Insight Research raises OGDC target price to Rs. 189

Insight Research has just released an update on its coverage of Oil & Gas Development Company Limited (OGDC) stock. The research house has raised its Dec 24 OGDC target price to Rs. 189 per share.

Here are the key points from the report:

Target Price and investment stance

The target price for OGDC has been revised to PKR 189 per share, indicating a potential upside of 42%. Additionally, the stock offers a 12% dividend yield. The investment stance on OGDC remains positive, supported by the company’s ongoing efforts to boost production and address operational challenges.

Production and project updates

OGDC has been actively working on several new projects to counteract the natural decline in production. Significant discoveries have been made at wells such as Toot Deep-1, Chak-214-1, Kharo-1, Togh-02, and Dars West Well-02. Major fields like Nashpa and Kunnar Pasakhi Deep are undergoing production enhancements to increase output.

Key Projects and Production Enhancements

• Nashpa Well-10: This project has added 1,430 barrels per day (BPD) of oil and 3.98 million cubic feet per day (MMCFD) of gas.
• Nashpa Well-11: Contributed 830 BPD of oil and 1.0 MMCFD of gas.
• KPD Project: Enhanced production by 16 MMCFD of gas, 150 BPD of condensate, and 18 metric tons (MT) of LPG.

OGDC is also implementing multiple compression projects, such as the Dhakni compression project, KPD-TAY, and Jhal Magsi South, which are expected to result in incremental production.

Circular debt and financial metrics

OGDC has been significantly affected by circular debt, impacting its financial metrics. The company’s P/E ratio has declined from 9.7x in Jun’18 to around 2.4x (TTM). However, there has been some improvement in the payment cycle from Sui companies:

Payment Cycle Improvement

• SNGPL Recovery Ratio: Increased from 29% in 9MFY23 to 52% in 9MFY24.
• SSGC Recovery Ratio: Improved from 17% in the previous period to 43% in 9MFY24.

OGDC is currently trading at an EV/EBITDA of 1.1x, compared to its 10-year historical average of 3.7x. This indicates a strong potential for re-rating as the financial situation improves.

Strategic production enhancements

OGDC plans to increase its crude oil production to 50,000 BPD by FY28. The company has outlined a five-year plan, with incremental production targets as follows:

Fiscal Year	Incremental Production (BPD)
FY25	9,379
FY26	12,104
FY27	16,286
FY28	19,583

Risks to valuation

Several risks could affect the valuation of OGDC:

1. Lower than expected hydrocarbon production: If the actual production falls short of projections, it could negatively impact revenues and profitability.
2. Decline in crude oil prices: Lower crude oil prices could reduce the company’s revenue and profitability.
3. Appreciation of PKR: A stronger PKR could reduce the value of OGDC’s exports and affect profitability.
4. Changes in the regulatory regime: Regulatory changes could impact the company’s operations and financial performance.
5. Higher than expected increase in trade receivables: An increase in trade receivables could strain the company’s cash flow and financial stability.

Improvement in payouts

OGDC’s payout ratio has historically been around 40% (FY10-FY18) but has recently fallen to 25% due to the buildup of trade debt. This surge in trade debt was mainly attributed to inadequate pricing and the diversion of RLNG towards the domestic segment during winters.

With the recent increase in gas prices and the inclusion of RLNG diversion costs in SNGPL’s price consideration, the payout ratio is expected to improve in the coming years.

Historical Payout Ratio

Period	Payout Ratio
FY10-FY18	~40%
Recent	~25%

Exploration and tight gas

OGDC has announced the first discovery of tight gas at the exploratory well Nur West-1, flowing at a rate of 1.24 MMCFD of gas with 150 psi. The company plans to drill 15 more tight gas wells over the next 24 months, aiming to attract significant investment for exploring untapped reserves.

Sale of Reko Diq stake

The government plans to sell its stake in Reko Diq, potentially generating a one-off gain for OGDC. The funds from the sale are expected to be distributed equally among OGDC, PPL, and GHPL, with each company receiving approximately US$333.3 million.

Potential Gain Scenarios

Scenario 1: Foreign Exchange Gains in OCI

If the foreign exchange gains are recorded in Other Comprehensive Income (OCI), the gain from the sale would be:

• Gain: US$146 million
• In PKR: PKR 26.6 billion (EPS: PKR 6.2/sh)

Scenario 2: Foreign Exchange Gains Transferred to P&L

If the foreign exchange gains are transferred to the Profit and Loss (P&L) statement, the total gain would be:

• In PKR: PKR 40.1 billion (EPS: PKR 9.3/sh)

Valuation summary

The SOTP valuation includes:

• NAV value of developed reserves: PKR 88/sh
• Cash & cash equivalents: PKR 201 billion (PKR 47/sh)
• Investments in subsidiaries: Valued at market value for MARI, and book value for PIOL and PML with a 25% liquidity discount

Valuation Components

The target price offers a 42% upside from the last close, with a 12% dividend yield. OGDC is currently trading at an EV/EBITDA of 1.1x, suggesting strong potential for future growth.

Metrics	Value
Current Price	132.6
Market Cap (PKR billion)	570.3
Market Cap (US$ million)	2,001.1
Free Float Market Cap (US$ million)	300.2
30-day Avg. Turnover (million Shares)	22.1
30-day Avg. Turnover (PKR million)	2,207.3
Shares Outstanding (million)	4,300.9
Free Float (%)	15%
Major Sponsors	Govt. of Pakistan
Bloomberg Ticker	OGDC PA

Key Financials & Ratios (PKR billion)	FY23	FY24F	FY25F
Sales – Net	413.6	455.5	439.8
Royalty	48.4	52.8	51.0
OPEX	93.6	115.8	115.1
Gross Profit	269.7	284.4	271.2
PBT	383.8	315.6	298.9
PAT	224.6	217.5	182.3
EPS	52.2	50.6	42.4
DPS	8.6	8.4	15.3
BVPS	252	294	322
P/E	1.5	2.6	3.1
P/BV	0.5	0.5	0.4
Dividend Yield	6%	6%	12%
ROE	23%	19%	14%

This table combines the financial data and key ratios for OGDC in an organized and comprehensive manner.

Conclusion

The research report indicates a strong potential for OGDC’s growth, supported by strategic project enhancements and improved financial metrics. Investors should consider the long-term benefits and potential risks associated with OGDC stock.

Disclaimer:

The information in this article is based on research by Insight Research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.