A review and the way forward

Mar 13 - 19, 2006

The spark in the capital market, flow of Direct Foreign Investment (DFI), and image building as a land of opportunity for doing business, and above all emergence of a strong private sector to lead the rally of growth, is by and large attributable to the impressive privatization process in Pakistan.

So far, the privatization process was being carried out with a two pronged strategy i.e. broadening ownership in the public sector entities through Initial Public Offerings (IPOs), and secondly, strategic sale of controlling shares of the government owned organizations.

Resultantly, the investment recorded 500 percent increase during last three years. As a result of the policy of broadening ownership and delegating powers to the private sector, the policy of privatization has yielded Rs285 billion in last three years which amounts to 1000 percent increase in proceeds.

In the third phase of the privatization, the process is now being expanded in the international financial markets.

In a recent move aimed at broadening of ownership of Pakistan's state enterprises, the Privatization Commission is actively considering for floating Global Depository Receipts (GDRs) of OGDC through London Stock Exchange.

A delegation led by Dr. Salman Shah, and some senior officials from the Privatization Commission visited London for initial talks with the management of London Stock Exchange.

Martin Graham, Director of Market Services and Head of AIM, and Hugh Sandeman, Head of Business Development for India and International Business Development told PAGE that London Stock Exchange on the back of its massive capital depth is the natural market for OGDC.

At present the admitted companies with LSE are around 3,091 which includes 2537 domestic companies. The market capitalization was estimated at $7,142 billion while UK listed comes to $3152billion of the total.

The oil and gas sector capitalization contributes over 14 percent of the total market capitalization.

When PAGE drawn his attention towards share of the energy sector in the market capitalization despite a global boom in the energy sector, Graham admitted that it looks narrow especially in the face of robust demand growth of energy, yet hastened to add that size of the energy sector is on the road of growth in the market capitalization.

Currently, the overseas oil and gas companies listed with London Stock Exchange are from Russia, Canada, Turkey, India, Poland, Greece, Ireland, USA, France and Norway, however, the major share goes to Russia in terms of a number of companies listed with LSE.

When asked the possible response of the investors to the offering of OGDC, Martin Graham was confident that the proposed GDRs are likely to receive an overwhelming response in view of the growing demand of oil and gas around the world. He said that LSE, is the choice for international companies which is reflected in the fact that 493 new companies joined in 2005, 419 were IPOs, 93 of which were international.

It may be mentioned that though India is energy starved country, Indian Company GAIL listed in 1999 successfully attracted the investors.

As a marketing man, he highlighted various positive points for the overseas companies, which are offered the choice of routes to market via London Stock Exchange. These overseas companies can reach to the investors by using of IFRS or US GAAP accounts give access to retail investors across Europe. The Local GAAP accounts gives access to institutional professional investors through Luxembourg and Professional Securities Market of the Non-European Union.

GDRs are trading on the London Stock Exchange's International Order Book (IOB). It was revealed during the meeting that IOB trading exceeded $130 billion in 2005, up 20 percent on 2004, while the average trade size recorded at $270,000. At present oil and gas companies traded on London's International Order Book include Tatneft, Gazprom, Novatek and Lukoil of of Russia, PK Naftowy Orlen of Poland, Turkiye Petrol Rafinerileri of Turkey, Hellenic Petroleum of Greece and Gail of India.

Since Pakistan has adopted international Financial Reporting Standards, GDRs are eligible to be marketed to retail as well as institutional investors.

During the meeting with LSE officials, it was agreed that Pakistan's corporate governance regime accepted as appropriate for GDR issues in London.

Apart from whatever the monetary or financial gains would be after the listing of OGDC with London Stock Exchange that would be an exposure of Pakistan's corporate sector in the international financial world. It is strongly believed the strong base of OGDC has the potential to excel on the energy map of the international market.


OGDCL presently focusing on international exploration program in countries such as Yemen, Sudan, Oman and Eritrea and prospects of listing of its GDRs with London Stock Exchange have placed the company at highly impressive course of glory in near future.

Since, international crude oil prices are hovering around the US$60/bbl and significant weakening of prices seems unlikely in the medium-term, the OGDCL at the capital market is trading at a prospective profit-earning ratio.

On the back of higher energy prices, new discoveries and development activities at existing fields are expected to fuel the growth momentum of OGDCL's revenues and earnings.

OGDCL earnings increased 29% to Rs20.3billion in the first half of the current financial year 2005-06 as against Rs15.7bn during the corresponding period last year.  The bottom-line was around 5% higher than our expectations. EPS during the period stood at Rs4.72 compared to Rs3.67 previously.

Sales of the company increased by 28% to Rs42.6billion as against Rs33.4bn previously. However, exploration and prospecting expenditure also posted extraordinary hike of 213% to Rs1.8billion along with 25% and 26% upsurge in operating expenses and transportation charges, respectively. Other income increased by 110% to Rs2.2billion on the back of higher interest rates on short-term deposits of the company.

Effective tax rate of OGDCL also depicted 1.1pps decline to 30.7%, with the taxation amount increasing by 22% to Rs9.0bn as against Rs7.3bn previously. OGDCL has also declared second interim cash dividend at 17.50% in addition to the 12.50% first interim announced during 1Q/FY06.

Higher profitability of OGDCL primarily emanated from significant increase in production from the company's own and operated-joint-venture fields as well as substantially higher product prices. Sales volumes of white petroleum products, gas and LPG increased by 15%, 7% and 18%, respectively, while crude production remained intact at 6.4million barrels.

During the period, the average net realized price of crude oil stood at US$48.32/bbl, 43% higher as against US$33.68/bbl during the same period of last year.

The OGDCL was aggressively pursuing its exploration and development activities which is evident by the 213% higher exploration and prospecting expenditure to Rs1, 841million.

This involved greater seismic acquisition and the drilling of several exploratory wells. During the period, the company acquired nine new exploration licenses and carried out a total of 40,427 meters of well drilling with work over operation on 12 wells.

The company has also made two discoveries in Tando Allah Yar North and Kunnar Deep-1 with expected production figures of 800 barrels/day of oil and 33 mmcfd of gas. Moreover, the work on development projects in Dakhni, Dhodak, Chanda, Uch, Qadirpur, Tando Allah Yar and Sinjhoro are also in progress.

The London Stock Exchange welcomed a senior delegation of officials from the Ministry of Finance and from the Privatization Commission of Pakistan, who opened the London markets recently to mark the occasion of their visit in London.  The delegation was led by Salman Shah, Advisor to the Pakistan Prime Minister on Finance and Economic Affairs, Ministry of Finance. Dr Shah was accompanied by officials from the Ministry of Finance and from the Privatisation Commission.