OGDC – Trough cash recovery makes debt a likely option

Dividends resumed in 3Q; while earnings disappointed: OGDCL’s 3QFY11 EPS at PKR4.09, up 25% YoY lagged our expectations on account of lower oil revenues coupled with higher amortization expense. Payout resumed in 3Q with 2nd interim DPS of PKR1.5, taking 9MFY11 payout to PKR3.0, down 24% YoY.

Receivables continue to rise as OGDC taps the debt option: Receivables rose by PKR19bn during 3QFY11, as OGDC’s cash recovery remained a mere 53% of 3Q sales during the quarter. Our channel checks suggest OGDC is considering the possibility to take long term debt for funding the scheduled development projects.

Disappointment continues on the development front; near term drilling triggers offset some negatives: Hydrocarbon deliverability of Qadirpur, post installation of wellhead compression system, have lagged the initially promised raw gas flows of 650mmcfd. Uch –II has now been pushed to 2HFY14 while we see risk to KPD/TAY’s achieving Dec-12 timeline. However, expected announcement of final hydrocarbon flows from Mela-03, Nashpa-02, Makori-East-01 and Tolanj X-01 within the next week could be potential triggers for OGDCL.

EPS and PT revision: We have revised our hydrocarbon volume estimates to incorporate expected in flows from the ongoing drilling activity while we have also revised the timelines for the above discussed development projects of OGDC. We have thus revised our FY11-13 EPS estimates by -2% to 3%. We have rolled forward our discounting timeline for OGDC to Jun-12 and raise our PT to PKR150/share. HOLD.

Dividends resumed in 3Q; while earnings disappoint

OGDCL’s 3QFY11 EPS at PKR4.09, up 25% YoY lagged our expectations on account of lower oil revenues coupled with higher amortization expense. While OGDC’s reported oil volumes clocked in 5% higher than estimates, realized oil wellhead at USD68/bbl was 10% below estimates. 3QFY11 oil wellhead, being 8% lower QoQ, despite 21% QoQ higher Arab Light prices, indicates under realization of oil revenues during the quarter. A close analysis of trade payables reveal that OGDCL has created a new provision for “Sales-pending price determinations” during 3Q, and our discussion with the company indicates the same pertains to oil wellhead price for a field that is yet to be finalized. Barring the provisions, 3QFY11 EPS would likely have been higher by PKR0.54 or 13%. Amortization of development and decommissioning cost jumped 45% QoQ, pushing up operating expenses to PKR7.4bn, up 45% YoY. Payout resumption in 3Q with 2nd interim DPS of PKR1.5, is a healthy sign though the scrip yield argument remains weak with 9MFY11 payout at a mere PKR3.0/share, down 24% YoY, and implying an annualized dividend yield of a only 2.6%.

Unabated rise in receivable leads OGDC to consider the debt option for development projects

Receivables rose by PKR19bn during 3QFY11, as OGDC’s cash recovery remained a mere 53% of 3Q sales, the lowest recovery rate ever. 1QCY11 post result conference calls of listed banks, highlighting their inclination for quality asset expansion in the “oil and gas” sector, had already given some indications regarding possibility of E&P companies resorting to debt. Our channel checks suggest OGDC is considering the option for long term debt for funding the development projects. With TAY- KPD and Uch II requiring the major outlays, with total capex requirement for the two amounting to PKR38bn, we believe borrowing to the tune of PKR25-30bn could be on cards.

Disappointment continues on the development front; though near term drilling triggers partly offset the negative

Qadirpur delivery lags initial guidance: With most recent reported production level at 483mmcfd (Week ending May 10th) Qadirpur has failed to deliver the initially promised raw gas flows of 650mmcfd. The company indicates the current field delivery at 525-530 mmcfd, while 13 out of the 14 compressors are currently operational. OGDCL expects the fourteen compressors to support current flows for the next 12-18 months. Meanwhile, two more compressors – originally installed at Pirkoh and currently being refurbished – shall be installed at the field, which shall sustain the raw gas deliverability from Qadirpur at 525-530mmcfd. While the company indicates “hopes” of possibility reaching 600 mmcfd of raw gas, we conservatively incorporate Qadirpur at 525 mmcfd.

KPD/TAY’s Dec-12 timeline seems tight: Bids for Tando Allahyar & Kunnar – Pasakhi Deep ( 4400bpd oil, 284mmcfd gas, 400bpd NGL and 387tpd LPG) integrated development project are currently under financial evaluation stage. Assuming award of tender by Jun-11, and 18 month construction period, the projects will likely start delivering hydrocarbons by Dec-12, same as the timeline given by OGDCL. While we see risk of delays, we for now incorporate TAY/KPD to commence from Jan-13.

Sinjhoro split into two phases: Being developed in house, Sinjhoro (300-3500bpd oil, 25-30mmcfd gas, 120-140 tpd LPG) has now been split into two phases, with 50% of the volumes expected in end Nov-11 while the remaining 50% from end Mar-12. We incorporate phase-1 Sinjhoro flows (50% of the entire project) from Jan-12 whereas as phase-2 flows from Mar-12.

Uch –II likely from Jan-14: As per the GSA signed with Uch Power, OGDCL is required to supply 160 mmcfd of gas from Uch field from Sep-13 onwards while PPIB website indicated expected commencement of Uch-II power project in Dec-13. We conservatively factor in Uch-II flows from Jan-14.

Completion of Nashpa-02, Mela-03, Makori East-01 could provide near term trigger: We expect announcement of final hydrocarbon flows from Mela-03, Nashpa-02, Makori-East-01 and Tolanj X-01 within the next week, which could be potential near term triggers for OGDCL.

EPS and PT revision

We have revised our hydrocarbon volume estimates to incorporate expected flows from Nashpa-02 at 4,000bpd, while raising Makori East-01 to 6,200bpd. We have also incorporated the revised timelines for the above discussed development projects of OGDC and thus revised our FY11-13 EPS estimates by -2% to 3%. We have rolled forward our discounting timeline for OGDC to Jun-12 and raise our PT to PKR150/share. HOLD.

Economic & Political News

Due to the failure of Pakistan’s economic managers and International Monetary Fund to develop a consensus on the fiscal deficit target for the next financial year, the government has postponed the announcement of the federal budget by six days. The federal budget for 2011-12 will now be announced on June 3, 2011.
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