
A closer inspection shows that this is no anomaly; with increasing drilling and production activity by OGDC that contributes 26 percent to the countrys total natural gas production and 52 percent to its total oil production cost is bound to go up. Increased 2D and 3D seismic activities, drilling and production adds to prospecting costs, while aging field depleting reserves add to the cost of write offs.
A total of eight wells were declared dry and abandoned during 9MFY13 with five during the first six months of FY13. The aforesaid costs were also the more than four times during the 3QFY13 versus trifling expense 3QFY12.
Asir Zafar of Optimus Capital Management informed BR Research that out of the total Rs 3.43 billion exploration and prospecting costs, approximately Rs 2.2 billion accounts for the write-off of Ajuwala well.
With the overall drilling and production activity in the country not sufficient to meet the rising demand, Zafar mentioned some major projects undertaken by OGDC to boost oil and gas production. Among them the low hanging fruits for OGDC are the ongoing development projects which include Kunnar Pasahki Deep-Tando Allah Yar, Sinjhoro, Uch-II, Nashpa/Mela, Jhal Magsi development project and Tal block additions.
The firm has spudded a total of 17 wells during the ongoing year so far with three main oil and gas discoveries.

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OIL AND GAS DEVELOPMENT COMPANY (OGDC)

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(Rs mn)                9MFY13    9MFY12    chg   3QFY13   3QFY12    chg

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Sales                 169,091   142,035    19%   58,465   53,355    10%

Gross profit          120,301   101,853    18%   41,349   39,726     4%

Other income           10,722     6,782    58%    3,876    2,160    79%

Exploration expense     8,950     2,625   241%    3,434      844   307%

PAT                    75,671    69,245     9%   26,444   27,672    -4%

EPS (Rs/share)          17.59     16.10     9%     6.15     6.43    -4%

Gross margin             71.1%     71.7%           70.7%    74.5%

Net margin               44.8%     48.8%           45.2%    51.9%

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Source: Company accounts

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