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EUR 20.00 For Business Accounts Only

Oil and Gas Development Company (OGDC): Relatively Cheap & One of the Safest Wildcats; Reiterate Buy

  • Investment thesis: We reiterate our ‘Buy’ call on OGDC, Pakistan’s largest oil & gas Exploration & Production (E&P) company that meets 29% of the Country’s existing oil & gas production. Our investment thesis is underpinned by its 1) 2p reserves based valuation of Rs183, providing 29% upside (including dividend) from current levels  & 27% discount (implied oil price) to existing Arab Light Crude oil price of US$62/bbl, 2) additional hydrocarbon flows that will arrest natural depletion and 3) on-going offshore drilling that can possibly be a game changer for the company.
  • Attractive valuation: OGDC is trading at implied oil price of US$45/bbl, 27% discount to prevailing Arab Light Crude (benchmark for Pakistan E&Ps) price of US$62/bbl. Other listed E&Ps Mari Petroleum (MARI), Pakistan Petroleum (PPL) & Pakistan oilfields (POL) are trading at implied oil prices of US$37/62/61. Further, the stock trades at FY19E PE of 6.0x which is 29% discount to market PE of 8.4x and 34% discount to its last 5 years avg. PE of 9.1x. A better than market average dividend yield of 10% likely for OGDC during FY19-21.
  • Upcoming oil & gas flows to arrest natural depletion: OGDC is expected to add around 1k bpd of oil and 177mmcfd of natural gas in phase wise manner till Dec 2020. These additions, on cumulative basis, are 15% of OGDC’s existing oil & gas production in barrels of oil equivalent and will serve to arrest natural depletion (3-5%) of existing fields, we believe. On net basis, we expect volumes to grow by 3% in FY20 and 2% in FY21.
  • Offshore drilling can be a game changer: OGDC along with one local (Pakistan Petroleum) and two international (ENI and ExxonMobil) partners have ventured into offshore territory of underexplored but promising Indus G-Block for a deep-sea drilling endeavor. The drilling has begun and the results are expected to come by April 2019.
  • The discovery, if commercially viable (success rate for the region is around 10-20%), is anticipated to yield gas flows which can be as big as Sui field, with estimated reserves of 3-8 Trillion Cubic Feet (TCF), or 25-40% of Pakistan’s remaining gas reserves, as per channel checks. This can have potential impact of Rs6-18/sh (24-71% of FY19 profits) on OGDC while we estimate impact of Rs23-52/sh on OGDC’s valuation.
  • Key risks: Key risks to our investment thesis include: 1) sharp decline in international oil prices, 2) delay in upcoming hydrocarbon flows, 3) significant exploration and development cost, 4) no resolution of circular debt  and 5) lower than expected devaluation of PKR against the greenback.
Underlying
Oil & Gas Development Co. Ltd.

Oil and Gas Development Company is a petroleum exploration and production (E&P) company in the Pakistan oil and gas sector. Co.'s principal activity is to explore, develop, produce and sell oil and gas resources and related activities. Co. also manufactures Gas, Liquefied Petroleum Gas, Crude Oil, and Sulphur. Co.'s major fields contributing in the aforesaid production of crude oil include Nashpa, Kunnar/KPD, Pasakhi, Sinjhoro and Rajian and for gas include Qadirpur, Uch, KPD, Nashpa and Dakhni. Co. carries out exploration and development activities on its own as well as in joint ventures with other oil companies.

Provider
Topline Securities Limited
Topline Securities Limited

Topline Securities is one of the fastest-growing brokerage houses in Pakistan. It has strong Equity Brokerage, Economic/ Equity Research, Commodity Trading and Corporate Finance & Advisory functions.

Topline Securities has been endowed with numerous awards by renowned international financial organizations. The highlights of which consists of the award for ‘Best Local Brokerage House of Pakistan’ by Asiamoney Brokers Poll (the largest Asia-focused equity services provider poll) in 2016 and ‘Best Equity Brokerage House’ by CFA Society Pakistan in 2015.

Previously, Topline Securities held the title for ‘Best Brokerage House’ for 4 consecutive years (2011-2014) by Asiamoney Brokers Poll. Other awards include the ‘Best Salesperson’ award by Asiamoney for 6 consecutive years (2011-2016), the ‘Arabia Fast Growth 500’ award and ‘Pakistan Fast Growth 100’ award in 2012 and 2013 by AllWorld Network.

JCR-VIS, a credit rating agency providing independent rating services in Pakistan has assigned initial rating of “A-2” for short term and “A” for long term to Topline Securities. Topline Securities is registered as Underwriter, Book Runner and Research Entity with Securities & Exchange Commission of Pakistan (SECP).

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