Oil and Gas Development Company Limited

Oil and Gas Development Company Limited (PSX: OGDC) is the largest E&P company in the country with operations including exploration, drilling operation services, production, reservoir management, and engineering support.

It has the most extensive exploration acreage in Pakistan, covering around 43 percent of the country’s total acreage awarded with net hydrocarbons of oil and gas, standing at 43 percent and 36 percent, respectively, as of FY21. As a result, the company contributed to 29 percent of Pakistan’s total natural gas production, 48 percent of its oil production, and 37 percent of its LPG production in FY21.

Shareholding Pattern

With over 67 percent, the Government of Pakistan is the largest shareholder in OGDCL, followed by the OGDCL Employee Empowerment Trust and Privatization Commission of Pakistan. A breakup of the shareholding pattern is given in the illustration.

OGDC in the recent past

On the operational side, OGDC has been leading the E&P sector because of its size and aggressive exploration and drilling activities over its history. Moreover, its steady rise in production flows amid depleting country reserves show the company’s strength. As a result, the company has seen a growth in the total volumes sold of oil, gas, and LPG over the years, along with a steady rate of hydrocarbon discoveries.

In FY18, OGDCL’s oil volumes continued to rise, while the company faced a decline in gas volumes sold – which can be taken as a decline in production. On the other hand, profitability continued to improve primarily due to the modest recovery price of crude oil. Plus, higher LPG production complemented by a favorable exchange rate and planned capital spending contributed positively to the financial growth in FY18. Also, OGDC made four new oil and gas discoveries during the year. However, an increase in operating expenses, depreciation and higher cost of dry and abandoned wells owing to 11 wells declared dry and abandoned in FY18 against four wells in FY17 were inhibiting factors for earnings.

In FY19, OGDCL’s revenues increased by 27 percent year-on-years, and botomline expanded by 57 percent year-on-year. The rise in revenues came from the higher average realized crude oil prices and higher average realized gas prices. On the production side, crude oil and gas production remained flat, while LPG production increased. The company spud 16 wells in FY19, and it made three new oil and gas discoveries.

Also, a rise in the average exchange rate and increase in other income and share of profit from associates accompanied the decline in exploration and prospecting expenditures, strengthening the bottomline. However, profitability in FY19 was partially impacted by the increase in operating expenses, mainly due to amortization expenses.

FY20 was a slow year in general and for the E&P sector, where crashing oil prices and COVID-19 had a critical impact on the sector’s financial performance. OGC’s bottomline slipped by 15 percent year-on-year, where most of the decline came from 2HFY20. The squeeze in earnings started from the top as revenues decreased by 6 percent year-on-year. The decline was both due to falling crude oil prices and production levels. Realized crude oil prices witnessed a drop of around 20 percent, whereas LPG realized prices also fell by 11 percent in FY20. In addition, production numbers were down as COVID-19 left many fields in partial shutdown mode. Oil and gas production thus witnessed a decline of around 12 percent each in FY20, while LPG production fell by approximately 11 percent.

The company incurred an increase in operating expenses, which aided the decline in gross profits. The absence of exchange gains restricted other income growth and increased expenses, including exploration, general administration, and finance costs, also impacted the bottomline.

Growth in exploration expenses was due significant cost of dry and abandoned wells during the year, as eight wells were declared dry and abandoned in FY20 versus only 2 in FY19.

FY21 was a year of recovery for the E&P sector. The trend of falling average gas production continued in FY21, and for OGDCL, it was lower by 2.6 percent year-on-year. However, OGDCL’s crude oil production recovered by 2.3 percent year-on-year. Along with the increase in crude oil and LPG production volumes, average realized prices for natural gas, up by 8 percent year-on-year were the driving factors for revenue growth for OGDCL in FY21. However, a decline in gas production and flat crude oil realized prices offset the gains, and OGDCL’s topline grew marginally by 2.65 percent in FY21.

Earnings for the E&P Company grew by 9.3 percent year-on-year, which was supported by a 5 percent year-on-year decline in the exploration and prospecting expenditure as fewer dry wells were incurred in FY21 versus FY20. However, the profitability during the year was affected by the reduction in other income due to exchange loss and decline in interest income, and higher operating expenses primarily due to higher amortization, development, and repair cost.

FY22 and beyond

FY22 has benefited Pakistan’s oil and gas exploration and production sector because of spiking international oil prices amid rising demand and geopolitics and depreciation of local currency significantly. Oil and Gas Development Company Limited (PSX: OGDCL) in 1HFY22 has seen its profits increase due to the same factors.

Starting with the topline growth, OGDCL’s revenues for 2QFY22 grew by 46 percent year-on-year, while the bottomline growth stood at 87 percent year-on-year. Overall, 1HFY22 revenues climbed by 36 percent, while earnings increased by 63 percent year-on-years.

Topline growth was driven by a 77 percent year-on-year rise in international crude oil prices, three percent currency depreciation, and a slight uptick in crude oil production for OGDCL during 1HFY22. The average net realized price of crude oil increased by 63 percent year-on-year in 1HFY22, while that of natural gas sold was up by around 7 percent year-on-year. Crude oil production was up by one percent year-on-year; however, the natural gas production was down by 3 percent year-on-year in 1HFY22.

OGDCL’s bottomline grew due to an increase in other income that came from hefty exchange gains from currency depreciation. On the expenditure side, two times increase in exploration expenditure in 2QFY22 offset the decline of 23 percent year-on-year in 1QFY22- taking the 1HFY22 expense up by 32 percent. OGDCL spud six wells, including four exploratory wells and two developments well.

Oil prices have continued to drive earnings for the E&P sector. And currency depreciation has been a companion in moving the E&P sector’s profits.