October 2, 2013

Short Report
Pakistan Research

Oil & Gas

OGDC: Stellar earnings growth to drive outperformance

OGDC PA

BUY

Price Target: PKR300/Share Closing Price: PKR238.6/Share

Key Data 12m Price Range (PKR) Market Cap (PKR mn) Outstanding Shares (mn) Avg. Daily Volume mn (6m) 260.6 168.3 1,026,373.6 4,300.9 0.9

OGDCL is set to post stellar EPS growth of 23% in FY14 which will likely be followed by an even stronger 27% growth in FY15. Growth in EPS would likely be driven by commencement of long awaited development projects which were initially delayed due to litigations. Commencement of these projects would likely deliver volume growth of 13% in FY14 and 18% in FY15. OGDCL has also benefited from conversion of its overdue receivables into long term government bonds as the government picked up the subsidy burden. This would augment other income going forward and we expect OGDCL's other income to rise to PKR22bn (PKR4.1/share) in FY14. OGDC has underperformed KSE100 index by 3% during 2013 owing to disappointing FY13 results. We believe that strong earnings rebound in FY14/15 would drive outperformance. The stock currently offers an upside of 26% to our Jun-14 PT of PKR300/share along with a dividend yield of 4%. BUY! Volumetric growth to drive earnings: OGDC's earnings are set to rise by 23% in FY14, driven by 13% growth in volumes. Growth in volumes will likely be gas heavy with gas volumes likely to rise by 15% while oil volumes would rise by 5%. Volume growth would be driven by commencement of gas processing facility at Makori, and full year impact of commencement of Maramzai, Mamikhel and Sinjhoro. Completion of Nashpa/Mela development projects, commencement of KPD phase 2 and ramp up of production from Tal along with Uch expansion would ensure volume growth of 18% in FY15, leading to 26% growth in FY15 earnings. Improving cash balances to support other income: OGDCLs cash and cash equivalents improved from PKR59bn in Jun-12 to PKR132bn in Mar-13, helped by a TFC issue against its outstanding receivables in 1QFY13. OGDCL also received PIBs worth PKR51bn in Jun-13 under settlement of circular debt. This has further jacked up cash and cash equivalents to PKR183bn as of Jun-13 while receivables have reduced to the levels last seen in Jun-09. This will likely augment other income going forward and we expect OGDCL's other income to rise to PKR22bn (PKR4.1/share) in FY14.

1Yr Relative Performance

(%) 160
140 120 100 80 60

OGDC

KSE-100 INDEX

Aug-13

Oct-12

Dec-12

Feb-13

Apr-13

Oct-13

Jun-13

Source: Elixir Research

OGDC Financial Highlights FY11A EPS DPS (PKR) BV/share PER (x) Dividend Yield PBR (x) EV/EBITDA ROA ROE 14.8 5.5 44.4 16.2 2% 5.4 8.8 26% 37% 9% 7% FY12A 22.5 7.3 59.6 10.6 3% 4.0 6.7 32% 43% 32% 53% FY13A 21.1 8.3 72.5 11.3 3% 3.3 6.4 24% 32% 6% -6% FY14E 25.9 10.0 88.4 9.2 4% 2.7 5.5 25% 32% 11% 23% FY15E 32.9 16.0 105.3 7.3 7% 2.3 4.1 27% 34% 27% 27% FY16E 33.8 17.0 122.0 7.1 7% 2.0 3.8 24% 30% 1% 3%

Sateesh Balani sbalani@elixirsec.com (+92-21) 3569 4679

AC

EBITDA growth Net Profit growth

Source: Company Accounts, Elixir Research

Please refer to the last page for Analyst Certification and other important disclosures.

Short Report
EPS growth
60.0% 52.5% 50.0% 90 40.0% 80 30.0% 20.0% 25.3% 27.0% 22.7% 70 71 85

OGDC
Volumetric growth to be robust during FY13-15
Mn boe 100 Total Production 95 90

66

69

60
10.0% 0.0%

6.5%

7.4% 2.6%

50 40
FY15E FY16E
FY14E

FY09

FY10

FY11

FY12

FY13

FY15E

FY14E

FY11

FY12

-6.3%

Source: Company Accounts, Elixir Research

Source: Company Accounts, PPIS, Elixir Research

Volume driven earnings growth

OGDC's earnings are set to rise by 23% in FY14, driven by 13% growth in volumes. Growth in volumes will likely be gas heavy with gas volumes likely to rise by 15% while oil volumes would rise by 5%. Volume growth would be driven by commencement of gas processing facility at Makori and full year impact of commencement of Maramzai, Mamikhel and Sinjhoro. Completion of Nashpa/Mela development projects, commencement of KPD phase 2 and ramp up of production from Tal along with Uch expansion would ensure volume growth of 18% in FY15, leading to 26% growth in FY15 earnings.

Own operated development projects to augment volumes

OGDC is currently undertaking key development projects which would add to volumetric growth during FY15-16. These projects are estimated to add 350mmscfd gas and 14,385bpd of oil over the next two years. Uch-II development project would be the key contributor to gas volumes and is expected to add 160mmscfd in Nov-13 and thus, boost gas volumes from 2HFY14. This would comprise 44% of the total incremental gas volumes from development projects. KPD development project would also contribute 34% incremental gas volumes while full year impact would come from FY15 as the project is expected to come online from 4QFY14. Nashpa/Mela development project which is expected to be commissioned by Jun-14 would likely add ~9,000bpd of oil, 34% of total incremental oil volumes. KPD project would be the major contributor to oil volumes adding 3,600bpd from Apr-14 followed by Sinjhoro which would also add 1600bpd from Apr-14.
Development projects Field Kunnar Pasakhi deep Sinjhoro Uch-II (phase-I) Uch-II (phase-I) Jhal Magsi Nashpa/Mela Development
Source: Company Accounts, Elixir Research

% share 100.0% 62.5% 100.0% 100.0% 56.0% 56.5%

Production flows 125mmscfd/3,600bpd 9mmscfd/1,600bpd 100mmscfd 60mmscfd 15mmscfd 41mmscfd/9,185bpd

FY13

-10.0%

FY16E

Expected commencement Apr-14 Apr-14 Jul-13 Nov-13 Oct-14 Jun-14

Elixir Securities

Prices as of October 1, 2013

Short Report
Volumes to grow at a 3-year CAGR of 11%

OGDC
Volumes of OGDC would grow at a 3-yr CAGR of 11% during FY13-15 to 95.2mnboe. Oil and gas volumes would grow at the same pace during the period. Growth in oil volumes in FY14 would primarily be contributed by improved volumes from Tal block, Sinjhoro, Kunnar and Nashpa. Tal block oil volumes would rise by ~2000 barrels per day. Growth in Tal block oil flows would primarily be driven by addition of volumes from well Makori East - 03 expected in 2HFY14. Full year production from two wells Maramzai-2 and Mamikhel-2, which were commissioned in May-13, is also estimated to fuel oil volumes growth in FY14. Other key contributors in FY14 oil volumes would be Sinjhoro and Kunnar. Oil volumes of OGDC in FY15 would grow phenomenally by 24% YoY owing to full year impact of commencement of incremental volumes from Nashpa, KPD, Mela, Sinjhoro and Tal. Nashpa would contribute 45% of oil volume growth in FY15 while KPD would also lead in volumes, adding ~2,650barrels/day. Makori and Mela would further add ~1,400 and ~1,100 bpd in FY15.
Incremental Oil Volumes(bpd) (OGDC's share) Field Makori Nashpa Mela Sinjhoro Mamikhel Maramzai
Source: Company Accounts, PPIS, Elixir Research

FY14 2,178 185 -48 1,068 286 279

FY15 1,423 4,666 1,101 913 -

Growth in gas volumes would primarily be driven by development projects mentioned previously. Uch would add 160mmscfd gas volumes in FY14 out of which 50mmcfd would be driven by improvement in existing volumes due to improvement in demand from Uch-I power plant post payment of circular debt. However, in FY15, KPD would be the major contributor to gas volume growth.
Incremental Gas Volumes (mmscfd) (OGDC's share) Field
Uch

FY14 160 35 -

FY15 20 95 21 14

Kunar Deep Nashpa Maramzai

Source: Company Accounts, PPIS, Elixir Research

Gearing on exploration potential

OGDC is gearing up on the exploration front as the company acquired 29 new blocks in FY13. 3D seismic activity has increased at a 3-yr CAGR of 56% during FY10-13. During the last five years, the company has drilled 24 wells annually on average. Owing to aggressive growth exploration strategy, prospecting expenditures of OGDC have increased at a 3-year CAGR of 27% during FY10-13 to PKR7.0bn. Going forward, OGDC would likely increase drilling activities and we expect the company to drill 34 wells in FY14 as compared to 24 wells in FY13. OGDC already outpaced its drilling target of 13 wells in FY13 by far and spud 24 wells so far.

Elixir Securities

Prices as of October 1, 2013

Short Report
Exploration costs to continue rising
(PKRbn) 25 20 Exploration costs

OGDC
Drilling activities have remained strong
Wells Drilled Oil & Gas Discoveries (RHS)

35 30 25

7 6 5 4
3 2 1 FY09 FY10 FY11 FY12 FY13

15 20
10 5 0 15 10 5

FY09A

FY10A

FY11A

FY12A

FY13A

FY14E

FY15E

Source: Company Accounts, Elixir Research

FY16E

Source: Company Accounts, Elixir Research

Improving cash balances to support other income

OGDCLs cash and cash equivalents improved from PKR59bn in Jun-12 to PKR132bn in Mar-13, helped by a TFC issue against its overdue receivables in 1QFY13. OGDCL received PIBs worth PKR51bn in the Jun-13 settlement of circular debt. This has further jacked up cash and cash equivalents to PKR183bn as of Jun-13 while receivables have reduced to the levels last seen in Jun-09. This will likely augment other income going forward and we expect OGDCL's other income to rise to PKR22bn (PKR4.1/share) in FY14.

Circular debt settlements have eased receivables in FY13

(PKRbn) 200 180 160 140 120 100 80 60 40 59 93 110 118 96 105 138 137 135 Cash balances including Govt. securities Receivables 183

Other income to increase owing to rising cash balances

(PKRbn) 35 30
27 22 16

33

132

25 20 15
56

57

66

73 59

10 5
1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13
3

10

20
-

0
FY11

FY12

FY13

FY14E

FY15E

Source: Company Accounts, Elixir Research

Source: Company Accounts, Elixir Research

Elixir Securities

Prices as of October 1, 2013

FY16E

Short Report
Onetime tax adjustment dented earnings in FY13

OGDC
OGDC has underperformed KSE100 index by 3% during CY13 owing to disappointing FY13 results. We believe that this underperformance offers an ideal entry opportunity as the stock would outperform in FY14 owing to strong earnings rebound in FY14/15. FY13 results were disappointing due to higher tax rate. Effective tax rate for the last quarter clocked in at 54%, 22pp higher than 9MFY13 average of 33%. This higher tax rate for 4Q was due to onetime demand raised by tax authorities for prior years tax adjustmen t. Tax authorities suggested that for expenses, each concession to be treated as separate entity for expenses in tax calculations as each concession was under different taxation regime. However, the company had been using expenses for OGDC as a whole for tax purposes.

Valuation
We have used equity discount rate of 17% for valuation of OGDC, assuming risk-free rate of 10% and risk premium of 7%. We have used reserve based valuation method and discounted cash flows of 2P reserves. Despite aggressive exploration program, we have remained conservative and have not incorporated any exploration value in our PT. Using the above mentioned assumptions, we arrive at Jun-14 PT of PKR300/sh, which offers a strong upside of 26% from current levels.
Reserves BOE 1P Reserves 2P Reserves Cash Less: FY14 Dividends Jun-14 PT Source: Elixir Research 908 737 Value PKRmn 769,920 371,658 182,692 43,009 Value PKR/share 180 87 42 10 300

Elixir Securities

Prices as of October 1, 2013

Short Report
Financials
Income Statement PKRmn Net Sales Operating costs EBITDA EBIT Other Income/Fin. cost Net Profit - Recurring EPS Recurring (PKR) Net Profit Reported EPS Reported (PKR) FY11A 155,631 45,230 110,401 93,873 -2,969 63,527 14.77 63,527 14.8 FY12A 197,838 52,312 145,527 132,058 937 96,905 22.53 96,905 22.5 FY13A 223,365 69,572 153,793 140,007 5,705 90,777 21.11 90,777 21.1 FY14E 249,272 79,044 170,228 154,616 10,744 111,360 25.89 111,360 25.9 FY15E 310,242 94,001 216,240 198,485 13,420 141,466 32.89 141,466 32.9

OGDC

FY16E 316,929 98,460 218,468 198,389 18,257 145,175 33.75 145,175 33.8

Source: Company Accounts, Elixir Research

Balance Sheet PKRmn Paid up Capital Reserves + Unapp profit Shareholders Funds Long Term Liabilities Current Liabilities Capital & Liabilities Net Fixed Assets Current Assets Total Assets FY11A 43,009 147,804 190,813 38,436 32,528 261,778 112,174 149,603 261,778 FY12A 43,009 213,528 256,537 45,363 36,421 338,321 123,445 214,876 338,321 FY13A 43,009 268,822 311,831 51,611 50,569 414,011 279,682 134,330 414,011 FY14E 43,009 337,173 380,182 56,906 45,538 482,626 302,150 180,476 482,626 FY15E 43,009 409,824 452,833 62,814 59,635 575,282 324,880 250,402 575,282 FY16E 43,009 481,884 524,893 69,415 61,812 656,119 349,043 307,076 656,119

Source: Company Accounts, Elixir Research Cash Flow Statement PKRmn Recurring Net Profit Depreciation Working Capital Changes Operating Cash Flows Capex Add: Interest (after tax) FCFF Less: Interest (after tax) FCFE Dividends Paid Net Cash Flow Beginning cash Ending cash & equiv. FY11A 63,527 16,528 -7,659 72,395 -19,381 965 53,979 -965 53,014 -19,354 33,660 22,196 55,856 FY12A 96,905 13,469 -53,070 57,304 -23,478 1,117 34,943 -1,117 33,826 -30,106 3,719 55,856 59,576 FY13A 90,777 13,786 86,642 191,205 -32,274 1,505 160,436 -1,505 158,931 -35,483 123,448 59,576 183,024 FY14E 111,360 15,611 -6,174 120,797 -37,390 1,741 85,148 -1,741 83,407 -41,128 42,280 183,024 225,303 FY15E 141,466 17,755 -3,407 155,814 -39,747 2,014 118,081 -2,014 116,067 -62,363 53,704 225,303 279,007 FY16E 145,175 20,079 7,283 172,537 -43,451 2,330 131,416 -2,330 129,086 -72,041 57,045 279,007 336,052

Source: Company Accounts, Elixir Research

Elixir Securities

Prices as of October 1, 2013

Short Report
Financial Ratios FY11A EPS - rec DPS BVPS PER EV/EBITDA P/BV Div Yield ROCE ROA ROE Gearing Turnover Growth EBITDA Growth Net Profit Growth 14.8 5.5 44.4 16.2 8.8 5.4 2% 26% 26% 37% -0.3 9% 9% 7% FY12A 22.5 7.3 59.6 10.6 6.7 4.0 3% 33% 32% 43% -0.2 27% 32% 53% FY13A 21.1 8.3 72.5 11.3 6.4 3.3 3% 25% 24% 32% -0.1 13% 6% -6% FY14E 25.9 10.0 88.4 9.2 5.5 2.7 4% 25% 25% 32% -0.2 12% 11% 23% FY15E 32.9 16.0 105.3 7.3 4.1 2.3 7% 27% 27% 34% -0.3 24% 27% 27%

OGDC

FY16E 33.8 17.0 122.0 7.1 3.8 2.0 7% 24% 24% 30% -0.4 2% 1% 3%

Source: Company Accounts, Elixir Research

Elixir Securities

Prices as of October 1, 2013