Oil and Gas Development Company Limited (PSX: OGDCL) announced a 6 percent year-on-year decline in its earnings for 1HFY20. The E&P company’s profitability was largely affected by over a 100 percent increase in its exploration and prospecting expenditure. However, falling production volumes amid tepid crude oil prices also kept the earnings growth restricted.

Decline in the production of oil and gas for OGDCL was due to natural decline of fields as well as mechanical problems at key fields like Tando Alam, Nashpa and KPD. The company report highlights that the decline in gas production was further impacted by less gas intake. The decline in production was partially mitigated by injection of seven new operated wells in the production system.

Despite the E&P firm’s oil and gas production decline by 7 and 8 percent year-on-year respectively in 1HFY20, OGDC’s topline was up by 5 percent year-on-year.  This was primarily due to currency depreciation and 25 higher average realized gas prices. Average realized crude oil prices on the other hand declined by 13 percent year-on-year in 1HFY20.

Exploration and prospecting expenditure grew significantly on account of five wells declared dry and abandoned in 1HFY20 against one well in 1HFY19. Moreover, reduced other income due to exchange loss on revaluation contributed towards lower earnings during the period. The company announced the interim cash dividend of Rs1.75 in 2QFY20 in addition to Rs2.5 already paid in 1QFY20.

2020 did not start on a good note for the global economy as the Novel Coronavirus outbreak in China and other countries continue to engulf markets. Oil prices have been tepid and the outlook remains bleak as global demand led by China is likely to remain weak, which will not bode well for the E&P companies, and any significant growth in earnings in 2HFY20 will have to come from improvement in production volumes.