Final Sm Report

8/8/2019 Final Sm Report

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Executive Summary

OGDCL is the national oil & gas company of Pakistan and the flagship of the countrys 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, companys 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 companys 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.


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Table of Contents

Chapter#1 Introduction to Company

Introduction

Background

Business prospects

Chapter # 2 Industry & CompanyAnalysis

Chapter # 3 Business Analysis

Business Strategy

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


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Introduction

Background

Business Prospects


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Introduction to OGDCL

OGDCL is the national oil & gas company of Pakistan and the flagship of the countrys 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 ProductionCompany 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.


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Current Strategic Direction Of The Company:

Mission statement:

To become the leading provider of oil and gas to the country by increasingexploration and production both domestically and internationally, utilizing all optionsincluding strategic alliances.

To continuously realign ourselves to meet the expectations of our stakeholders

through best management practices, the use of latest technology, and innovation for

sustainable growth, while being socially responsible.

Evaluation:

Analyzing mission statement on 9 characteristics

1) Customer Yes

2) Product and services yes

3) Market yes

4) Technology yes

5) Concern for survival and growth yes

6) Philoshpy No

7) Self Concept yes

8) Concern for public image yes

9) Concern for employess Yes

The mission statement is good enough having maxmium characteristic which are an

important ingredient for a companies mission statement.


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Vision Statement:

To be a leading multinational Exploration and Production Company.

The vision statement clearly reflects where the company wants to be in the future.As the

company currently doing much well in local market and growing so the compnay wants toexpand its operation globally and be leading global company in oil and gas exploration and

production sector.

Long Term Objectives:

Financial Objectives:

Buid strategic reserves for future growth/expansion.

Growth and superior returns to all stake holders.

Double the value of the compnay in the next five years.

Make investment decisions by ranking projects on the basis of best economic indicators.

Maximize profits by investing surplus funds in profitable avenues.

Customers:

Continuously improve quality of service and responsiveness to maintain a satisfied

customer base.

Improve reliability and efficiency of supply to the customer.

Internal Processing:

Evolve consensus through consultative process inter-linking activities of all departments.

Excel in exploration, development and commercialization.

Be transparent in all business transactions.

Synergize through effective business practices and teamwork.

Have well-defined SOPs with specific ownerships and accountabilities.


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Improve internal business decision making and strategic planning through state-of-the-

art MIS.

Strategies:

The company is pursuing a generic strategy of Grow and build more specifically it

is following the growth strategy of product development, market development, and

market penetration.

Bussiness Strategy:

As the leading exploration and production company in Pakistan, OGDCLs primary objective is toenhance its reserves and production profile and ultimately maximise value for shareholders. In orderto achieve this goal, the Company seeks to execute the following strategies:

Accelerate Production Growth: by continuing to accelerate production growth through utilizingcutting edge technologies, allowing the Company to utilise its significant reserves base andcapitalise on the strong economic growth and accelerating energy demand in Pakistan.

Exploit Exploration Opportunities: by building the Companys future reservesportfolio through its large onshore exploration acreage. During the fiscal year2009-10 target of drilling is 52 wells.

Maintain Low Cost Operations: OGDCLs 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 Companys 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 OGDCLs 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 structureand business processes that are focused on core production.

Financial Trends:

The authorized share capital of OGDCL is Rs. 50 billion. The issued, subscribed and

paid-up capital is Rs. 43.009 billion of which 5% is held by the general public and the

rest is owned by the Government of Pakistan

Year 2oo7/8 Year 2oo8/onine

Year 2oo/1o

SalesRevenue

125.nine 13o.8 142.6

Profit beforetaxation

78.3 8o.o nine 88.6

Profit for theyear

44.3 55.55 5nine.2

Dividend pershare

8.25 Nine.5o 5.5o


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Earning pershare

1o.31 12.nine1 13.76

Reason for such increase in the revenue of the company:

Six (6) oil, gas/condensate discoveries namelyReti-1A, Baloch-1, Nashpa-1, Dakhni-11, Maru-1 andShah-1 were made by the Company

Crude oil production on working interest basis averaged 38,075 barrels per day (bopd).

Gas production on working interest basis averaged 976 MMcf per day (MMcfd).

LPG production on working interest basis averaged 202 M.Tons/day

Seismic acquisition of 2,493 L. Kms of 2-D and 290 Sq. Kms of 3-D

Twenty six (26) new wells (fifteen (15) exploratory/ appraisal and eleven (11) development)spudded

during the year

Commencement of production from Nashpa-1,Pakhro-1 and Baloch-1.

Compnay with its strategy to continue prdouct development and market developmentenabling to increase its revenues.


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Industry and Company Analysis

Particulars ExplanationTotal Reserves in Country:

OilGas

300 Million Barrels28 trillion cubic feet (Tcf)

Production (Recent Year): Oil

Gas

60,000 Barrels/day968 billion cubic feet (Bcf)

OGDCL Contribution: Oil

Gas

Reason For Decrease

59% (41,581 Barrels Per day, 7.2%decrease)23% (966 Mmcf per day, 1.7%

Increase)

Water Cuts in Some oil Fields.

Productions of OGDCL otherthan Oil & Gas:

LPGSulphur

228 Tons per day (37.4% decrease)53 tons per day (22.8% Decrease)

Market Players in the SectorBP (UK), Eni (Italy), OMV (Austria),Orient Petroleum Inc. (OPI, Canada),Petronas (Malaysia) and Tullow(Ireland), PPL (Pak), PSO (Pak)

Competitors to OGDCL

Oil:BP (UK).Gas:OMV (Austria) , PPL (Pak).

Contribution of majorcompetitor in production:

Oil:BP (UK), producing 35,000 barrelsper dayGas:OMV (Austria) , PPL (Pak), 30% oftotal production

Consumption (Recent year): OilGas

400 thousand Barrels.968 billion cubic feet (Bcf)

Imports:Oil 80% of consumption

Oil Exporters to Pakistan Middle East, with Saudi Arabia

Strategy Adapted by OGDCL inSite exploration.

Aggressive growth strategy resultedin discovery of 6 fields


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Production Capacity of sitesOilGas

1150 barrels per day46 MMcf per day

OGDCL Portfolio of netrecoverable hydrocarbon

reserves:OilGas

30% (as of Dec 2006)32% (as of Dec 2006)

Industrial Life Cycle Expansion Stage

Type of Industry Growth & Cyclical

Business Cycle Recovery

Risk & mitigation (OGDCL)

Systematic (External Risks)

o Interest Rateo Inflation Rate

o GDP

o Foreign Debt

o Foreign Reserves

o Trade Deficit

o Budget Deficit

o CPI

o Political Conditions

o Beta

Unsystematic:o Management Style

o

15%17.2%175 Billion (21.6% growth)45 Billion9.45 Billion-1.19 Billion-3.98 Billion12%Political Instability

Bureaucratic


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Business Analysis

(Business Strategy)


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BUSINESS ANALYSIS OF OGDCL

Business strategy

As the leading exploration and Production Company in Pakistan, OGDCLs 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 Companys future reserves portfoliothrough its large onshore exploration acreage. For the fiscal year 2007, the Companyhas set targets for exploration drilling of at least 41 wells and plan to increase this targetto 52 wells in fiscal year 2008 and 65 wells in fiscal year 2009.

Maintain Low Cost Operations: OGDCLs operating environment, namely thegeographic concentration of its reserves base within Pakistan, will be a major factor inallowing it to control its low cost structure. Within Pakistan, the Companys leading

position also enables it to access economies of scale across its significant reserves baseand operations.

Pursue Selective International Expansion: while domestic expansion remainsOGDCLs core focus, the Company intends to grow and diversify its portfolio throughselective international expansion in the medium to long-term.


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Implementing International Best Practice: by ensuring an efficient organizationalstructure and business processes that are focused on core production. As part of theyrestructuring plan, OGDCL has established an in-house technical services division, thePetroserv Directorate, which separates technical support services from core E&Pactivities.

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:


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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 ofOGDCL is very high because of the government control due to 85% share in capital.

Government covers its losses of petrol by getting these dividends.


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Operating Leverage:

OGDCL has high operating leverage as it has high total Fixed Expenditures ascompare to variable expenditure, it gives a magnifying effect. It also shows that thecompany is risky one.


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Trend Analysis

Cross Sectional Analysis


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Trend Analysis

I. Current Ratio

YearRatios

DeviationReason for Deviation

Current Previous

2005 12.17 4.96 -59%

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.

2006 6.51 4.96 +31.25%

1. Decrease in trade and other payables2. Accrued liabilities increased due to

payment of benevolent fund and someother employee related liabilities.

3. The C.L. decreased by about 19.5%

and Current assets also increased by6%.

2007 6.16 6.51 -5.38%

1. Other financial assets decreased dueto decrease in Term Deposit Receiptsby about 18bn.

2. Net increase in C.L. is about 1bn ,3. Provision for taxation decreased by

3bn and4. Trade and other payables increased

by about 4bn, due to increase inunpaid dividend by 2bn.

2008 3.69 6.16 -40.1%

1. C.L. has shown a heavy increase dueto:

The royalty payables, which rosefrom Rs 2.397 billion to Rs 6.606billionAccrued liabilities.

2. The tax payable at the end of the yearamount also was high, as it included


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advance tax from last year as well3. C.A also rose in the year, primarily

due to the massive increase in tradedebts, from Rs 27873.515 billion fromlast year to Rs 40626.931 billion.

Still the increase in liabilities is muchhigher than the Increase in C.A. and ascompared to previous year.

II. Quick Ratio


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YearRatios


Current Previous

2005 4.4 10.32 -57.4%

Decrease in inventory butcomparative greater increase in

liabilities.

2006 5.49 4.4 +24.8%

The inventory level remainedsame; But there is a decreasein C.L.

2007 4.97 5.49 -9.5% Increase in inventory level by300m.

2008 2.91 4.97 -41.5% Increase in C.L. in form of royalties and as in the case of

last year in the form of taxesprovision incurred.

III. Debtor Turnover Ratio (or Receivables Turnover

Ratio)

YearRatios


Current Previous

2005 4.65 3.92 +18.6%

Increase in sales was in greaterpercentage as compared to the AccountReceivable increase

2006 4.50 4.65 -3.2%

1. The drastic change in sales2. The DTO in days has changed from

78 to 81 days

20073.83 4.5 -14.9%

Comparatively less increase in sales ascompared to trade debts Receivables..

2008 3.66 3.83 -4.4% Although rise in sales was high, but therise in debtors is relatively higher thansales


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IV. Asset Turnover Ratio

V. Operating Profit margin

YearRatios


Current Previous2005 70% 57% +22.8% Sales increased by 43% and assets

increased by 20%.

2006 82% 70% +17.1%

About 60% of companys total assets inthis year are C.A. The sales increasedwith greater percentage as compare toassets. That means that existing assetswere more effectively utilized. In fact theplant property and equipment decreasedby about 1%

2007 80% 82% -2.4%Increase in sale by 3.6% and increase inassets by 6.6%. Increase in asset is dueto increase in intangible production assetsby 7bn.

2008 90% 80% +12.5%Sales have been on the increase(25.12%), so have the assets (15.02%)but the increase in sales have been muchhigher than the sales of assets


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VI. Net Profit Margin

YearRatios


Current Previous2005 63% 57% +10.5% Comparative increase in EBIT of 2005 is

greater than comparative increase in

sales. Workers profit participation fundincreased by about 1bn.

2006 64% 63% -1.6%

Percentage increase in sales was morethen percentage change in operatingprofit expenses. It can be concluded thatthe company managed its op. expenseswell and was able to control them. Wecan see that EBIT increased by 32%against 31% increase in sale

2007 57% 64% -10.9%Increase in sales by 3.6% but EBITdecreased by 7%. Operating expensesincreased by 22%. Other incomedecreased exploration expenditureincreased more than 100%.

2008 60% 57% +5.26%higher sales revenueIncome gained from exchange gain onforeign currency deposits


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YearRatios


Current Previous2005 45% 44% +2.3% increase in sales by 43% and increase in

net income is 45% even taxes have

increased by double

2006 48% 45% +6.67%

Although Operating profit margin justincreased by 1% but net profit marginincreased by 3% because the interestexpense didnt increase by the samepercentage of revenues, this means thatcompany has utilized its assets moreefficiently as supported by Asset turn overratio

2007 46% 48% -4.2%Decreased Gross Profit because ofincreased operating expenses asdevelopment and spud ding of wells

2008 40% 46% -13%More taxation costs of Rs 33.747 b ascompared to Rs 15.428 b of last year.This high taxation expense was mainlydue to tax effect of depletion allowancecost for prior years.


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VII. Gross Profit Margin

VIII. ROCE/ROE

Note: We are analyzing both ROCE & ROE under same head as there is no debt

involved

YearRatios


Current Previous2005 68% 61% +11.5% Due to increase in sale by 43% but the

COGS has not increased so much,showing that company performedefficiently.

2006 72% 68% +5.9%

Company has shifted explorationexpenses from COGS to operatingexpenses that is why the increase inEBIT is less than increase in gross profit.

2007 70% 72% -2.8%Increase in operating expenses of about3bn.

2008 70% 70% 0%The increase in cost of sales has beenmuch higher than the increase in grossprofits


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YearRatios


Current Previous2005 41% 33% +24.3% Increase in NI by 45% and

increase in total capital is 9.2%,

as evident by OPM & NPM &ROA of the respective years.

2006 52% 41% +26.8%

Capital increased by 13% dueto increase in appropriatedprofit but comparative increasein NI is much more that is about44%.

2007 47% 52% -9.6%Net income decreased by 0.7%and Average capital increasedby 6%.

2008 47% 47% 0%The rate of increase in Netincome is equal to that ofincrease in Average Capital


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IX. Return on Investment

YearRatios


Current Previous2005 31% 25% +24% Increase in NI is 45% and

increase in total assets is 20%.

2006 39% 31% +25.8%

Percentage increase in NI wasmore than the percentageincrease in the assets.

2007 36% 39% -7.7%Small decrease in net incomeand increase in the total assetsespecially the significantincrease in intangibleproduction assets by about 7bn.

2008 35% 36% -2.8%

Rise in assets has been 16.4%,

while the rise in Profit After Taxhas been 8.7%.


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X. 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.


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Cross Sectional Analysis

(Analysis with Industry)


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RatioTitle

RatiosDeviation

Reason for Deviation

Company Industry

CurrentRatio

3.69 4.3 -14.2%

I. Increase in Royaltypayable.

II. Increase in tax rateIII. Although Current assets

are 52% of total assets withindustrial average of 32%,but the current liabilities is

seen to have a significantrise due to above statedtwo major factors.

QuickRatio

2.91 3 -3%

I. Although the company hasmaintained less stock ascompared to industryaverage. Company Stock isabout 1.9% of total currentassets, but the industryaverage is 8% of totalcurrent assets. But the

major reason is still the risein royalty & taxes.

DebtorTurnover 3.66 5.89 -37.9%

The company has about 26% ofits sales as receivables whereasin the industry receivables are16% of sales. The companyscredit policy seems to be lessstrict than the industry.Because of the high RTO the RTOin days is also higher than theindustry as 100 days for the

company and 62 days for theindustry.

GrossProfitMargin

70% 60% +16.67%

The amortization of explorationand decommissioning costs forthe industry are about 16% of totalcosts of goods sold where as forOGDC there were no amortizationcosts for the last two years and aprovision for decommission costshas already been made. Overall

OGDCL is more profitable thanthe industry.

OperatingProfitMargin

60% 51% +17.65%Total operating expenses as apercentage of total expense arealso less for OGDCL than theindustry

Net ProfitMargin 40% 38% +5.3%

The NPM for industry and forthe company has reducedprominently from 47% and44% respectively. Reasonbeing:

I. Increase in Finance CostII. Increase in Tax rate from


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Sustainable Growth Rate (SGR)

SGR under Steady- State Model

SGR under varying assumptions

Forecasting statements on the basis of SGR


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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%


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= 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


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= 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%


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Forecasted Financial StatementsDemonstrated in Excel sheet.

Documents

Final Sm Report