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Foundation Research
Equities

July 07 2014
OGDC PA Outperform
Stock price as of 4 J ul Rs 260.0
Dec 14 target Rs 290.2
Upside/downside % 11.6
Valuation Rs 290.2
- Reserve based DCF
Oil and gas exploration
Market cap Rs bn 1,118
30-day avg turnover US$m 1.50
Market cap US$bn 11.4
Number shares on issue m 4,301
Investment fundamentals
Year end 30 J un 2013A 2014E 2015E 2016E
Total revenue bn 223 259 306 327
EBIT bn 148 186 217 235
EBIT Growth % 9.6 25.8 16.9 8.1
Recurring profit bn 91 125 148 160
Reported profit bn 91 125 148 160
EPS rep Rs 21.11 28.99 34.41 37.19
EPS rep growth % (6.3) 37.4 18.7 8.1
EPS rec Rs 21.11 28.99 34.41 37.19
EPS rec growth % (6.3) 37.4 18.7 8.1
PE rep x 12.3 9.0 7.6 7.0
PE rec x 12.3 9.0 7.6 7.0
Total DPS Rs 8.25 9.00 12.00 15.00
Total div yield % 3.2 3.5 4.6 5.8
ROA % 39.1 40.6 39.1 35.6
ROE % 30.7 34.0 32.3 28.9
EV/EBITDA x 6.3 5.4 4.6 4.3
Net debt/equity % -10.9 -24.7 -34.3 -45.5
Price/book x 3.5 2.7 2.2 1.9
OGDC PA rel KSE100 performance
Source: Bloomberg, Foundation Research, J uly'14
(all figures in PKR unless noted)
Analyst
Muhammad Fawad Khan, CFA
92 21 5612290-94 Ext 338 fawad.khan@fs.com.pk
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KSE OGDC






Oil & Gas Dev. Company


Improving drilling to complement
strong earnings momentum; O/P
Event
FY14 has proved to be a mixed year for Oil & Gas Development Company
(OGDC). Earnings growth has picked up sharply and balance sheet remains
in impressive shape. However, overall drilling performance in FY14 is once
again below par with target miss and no major discovery. With major reshuffle
in senior management and BoD coupled with governments renewed focus on
enhancing drilling, we believe the companys operating performance will likely
rebound in FY15. Trading at FY15E P/E of 7.6x and D/Y of 5%, we reiterate
O/P on OGDC whereby start of drilling in high profile blocks and results of
ongoing drilling remain key catalysts.
Impact
Massi ve earni ngs rebound underway: With QoQ production improvement
and absence of drag from FX losses, we believe OGDC is set to post a strong
QoQ earnings rebound in 4Q. We eye EPS range of PKR7.6-7.8/sh
translating FY14 EPS of PKR28.9 or 37% YoY jump. FY14 earnings growth is
largely driven by (1) product growth, (2) other income, (3) higher dollar-based
realized oil prices and (4) absence of one-off adjustment which dragged FY13
earnings.
Near-term producti on upsi de remai ns: 9MFY14 production depicted 2.5-
4% growth in oil & gas respectively however we see further acceleration in 4Q
as full-impact of commissioning of sizeable production addition
(Uch:160mmcfd, Makori GPF) will be more visible. Latest PPIS data reveals
companys oil production has averaged 42,500bpd of oil and 1,250mmcfd of
gas in 4Q up 4% and 8% from respective average in 9MFY14. We see higher
possibility of near-term upside in production from a number of fields which
include (1) Rajian, (2) Mela, (3) Pindori and (4) Adhi.
Dril li ng acti vi ty set to pi ck up: Drilling activity has failed to pick up once
again in FY14 with OGDC likely to miss its drilling target of 29 wells (including
contingent wells). Furthermore, OGDC has failed to strike any major discovery
for yet another year. With reshuffle in senior management ranks and
governments renewed focus supported by award of new exploration licenses,
we believe OGDCs drilling activity is likely to pace up in FY15 and beyond.
From market perspective, we believe start of drilling on high profile Kalchas
block (two wells awaiting security clearance) and result of drilling in Zin block
(an exploration well is underway) remain crucial. That said, we believe
OGDCs ongoing drilling program (a total of nine wells underway) has the
potential to deliver a big positive surprise. Among them, drillings in Sinjhoro,
TAY and Bhadra are noteworthy, in our view.
Bal ance sheet i s i n i mpressi ve shape: 9MFY14 account shows OGDCs
balance sheet is healthy and relatively less infected despite negative news
around energy debt. Though companys trade debt has jumped to PKR79bn in
9MFY14 up 43%, the level of overdue amount eclipsed the peak seen in early
2013 of PKR140bn. We do not expect any major shift in 4Q. Meanwhile,
improved cash flow generation coupled with swapping of companys non-
earnings over-due amount into earnings asset last year is significantly
PAKISTAN
Oil & Gas Development Company July 07, 2014

2 Foundation Securities (Pvt) Limited

contributing to companys bottom-line. Contribution of non-core income as percentage of PBT has jumped to 11% in
9MFY14 and will likely remain strong in FY15. J ust to highlight, companys total financial assets and cash (including
PIBs) amounted to ~PKR49/sh in 9MFY14 or 19% of current market cap.
Estimate changes
We have revised our FY14/15/16 estimates by -1.6/1/2% respectively.
We have set a new target price of PKR290.2/sh, up 2% which incorporates the impact of earnings revision.
Action & recommendation
OGDC has underperformed the broader KSE-100 index by 26% in FY14 on concerns of secondary offering. While
near-term stock price performance would be a function of likely positive news-flow on exploration and concerns on
share supply, we believe companys improving fundamentals and undemanding valuation will likely draw investors
interest. We re-iterate O/P on OGDC.






























Oil & Gas Development Company July 07, 2014

3 Foundation Securities (Pvt) Limited

About The Company
Oil and Gas Development Company (OGDCL), the largest Exploration and Production Company of
Pakistan, was established in 1961 to prospect, refine and sell oil and gas in Pakistan. The company is
listed on all three stock exchanges of Pakistan, as well as on London Stock Exchange.
Government of Pakistan (GoP) divested 4.98% of its shareholding in the company in October 2003
through an Initial Public Offering. GoP further divested 9.5% of its shareholding through Secondary
Offering in the form of Global Depository Shares to international and local institutional investors in
December 2006 and 0.5% to general public in February 2007. GoP now own 85.02% of shares of the
company. OGDCLs share in countrys total oil and gas production stands at 59% and 23%
respectively.