Executive Summary OGDCL is the national oil & gas company of Pakistan and the flagship of the country’s E&P sector. 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. Government of Pakistan holds 85.02% of shares in the company. OGDCL financial performance in the current year is quite impressive. Sales growth is about 25% , the reason for the high sales is rise in oil and is prices in the country. Gross profit, operating profit, Net profit of the company are high as compared all companies in the industry, this is because of the less decommissioning cost, no financial leverage, and other incomes. While in turnover, company’s debtor turnover is less as compared to other companies showing managerial inefficiency and ineffectivity. Earning per share of company is ever rising due to rising net income, while it is less as compared to companies in industry; this is because of 22 times more share of OGDCL than any other company in industry. OGDCL has a growth of almost 40%. An in future prospect, the company’s growth is expected to be 37.61% under sustainable growth method, while 35.31% under varying growth method, showing the company is growing robustly. OGDCL is 85% government owned, so the major income of it goes to the government revenues.
Table of Contents Chapter#1 Introduction to Company • Introduction • Background •
Chapter # 2 Industry & Company Analysis Chapter # 3 Business Analysis •
Chapter # 4 Financial Ratios Analysis • Trend Analysis • Cross-Sectional Analysis
Chapter # 5 Forecasted Financial Statements • Sustainable Growth Rate o SGR under Steady Model o SGR under varying Assumptions
• Forecasted Statements
Introduction Background Business Prospects
Introduction to OGDCL
OGDCL is the national oil & gas company of Pakistan and the flagship of the country’s E&P sector. The Company is the local market leader in terms of reserves, production and acreage, and is listed on all three stock exchanges in Pakistan and also on the London Stock Exchange since December 2006. The Company is all set to ride the wave of E&P activity, equipped with its Vision & Mission, Business and Strategic Plan, a debt-free and robust balance sheet and healthy cash reserves. The Company is ready to take on the challenges of a volatile E&P industry.
Background of the Company: The Government of Pakistan signed an agreement with USSR on the 4th of 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 Government of Pakistan 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 Exploration and Production Company in Pakistan, listed on all three exchanges of the country as well as the London Stock Exchange. Government of Pakistan holds 85.02% of shares in the company.
Business Prospects of OGDCL: Over the years OGDCL has grown to become the company owning the largest oil and gas shares in the country. Presently, the company's oil and gas production stands at 59% and 23% respectively. The company holds a total number of 44 Exploration licenses covering 85,100.98 Sq.Kms, which is 32% of the country's total exploration acreage.
Industry and Company Analysis Particulars Total Reserves in Country: Oil Gas
Production (Recent Year): Oil Gas
OGDCL Contribution: Oil Gas Reason For Decrease
Productions of OGDCL other than Oil & Gas: LPG Sulphur
Market Players in the Sector
Competitors to OGDCL
Contribution of major competitor in production:
Consumption (Recent year): Oil Gas
Explanation 300 Million Barrels 28 trillion cubic feet (Tcf) 60,000 Barrels/day 968 billion cubic feet (Bcf) 59% (41,581 Barrels Per day, 7.2% decrease) 23% (966 Mmcf per day, 1.7% Increase) Water Cuts in Some oil Fields.
228 Tons per day (37.4% decrease) 53 tons per day (22.8% Decrease) BP (UK), Eni (Italy), OMV (Austria), Orient Petroleum Inc. (OPI, Canada), Petronas (Malaysia) and Tullow (Ireland), PPL (Pak), PSO (Pak) Oil: BP (UK). Gas: OMV (Austria) , PPL (Pak). Oil: BP (UK), producing 35,000 barrels per day Gas: OMV (Austria) , PPL (Pak), 30% of total production 400 thousand Barrels. 968 billion cubic feet (Bcf)
80% of consumption Middle East, with Saudi Arabia Oil Exporters to Pakistan Strategy Adapted by OGDCL in Aggressive growth strategy resulted in discovery of 10 fields in 2007 and 6 Site exploration. Oil
fields in FY'08, bringing the total to 73.
Production Capacity of sites Oil Gas
OGDCL Portfolio of net recoverable hydrocarbon reserves: Oil Gas
Industrial Life Cycle Type of Industry Business Cycle Risk & mitigation (OGDCL) •
30% (as of Dec 2006) 32% (as of Dec 2006) Expansion Stage Growth & Cyclical Recovery
Systematic (External Risks) o o o o o o o o o o
1150 barrels per day 46 MMcf per day
Interest Rate Inflation Rate GDP Foreign Debt Foreign Reserves Trade Deficit Budget Deficit CPI Political Conditions Beta
Unsystematic: o Management Style o
15% 17.2% 175 Billion (21.6% growth) 45 Billion 9.45 Billion -1.19 Billion -3.98 Billion 12% Political Instability
Business Analysis (Business Strategy)
BUSINESS ANALYSIS OF OGDCL
As the leading exploration and Production Company in Pakistan, OGDCL’s primary objective is to enhance its reserves and production profile and ultimately maximize value for shareholders. In order to achieve this goal, the Company seeks to execute the following strategies:
Accelerate Production Growth: by continuing to accelerate production growth, allowing the Company to utilize its significant reserves base and capitalize on the strong economic growth and accelerating energy demand in Pakistan. Exploit Exploration Opportunities: by building the Company’s future reserves portfolio through its large onshore exploration acreage. For the fiscal year 2007, the Company has set targets for exploration drilling of at least 41 wells and plan to increase this target to 52 wells in fiscal year 2008 and 65 wells in fiscal year 2009. Maintain Low Cost Operations: OGDCL’s operating environment, namely the geographic concentration of its reserves base within Pakistan, will be a major factor in allowing it to control its low cost structure. Within Pakistan, the Company’s leading position also enables it to access economies of scale across its significant reserves base and operations. Pursue Selective International Expansion: while domestic expansion remains OGDCL’s core focus, the Company intends to grow and diversify its portfolio through selective international expansion in the medium to long-term.
Implementing International Best Practice: by ensuring an efficient organizational structure and business processes that are focused on core production. As part of they restructuring plan, OGDCL has established an in-house technical services division, the Petroserv Directorate, which separates technical support services from core E&P activities.
Demand of Oil and Gas: As discussed in the oil and gas industry analysis that the demand of both oil and gas are increasing very rapidly. Demand for oil has reached up to 400 thousand barrels a day, but the supply is only of 50 thousand barrels a day. The demand for gas is also increasing as the demand of LPG is increasing. To meet this demand OGDCL is increasingly spudding the wells. The spudding of wells depends upon the discovery of Oil and Gas. This discovery is also increasing day by day. We can see both of it in the graphs.
Capital Structure: OGDCL is 100% equity financed company out of which 85% share is of Government of Pakistan and remaining 15% is issued to general public and some shares are also bought by international investors.
Growth in Sales:
The sales of OGDCL has also grown insignificantly. In 2002 the sales of OGDCL 8 million barrels of oil and now it has reached to 14500 barrels of oil. This growth in sales is due to increasing demand of oil. The sale of Gas has also increased from 250000 MMcF in 2002 to 300000 in 2005 which was also same in 2007, now it has increased to 350000.
Earnings & Dividend: The EPS of OGDCL has increased from 4 in 2002 to 11.54 in 2008. The Dividend payout rate of OGDCL is very high because of the government control due to 85% share in capital. Government covers its losses of petrol by getting these dividends.
Operating Leverage: OGDCL has high operating leverage as it has high total Fixed Expenditures as compare to variable expenditure, it gives a magnifying effect. It also shows that the company is risky one.
A.Trend Analysis B.Cross Sectional Analysis
Trend Analysis I. Year
Ratios Current Previous
Reason for Deviation 1. Increase in: • Dividend payable • GST • Creditors • Compensated absences • Benevolent payables. 2. Though C.A also increase but percentage increase in C.L is higher. 1. Decrease in trade and other payables 2. Accrued liabilities increased due to payment of benevolent fund and some other employee related liabilities. 3. The C.L. decreased by about 19.5% and Current assets also increased by 6%. 1. Other financial assets decreased due to decrease in Term Deposit Receipts by about 18bn. 2. Net increase in C.L. is about 1bn , 3. Provision for taxation decreased by 3bn and 4. Trade and other payables increased by about 4bn, due to increase in unpaid dividend by 2bn. 1. C.L. has shown a heavy increase due to: • The royalty payables, which rose from Rs 2.397 billion to Rs 6.606 billion • Accrued liabilities. 2. The tax payable at the end of the year
amount also was high, as it included advance tax from last year as well 3. C.A also rose in the year, primarily due to the massive increase in trade debts, from Rs 27873.515 billion from last year to Rs 40626.931 billion. Still the increase in liabilities is much higher than the Increase in C.A. and as compared to previous year.
Ratios Current Previous
Reason for Deviation
Decrease in inventory but comparative greater increase in liabilities.
The inventory level remained same; But there is a decrease in C.L.
Increase in inventory level by 300m.
Increase in C.L. in form of royalties and as in the case of last year in the form of taxes provision incurred.
Debtor Turnover Ratio (or Receivables Turnover Ratio)
Ratios Current Previous
Reason for Deviation Increase in sales was in greater percentage as compared to the Account Receivable increase 1. The drastic change in sales 2. The DTO in days has changed from 78 to 81 days Comparatively less increase in sales as compared to trade debts Receivables. . Although rise in sales was high, but the rise in debtors is relatively higher than
IV. Year 2005
Asset Turnover Ratio
Ratios Current Previous 70%
Reason for Deviation Sales increased by 43% and assets increased by 20%. About 60% of company’s total assets in this year are C.A. The sales increased with greater percentage as compare to assets. That means that existing assets were more effectively utilized. In fact the plant property and equipment decreased by about 1% Increase in sale by 3.6% and increase in assets by 6.6%. Increase in asset is due to increase in intangible production assets by 7bn. Sales have been on the increase (25.12%), so have the assets (15.02%) but the increase in sales have been much higher than the sales of assets
Operating Profit margin
Ratios Current Previous 63%
Reason for Deviation Comparative increase in EBIT of 2005 is greater than comparative increase in sales. Workers profit participation fund increased by about 1bn. Percentage increase in sales was more then percentage change in operating profit expenses. It can be concluded that the company managed its op. expenses well and was able to control them. We can see that EBIT increased by 32% against 31% increase in sale Increase in sales by 3.6% but EBIT decreased by 7%. Operating expenses increased by 22%. Other income decreased exploration expenditure increased more than 100%. higher sales revenue Income gained from exchange gain on foreign currency deposits
VI. Net Profit Margin
Ratios Current Previous 45%
Reason for Deviation increase in sales by 43% and increase in net income is 45% even taxes have increased by double Although Operating profit margin just increased by 1% but net profit margin increased by 3% because the interest expense didn’t increase by the same percentage of revenues, this means that company has utilized its assets more efficiently as supported by Asset turn over ratio Decreased Gross Profit because of increased operating expenses as development and spud ding of wells More taxation costs of Rs 33.747 b as compared to Rs 15.428 b of last year. This high taxation expense was mainly due to tax effect of depletion allowance cost for prior years.
Gross Profit Margin
Ratios Current Previous 68%
Reason for Deviation Due to increase in sale by 43% but the COGS has not increased so much, showing that company performed efficiently. Company has shifted exploration expenses from COGS to operating expenses that is why the increase in EBIT is less than increase in gross profit. Increase in operating expenses of about 3bn. The increase in cost of sales has been much higher than the increase in gross profits
Note: We are analyzing both ROCE & ROE under same head as there is no debt involved
Ratios Current Previous 41%
Reason for Deviation Increase in NI by 45% and increase in total capital is 9.2%, as evident by OPM & NPM & ROA of the respective years. Capital increased by 13% due to increase in appropriated profit but comparative increase in NI is much more that is about 44%. Net income decreased by 0.7% and Average capital increased by 6%. The rate of increase in Net income is equal to that of increase in Average Capital
IX. Return on Investment Year 2005
Ratios Current Previous 31%
Reason for Deviation Increase in NI is 45% and increase in total assets is 20%. Percentage increase in NI was more than the percentage increase in the assets. Small decrease in net income and increase in the total assets especially the significant increase in intangible production assets by about 7bn. Rise in assets has been 16.4%, while the rise in Profit After Tax has been 8.7%.
Earnings Per Share
EPS for the year is 11.56 while for the previous year it was 10.41, showing a rise in net income. Rise in EPS means the rise in income as the total number of share of OGDCL are same.
Cross Sectional Analysis (Analysis with Industry)
Ratios Company Industry
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Reason for Deviation I. Increase in Royalty payable. II. Increase in tax rate III. Although Current assets are 52% of total assets with industrial average of 32%, but the current liabilities is seen to have a significant rise due to above stated two major factors. I. Although the company has maintained less stock as compared to industry average. Company Stock is about 1.9% of total current assets, but the industry average is 8% of total current assets. But the major reason is still the rise in royalty & taxes. The company has about 26% of its sales as receivables whereas in the industry receivables are 16% of sales. The company’s credit policy seems to be less strict than the industry. Because of the high RTO the RTO in days is also higher than the industry as 100 days for the company and 62 days for the industry. The amortization of exploration and decommissioning costs for the industry are about 16% of total costs of goods sold where as for OGDC there were no amortization costs for the last two years and a provision for decommission costs has already been made. Overall OGDCL is more profitable than the industry. Total operating expenses as a percentage of total expense are also less for OGDCL than the industry The NPM for industry and for the company has reduced prominently from 47% and 44% respectively. Reason being: I. Increase in Finance Cost II. Increase in Tax rate from 25% to 40%
a. Sustainable Growth Rate (SGR) b. SGR under Steady- State Model c. SGR under varying assumptions II.
Forecasting statements on the basis of SGR
Sustainable Growth Rate A. Under Steady State Model
Where; b = Dividend Payout ratio = Net profit margin = Debt to equity ratio = Assets to sales
For OGDCL: b = 82% = 40%
= 0 (OGDCL is fully equity Financed) = 1.20
So, SGR is,
B.SGR under varying assumptions
Where; Eq. = Current Equity New Eq. = Additional Equity issued Div.
= Dividends = Debt over equity ratio
= Sales over assets = Net profitmargin
= Current year sales So, for OGDCL;
Eq. = 100 New Eq. = 0 Div.
= Rs9.82 =0
= 0.833147 = 40% = Rs 125,445,674 So, SGR for OGDCL under varying assumptions is; SGR = 35.31%
Forecasted Financial Statements
Demonstrated in Excel sheet.