Morning Shout released by KASB Securities Limited and Economics Research

April 08, 2013 (PPI-OT)

OGDC: Circular debt to overshadow strong 3Q results

OGDC underperformed has KSE-100 index by ~6%, over concerns that huge pile up of receivables (which as per news reports have climbed to ~PRs147.42bn) could hurt operations, going forward.

According to KASB Securities Limited estimates another quarter of strong earnings in 3QFY13 at PRs7.28/sh (9M PRs18.69, +16% YoY) and expect dividend of PRs2.0-2.25/sh (9M PRs5.75-6.00).

Uptick in 9MFY13 oil and gas production by 7% and 5% YoY should lead top-line growth accompanied by higher oil and gas prices and Pak rupee deval (+8.9% YoY).

Despite the write off of Ajuwala Well in 3QFY13, higher 2D/3D survey costs should complement future earnings. Other income should jump 1.6x YoY owing to interest income from TFC, however the same has yet to be received in cash.

Trading at FY13E P/E of 7.9x and EV/EBITDA of 4.6x, KASB Securities Limited believes valuations are still attractive on both local and regional matrices. KASB Securities Limited reiterates Buy.

Resolution of circular debt key to OGDC performance OGDC stock price continues to be lacklustre and underperformed the KSE-100 index by 6% since announcement of 2Q results despite higher oil and gas production and positive news flow on key development projects including completion of Sinjhoro Development project Phase-I and signing of gas supply agreement with 5 fertilizer companies. The main reason behind this subdued performance is the continuous piling up of circular debt. As per news reports, OGDC receivables has increased to PRs147.42bn as compared to PRs96.08bn as of December 31, 2012.

The massive increase in receivable indicates that the company’s is not able to generate cash on more than 80% of sales, which could hurt its operating cycle and future operations, going forward. KASB Securities Limited continues to believe that favourable policy steps on resolution of circular debt is the key to unlocking of attractive valuations on offer in OGDC. The stock trades at FY13E P/E of 7.9x vs regional peers P/E of 16.1x and offers 20% upside to KASB Securities Limited PO of PRs234.

9M profits expected to be 16% higher YoY

KASB Securities Limited expects OGDC to report net profit of PRs31,178mn (EPS: PRs7.28) for 3QFY13 (up 13% YoY) taking cumulative profits to PRs80,405mn (EPS: PRs18.69) for 9MFY13 (up 16% YoY). KASB Securities Limited expects 3Q dividend of PRs2.0-2.25/share in addition to the PRs3.75/sh already paid in 1HFY13. -

Increased oil and gas production to drive earnings: Increased earnings will be backed by 7%/5% increase in oil/gas production for 9MFY13. The increase is driven by both operated and non-operated assets i.e. Naspha, Tal Block, Uch, KPD and Adhi fields. The top-line will also be supported by rupee devaluation (+8.9% YoY in 9MFY13) and better oil and gas prices.

Exploration cost up 2.8x but should complement future earnings: Exploration cost will likely surge by 2.8x YoY in 9MFY13 on the back of higher 2D/3D seismic surveys and write-off of 6 dry wells (5 booked in 1HFY13 and another well named Ajuwala-01 will be booked in 3QFY13). The company drilled a total of 12 wells in 9MFY13 vs 17 wells in FY12. With its high success ratio of 31% in last 3 years and reserve replacement ratio of 121%, KASB Securities Limited believes that the company should benefit from its aggressive exploration and development strategy.

TFC impact to complement earnings but no cash flow realized yet: Other income of the company should see a major upsurge of ~1.6x YoY as interest income on the TFC will be booked but the realization of the cash has not yet materialized since government has not been able to pay the required interest income due to cash flow constraints.

Investment Perspective

OGDC’s valuation is cheap and looks favourable on both local and regional valuation matrix as the stock is trading at FY13E P/E of 7.9x, EV/EBITDA of 4.6x, and EV/BOE (reserves) of 5.0x.